Past CFO Commentary

By now, you’ve had a chance to digest our recent earnings release, which discussed our strong business and financial performance in Q3.  In our conversations following the release, we heard positive feedback on those results – but also lingering questions around client cash sorting and the implications for our net interest margin and net interest revenue.

In light of these questions, we wanted to reinforce a few points.  The main takeaway is that we believe we’re in a position to grow both our net interest margin and net interest revenue from Q3 2022 to Q4 2022 and on through Q4 2023, assuming that rates follow the current forward curve.  Why is that?  Several reasons:

• We believe we’re in the middle innings of client cash sorting, which we’re tracing from May forward (remember April outflows were driven by tax season). While sorting activity has occurred faster than we expected at the beginning of the year, that is because the Fed increased rates much faster.  That faster pace of sorting in 2022, however, does not change our view that the magnitude of sorting (relative to uninvested client cash) is unlikely to exceed our experience through the last rising rate cycle.  And contrary to some perceptions, the net reduction in client cash on our balance sheet was actually less in September than we saw in August.
   


• Our deposit betas (i.e., changes in our Bank Sweep rates versus changes in the Fed Funds target rate) continue to be lower than the last cycle, and we see no reason for that to change. Clients at Schwab have access to a broad range of cash solutions (e.g., off balance sheet purchased money funds) that offer very attractive rates for their investment cash.  For everyday cash, our Bank Sweep solution provides a rate that is currently far superior to the level offered within checking accounts at the big banks.  What we have seen historically is that client interest in utilizing investment cash solutions is driven by the rate offered on those solutions and their own particular cash management priorities, rather than the specific rate offered on Bank Sweep. So while we expect to see marginal betas rise somewhat along with short-term rates, we do not anticipate a need to play 'catch up'.
   


• Approximately 40% of our interest-earning assets are tied to shorter-term interest rates, and extension risk within our fixed securities portfolio is quite limited.  Despite the dramatic increase in rates over the last three months, the duration of our overall investment portfolio remains at approximately 4 years – with our AFS portfolio under 3.5 years.  This reflects our focus on buying securities with less likelihood of slower paydowns in a rising rate environment.
   


• We expect to cover the vast majority of potential client cash sorting through cash on hand, cash generated from our investment portfolio, and organic cash brought to the firm as we attract new assets.
   


• We have ample access to additional sources of liquidity, including FHLB advances and potential retail CD issuance.  We have used these in the past for temporary funding, and we’d expect to do so again.  But our expectation is that any temporary usage won’t account for more than a mid-single digit percentage of our interest-earning assets while in place, thereby limiting upward pressure on aggregate liability beta.

Putting all this together, we expect to continue benefitting from rising rates in coming quarters – delivering on growth and capital return as our financial formula helps build stockholder value through the cycle. We look forward to sharing our current perspectives with you at our Business Update on October 27.

Forward-Looking Statements

This commentary contains forward-looking statements relating to Schwab’s net interest margin and revenue; client cash sorting; deposit betas; investment portfolio; liquidity funding for sorting activity and impact; liability betas; benefit from rising rates; growth; returning excess capital to stockholders; and stockholder value. 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, general market conditions, including the level of interest rates and equity valuations; client cash allocation decisions; client sensitivity to rates; competitive pressures on pricing; level of client assets, including cash balances; 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; margin loan balances; securities lending; the migration of bank deposit account balances; and client use of the company’s advisory solutions and other products and services. Other important factors include 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; manage expenses; monetize client assets; and other factors set forth in the company’s most recent reports on Form 10-K and Form
10-Q.