Charles Schwab Earnings: Despite Sequential Decline, We Still Believe in Medium-Term Growth Story

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $76.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Charles Schwab’s Earnings

Charles Schwab’s SCHW revenue and earnings took a step back in the second quarter of 2024. Still, we believe the medium- and long-term trends driving earnings, such as client asset growth and higher client cash-related revenue over time, are intact. The company reported net income to common shareholders of $1.2 billion, or $0.66 per diluted share, on $4.69 billion of net revenue. Net revenue declined 1% sequentially, as an increase in asset management revenue wasn’t enough to offset a decline in client-cash-related revenue and trading revenue. Second-quarter revenue was still higher than in the previous five quarters, where we’ve seen a stabilization to an uptrend in revenue. We don’t anticipate making a material change to our fair value estimate, and assess the shares as fairly valued to somewhat undervalued.

Schwab’s asset management and trading revenue came in largely as expected, with asset management revenue increasing with the equity markets and trading revenue still in a normal range. Meanwhile, client-cash-related revenue (about half of total revenue) remains the focus for the firm’s earnings trajectory and our investment thesis. Net interest income decreased by $75 million sequentially, bank deposit agreement revenue decreased by $30 million, and money market fund revenue increased by $21 million. The decrease in net interest income was tied to a $17 billion decrease in bank deposits and related decreases in the bank’s corporate cash balances and securities portfolio.

Schwab needs client cash balances and deposits to stabilize to see more consistent earnings growth. Some of the decrease in deposits was related to tax payments, but there is still some cash sorting occurring, demonstrated by the more than $20 billion increase in money market balances. We still believe deposits will stabilize and grow as the federal-funds rate gets cut over the next year.