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Walt Bettinger & Rick Wurster on CNBC, October 15, 2024

SARA EISEN: Welcome back. Look at Charles Schwab. The stock is soaring, up now more than 7-1/2% as the company beats Q3 earnings and revenue estimates, reports a 27% increase in client assets to nearly $10 trillion. That said, the company will undergo a CEO transition on January 1st of next year. Joining us now in an exclusive interview is Charles Schwab CEO, Walt Bettinger and incoming CEO Rick Worcester. Gentlemen, good morning. It’s good to have you.

WALT BETTINGER: Oh, good morning, Sara. Thanks for the invitation. I know Rick and I are both pleased to be with you today.

SARA: No, we’re happy to have you, especially after you announced that transition with us here on CNBC two weeks ago. So on this news today on earnings, Walt, it feels like the biggest development here is the uptick in client sweep cash. Can you explain what that means and why investors are so excited about it?

WALT: Well, Sara, I think the first thing we want to make clear is the business that we’re in has been healthy throughout this entire time that the stock has been a bit more volatile. Even in some of the more challenging times last year, our clients still brought us hundreds of billions of dollars in net new assets, and all that’s happening now is clients are continuing making rational decisions about their cash. As interest rates went up, we encouraged them to ensure that their investment cash was placed where it could maximize the yield relative to their risk tolerance. And now as interest rates moderate a little bit, clients are making some different decisions than they might have made when rates were skyrocketing. So the business has been healthy, and now you’re starting to see some of the financial metrics match up to where the clients have been.

SARA: And that was the source of anxiety around Schwab, right, when we talked, Walt, in the spring of last year after the regional bank issues and crisis. So Rick, I guess to you, can you declare victory now over this cash sorting issue?

RICK WURSTER: Well, what’s important is that we deliver for our clients. And I think in this past quarter you saw robust client engagement. You saw clients engage in our wealth solutions and our lending solutions at levels that were historic for us. And that’s what’s most important to us.

In terms of declaring victory, you know, clients are going to put their cash in the place that’s best for them, and we’re going to encourage them to do that. So we did see positive developments on the cash front. We saw $9 billion of cash flow sweep into the bank, into our broker-dealer. That allowed us to pay down supplemental funding. And the combination of those two things, I think, is a big part of the reason that the stock is

up today. But what’s most important to us is making sure that we’re delivering for the clients.

SARA: Walt, what’s it going to take to get more money moving out of money market funds? Is it the speed of rate cuts? The size of rate cuts? What do you think?

WALT: Well, certainly lower rates will cause clients to reevaluate where they place their cash. But again, I just want to take us back to we were very proactive in reaching out to our clients. It’s the right thing to do. Our strategy, as you know, is through clients’ eyes. So we’re always going to try to encourage our clients to do what’s in their best interest, even if it impacts our earnings in the short run. That’s been the philosophy that Chuck has had for over five decades, and it’s served us well. If we do the right thing by our clients, in the long run, we’ll be rewarded, our clients will be rewarded, and importantly, our stockholders will be rewarded also.

SARA: Rick, more broadly, how should investors think about a Schwab performance in a lower rate environment, because there are obviously puts and takes for the business? Is it overall a net positive to have lower rates?

RICK: Well, as we sit here today, we’re confident that our net interest margin will expand as we go into 2025. And that’s regardless of how much the Fed moves rates in the coming period. We’re coming out of a period where our bonds were invested at a lower interest rate far below where Fed Funds are today. So even if Fed Funds comes down 50, 100, 200 basis points, that’s still going to provide us with an opportunity to invest at higher rates than our maturing bonds. And so as a result, our net interest margin will expand, and investors should see our earnings grow as a result.

SARA: What about the state of retail investors, Walt? What can we glean from your numbers, and where do you think that goes? How much more scope is there for participation?

WALT: Well, our investors are fairly bullish right now. They did moderate some of their trade volume late into the third quarter. I think they were taking a breather trying to evaluate the Fed’s next move. And of course, with the equity markets at all-time highs, that plays into it. But our clients are bullish. The thing to keep in mind about our client base, although we have many very active traders who do an excellent job at that, the majority of our clients are long-term investors. And so they don’t react that much to what might be, say, short-term swings within the perceptions of where the Fed is moving or what equity markets are doing at one point in time.

SARA: So where do you see, Rick, potential for growth here in terms of retail customer engagement?

RICK: Well, first, just to build off what Walt said, our clients are very engaged. We’ve seen our trading activity increase. We’ve seen margin growth throughout the year. Our clients are engaged.

In terms of growth, it’s going to come from serving our clients’ holistic needs. We have a range of clients, both in terms of the advisors that we serve, but also our retail clients. And there’s an opportunity to do more for them, to bring our wealth and advice capability to the retail investor, to help them from a lending standpoint. We know that the more we can help a client, the more we can put our arms around the everyday client and help them in their financial journey, the better off they’re going to be, and we will grow along the way.

SARA: Where do you think, Walt, investors are right now on the stock? Do you think that there is still an underappreciated story here for Schwab, or do you feel good about it?

WALT: Well, I think we take a long-term view, and ultimately, in time, stock performance will be a direct reflection of our ability to serve our clients. You get mismatches at times. I think we’ve seen that a bit in the last 18 months. But we understand that the stock market is very intelligent, and it makes rational decisions. Our emphasis is on our clients. In the long run, the stock price will always reflect that. We maybe are getting a little bit of catch-up today, but we feel very good about where we are with clients, and therefore, where the stock will be in the long run.

SARA: Yeah, with Walt’s retirement, Rick, new CFO, how are the investor conversations going for you as it relates to wondering about a new strategy and a new direction?

RICK: Well, I’m fortunate that I’ve spent most of the last decade working closely with Walt, and in particular, in the last three years. So as we think about this transition, it’s one of continuity. And I’m incredibly grateful to be in this role. Walt, when he started 16 years ago, our company was an $18 billion market cap company. And I have a good fortune of stepping into this role at a time where we’re over 130 billion now, and we’re in a period where we’re number one or number two in the two big markets that we participate in, which also happen to be the fastest growing segments of our industry. So coming in at a time, we’ve never had stronger capabilities for clients, and we have a plan that Walt and I have shared for a while and will continue to execute. And so that has made the conversations with investors pretty straightforward.

SARA: Well, we certainly appreciate you both joining us. I think it really helps to paint that picture on an earnings day like this one. Thank you, Walt and Rick.

WALT: Thank you, Sara.

SARA: Incoming and outgoing CEOs of Charles Schwab.

Disclosure:

Some of the statements in this document may be forward looking and contain certain risks and uncertainties.