Past CFO Commentary

Schwab’s strong business momentum persisted through May with year-to-date core net new assets totaling $150 billion and total new accounts approaching nearly 1.7 million. Over Memorial Day Weekend, we also successfully migrated over five million Ameritrade accounts onto the Schwab platform.   

At the same time, client cash realignment trends extended through the end of May. The average daily pace of net outflows from the combination of bank sweep deposits and Bank Deposit Account (BDA) balances declined for the fourth consecutive month to approximately $350 million, or a month-over-month improvement of 65%:

When including broker-dealer cash balances as well, we observed an even greater slowdown in the average daily pace of net outflows versus April:

This trend carried into early June, with the month-to-date pace across bank sweep, BDA balances, and broker-dealer cash balances tracking similar to May. The trajectory in client cash realignment further supports our belief that this activity will abate during the second half of 2023.

As previously mentioned, part of our strategy to navigate the fastest interest rate tightening cycle in four decades includes supplementing our organic cash flows with certain temporary higher cost funding sources – primarily Federal Home Loan Bank (FHLB) borrowings and retail certificates of deposit (CDs). While we plan for the vast majority of these more expensive balances to be repaid before the end of 2024, they are currently weighing on our near-term net interest margin (NIM). We estimate that the impact from these transitory borrowings and time deposits will more than offset the benefits of higher asset yields in this environment, resulting in our second quarter NIM contracting by approximately 35 basis points sequentially. The combination of a temporarily compressed NIM and a smaller interest-earning asset base, along with softer trading activity, is expected to drive a year-over-year decline in second quarter revenue of 10%–11%. That being said, the measurable deceleration in the pace of client cash realignment activity is helping limit the incremental utilization of the supplemental funding sources. If these recent trends persist, we could see a further decrease in usage of these more expensive interest-bearing liabilities over the coming months as organic cash flows from our investment portfolio and ongoing asset gathering support client cash allocation decisions – eventually leading to the resumption of balance sheet growth.

Looking forward, we believe the growth and long-term value creation opportunities available to Schwab are as prevalent as ever – as our “Through Clients’ Eyes” strategy keeps us well-positioned to meet the needs of individual investors and the advisors who serve them. We look forward to digging in further on these topics and more at our upcoming Summer Business Update next month.

Forward-Looking Statements

This commentary contains forward-looking statements relating to Schwab’s business momentum and growth; client cash realignment activity and trends; utilization of, impact from using, and repayment of, supplemental, higher cost funding sources; second quarter net interest margin and revenue; organic cash flows; balance sheet growth; and opportunities. These forward-looking statements reflect management’s expectations as of the date hereof. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, the company’s ability to attract and retain clients and independent investment advisors and grow those relationships and client assets; develop and launch new and enhanced products, services, and capabilities, as well as enhance its infrastructure and capacity, in a timely and successful manner; hire and retain talent; support client activity levels; successfully implement integration strategies and plans; monetize client assets; and manage expenses. Other important factors include client use of the company’s advisory solutions and other products and services; general market conditions, including the level of interest rates and equity valuations; client cash allocation decisions; client sensitivity to rates; level of client assets, including cash balances; competitive pressures on pricing; capital and liquidity needs and management; balance sheet positioning relative to changes in interest rates; interest earning asset mix and growth; the level and mix of client trading activity; market volatility; securities lending; margin loan balances; new or changed legislation, regulation or regulatory expectations; and other factors set forth in the company’s most recent reports on Form 10-K and Form 10-Q.