Charles Schwab Company (NYSE:SCHW)
Due to the financial crisis of the previous two weeks, The Charles Schwab Company (NYSE:SCHW) has been oversold at current levels. The gloomy outlook is unfounded because SCHW is mainly a brokerage firm with a value-added banking function to support its customers’ asset management.
Brokerage accounts represent $7.38T (-6.1% YoY) in managed assets at SCHW as of March 17, 2023, up from $7.05T (+4.2%) in December 2022. Most notably, as of February 2023, the transactional balances of its customers’ brokerage accounts accounted for just 11.7% (-0.2 points YoY) of the assets.
In FY2022, the corporation had $366.72B in bank deposits. Therefore only 7% of them were in danger if there were bank runs, totaling $25.8B (-14.2% YoY). In particular, 91% of its cash was invested in stocks and securities in deposits cleaned from brokerage accounts. In addition, fewer than 20% of its deposits were larger than the $250,000 cap the FDIC would insure.
With an uninsured deposit ratio of 38%, SCHW’s risk management is noticeably superior to that of SVB Financial (SIVB), JPMorgan (JPM), Bank of America, Citigroup, and Wells Fargo & Company (WFC), all of which have ratios between 56% and 38%.
In addition, with $93.98B (-20% YoY) of High-Quality Liquid Assets (HQLA) in FY2022, SCHW’s rising liquidity coverage ratio [LCR] of 123% (+17 points YoY) proved its solid liquidity sources. The corporation also received $300 billion in extra liquidity from the Federal Home Loan Bank [FHLB] and the recently implemented Bank Term Funding Program (BTFP). The company has more than enough liquidity to service its present bank deposits.
A decrease in Bank Deposit Account [BDA] balances of -7% YoY to an average of $147.27B in FY2022 caused some worry; nevertheless, the business also saw an increase in BDA fee income +7.1% YoY to $1.4B during the same period.
Total assets remained unchanged, and the drop was blamed on customers shifting their deposits from the company’s bank to higher-yielding certificates of deposit (CDs), treasury bills, and money market funds instead. So, it was clear that SCHW’s varied offers found favor with its customers regardless of the macroeconomic outlook, avoiding a flight of capital to rivals.
In addition, from March 10–16, 2023, the brokerage firm received $16.5B in core net new assets, or an average of $3.3B per day, demonstrating the customers’ rising faith in the management’s forward performance despite the financial crisis of the last two weeks. Compared to the daily average of $2.02B for February 2023 and the daily average of $1.58B for January 2023, the acceleration was rather noticeable.
Consequently, we are cautiously sure that SCHW need not realize the losses in its Available-For-Sale [AFS] securities at $12.29B (+150.8% YoY) and in its Held-To-Maturity [HTM] securities at $15.58B in FY2022.
The company’s net revenue grew by 12% YoY in FY2022, reaching $20.8B. Net interest revenue increased by 33% YoY to $10.68B, accounting for 51.3% of revenues, up from 43.3% in FY2021. So far, increasing interest rates have been mostly responsible for the staggering figure.
For this reason, it is not surprising that SCHW has been increasing its non-GAAP Return on Tangible Common Equity [RoTCE] (to 42% in FY2022, compared to 22% in FY2021). Adding fuel to the fire, its net income increase surged by +22.7% YoY to $7.18B.
The company’s strong estimate of a GAAP pre-tax profit margin of up to 43% for FQ1’23 is a major reason for our optimism. It represents a considerable improvement from the 39.4% recorded in FQ1’22. Based on analysts’ conservative projections of net sales growth CAGR of 8.8% and EPS of 15.9% through FY2024, we believe SCHW may outperform the market, especially considering interest rates will likely continue increasing to a terminal rate of 5.5%.
The Fed’s unrealized losses in the current securities may diminish in the intermediate term if/when the Fed begins reducing rates. This should also assist in easing the strain on the company’s finances, which are expected to grow by an average of 0.26% in FY2022 compared to only 0.09% in FY2021. There’s no telling what the future holds at this point.
Where Do You Stand? Buy, Sell, or Hold SCHW Stock?
The current Price/Sales ratio for SCHW is 4.71, and the NTM P/E ratio is 13.57, which is lower than the 3Y pre-pandemic average of 5.94 and 19.31, respectively. Nevertheless, it’s still somewhat below the 1Y averages of 6.24x and 16.67x.
With an EPS forecast of $5.24 for FY2024 and the stock’s current P/E values, a reasonable price objective of $71.10 would imply a 26% increase from current levels.
SCHW 5Y Stock Price Overview
SCHW has been unfairly punished by the market, as its share price has fallen by 26.3% to $56.41 at the time of writing, drawing close to its February 2021 lows and June 2018 highs. The stock trades well below its 50-, 100-, and 200-day moving averages.
With a forward yield of 1.77% based on its annualized FQ1’23 dividends of $1.00, the stock looks better than its 4Y yield of 1.32%. However, it is still below the sector median of 3.03%.
As a result, we advocated that now is the perfect moment for interested parties to purchase SCHW stock.
Featured Image: Unsplash @ PiggyBank