Charles Schwab
stock has suffered a drubbing this year, but one analyst is optimistic about the future.
Shares of Schwab, the nation’s largest custodian of assets for registered investment advisors and one of the largest discount brokerage firms, were up 7.1% on Wednesday, changing hands at around $59.77 shortly before the close. So far this year, the stock is down 29% while the
S&P 500
has gained about 18%.
Like many financial companies, Schwab has been buffeted as high interest rates have given customers a reason to move billions of dollars out of its default low-interest bank accounts into higher-yielding options, such as money-market funds, certificates of deposits, and mutual funds. The phenomenon is known as cash sorting.
Because outflows of bank deposits have exceeded Schwab’s cash on hand, it has had to rely on costly short-term borrowing, which has caused its interest expenses to soar and hurt earnings.
“While Schwab is not completely out of the woods yet and future Fed rate hikes could lead to an acceleration of cash sorting activity, we think sentiment should improve into year-end,” said Patrick Moley, senior research analyst at Piper Sandler, in a note. He cited reduced outflows of deposits and growth in the amount of assets pouring into the firm.
While the Federal Reserve has raised its key rate 11 times since March 2022, many analysts believe the central bank is likely done tightening credit. If short-term interest rates stop rising, investors would have less new reason to move money out of low-yielding accounts like those at Schwab, many analysts say.
That would reduce pressure on Schwab’s net interest income, improving the outlook for profits.
Moley acknowledged Schwab has had “a challenging 2023,” but argued that it is a “‘24/’25 story.” He noted that the market is expecting the Federal Reserve to reduce rates in 2024, with the first cut happening in May.
“Should this play out, we believe Schwab will benefit as lower rates would likely translate to a further slowdown and/or reversal in client cash sorting,” he said. “In past cycles, client cash sorting has slowed significantly once the Fed begins cutting rates and we’d expect a similar behavioral shift this cycle.”
Moley has an Overweight rating on Schwab and a price target of $75.00. Shares of the company plunged during March’s regional bank crisis in response to concern about deposit outflows and rising interest expenses.
Write to Lauren Foster at [email protected]
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