Trending Tickers

SIVB’s troubles weighs down Charles Schwabs’s stock

Share this article

After the SVB Financial Group scandal, Charles Schwab shares fell 20%. SVB Financial Group (SIVB) issues have caused financial sector turmoil, which has hurt The Charles Schwab Corporation (NYSE:SCHW) shares.  While Schwab’s situation is not comparable, investors are worried about similar trends—deposits leaving the business and investment book losses—because they are raising questions across the banking and financial industry.

What Just Happened ?

Over the past decade, total assets have grown from $140 billion to $550 billion, driving sales and earnings growth and huge long-term gains for long-term holders. Charles Schwab shares fell from $76 to $62 in two days after SIVB issues surfaced on March 8, losing $25 billion in value. Shares have recovered to $80 in recent weeks, now falling to $60 overnight.

Growth Despite Macro Backdrop

The 2022 results appear promising where GAAP earnings rose 23% to $7.2 billion, or $3.50 per share, while adjusted earnings reached $3.90 per share. Sales rose 12% to $20.8 billion.  In one of the hardest years since the economic crisis, with the war in Ukraine, rising inflation and interest rates, and the world economy still recovering from the pandemic, this is an impressive feat. Despite $1.5 trillion in lower asset values, the company ended with $7.05 trillion in client assets due to $428 billion in new asset inflows.  Further,  Schwab’s spread is good. Interest income for the whole year went from $8.5 billion to $12.2 billion, while interest costs went from less than half a billion to $1.5 billion, giving a net interest income of $10.7 billion (which rose sharply in 2022). The broker ended the year with $552 billion in assets, down significantly from the year before. Bank deposits of $367 billion are paid 0.46% per year in the fourth quarter, which is far below short-term Treasuries. With pre-tax earnings of $9.4 billion in 2022, margins are expected to be increased to maintain deposits.

What Next ?

The 10-K filing for 2022 shows that the bank had a net unrealized loss of around $14 billion for the year. This is a sign that the bank also lost money, which is fine as long as the deposit base are expected to remain stable. Of course, SVG aggressively moved up the duration curve, so Schwab is not a fair comparison. However, even investments with short maturities run the risk of incurring losses that are a fraction of the $300 billion-plus asset base. If deposits leave, this could seriously damage the capital base.Due to Schwab’s size and considerable earning power to increase deposit rates, there is of course no evidence for this.

Summary : 

A share of Schwab that cost $10 in 2012 had risen to the $50 mark by 2020, and its price had reached a peak in the low $90s by the beginning of 2022, coinciding with the peak in markets as a whole. The current pullback in stock price is significant, and it is not necessarily driven by earnings power, although it is likely that Schwab will need to offer higher rates as well to attract deposits. This may significantly hurt near term earnings power.  Still, the broker seems to have a lot of money and be very big, and the situation is in no way similar to SIVB. However, the industry is worried about the speed and size of rate hikes, which is making it hard for banks to be competitive and causing some big unrealized losses here and there in the system.

Tags: Trending Tickers
Challenging times for Western Alliance Bancorporation : Updated Financial Figures reflect Uncertainty in the Industry
Can Tesla Maintain Its Dominance in China’s EV Market Amid Increased Competition?
Google News

New in Research

You May Also Like