Shares of Charles Schwab (SCHW +0.54%) fell over 15% this week, according to data from S&P Global Market Intelligence. One of the largest brokerages posted slow growth and poor earnings as the company still deals with low-yielding assets on its balance sheet. As of 1:31 p.m. ET on Friday, July 19, Charles Schwab stock was down 17.5% this week.
Here's why.
Slow growth and headwinds on the balance sheet
This week, Charles Schwab reported earnings for the second quarter of 2024. For the first six months of 2024, revenue is down 3% from 2023. Net income looks even worse, down 7% year over year to $2.7 billion. Falling sales and earnings are not something investors prefer, which is why Charles Schwab stock slumped this week.
Why were earnings down? The company has a bunch of low-yielding assets stuck on its balance sheet. See, when interest rates were near zero during the pandemic, Charles Schwab made the mistake of buying a bunch of loans for its banks with extremely low interest rates. It currently has $154 billion in "held to maturity" loans yielding a measly 1.7% on its balance sheet. The Federal Reserve has its benchmark rate over 5% right now.
These loans are a drag on Charles Schwab's earnings because of the growing payments it needs to make to keep depositors around. With its $258 billion in bank deposits, Schwab had to pay an average interest rate of 1.31% last quarter, up from 1.11% last year. This will continue to rise while the held-to-maturity loans are stuck on the asset side of the bank's balance sheet.
This headwind will persist for many more years and is why Wall Street is sour on Charles Schwab right now.
NYSE: SCHW
Key Data Points
But is the stock a buy?
Not everything is going poorly for Charles Schwab in 2024. It continues to lead in the brokerage industry, with a record $9.4 trillion in total client assets last quarter. Customers are not fleeing Charles Schwab, which is the lifeblood of its brokerage/banking business.
Today, the stock trades at a price-to-earnings ratio (P/E) of around 25. This does not look dirt cheap, and the earnings headwind from low yielding loans on the balance sheet will continue. But for those looking at the long term, Charles Schwab could be cheaper than you think. At its peak, earnings per share (EPS) hit around $3.50, which would be a P/E of 17.7 based on the current stock price. As it continues to acquire assets and resets its banking business, EPS should climb even higher five to 10 years from now.
Add it all together, and Charles Schwab could be a good buy at today's depressed price.
