The Charles Schwab Corporation (SCHW) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Successful Ameritrade Integration: The integration of Ameritrade has been completed, bringing $2 trillion in assets and 17 million client accounts to Schwab. This has positioned Schwab for strong growth in client metrics and financial results in the coming years.

• Positive Client Engagement and Asset Flows: Client engagement remained solid with equity buy-sell ratio at about 1.1. Net new assets year-to-date were over $150 billion, indicating strong client activity and interest in Schwab's offerings.

• Growth in Managed Investing Solutions: There has been a significant increase in interest among clients for Managed Investing solutions, with nearly $25 billion in net flows, a 56% increase over the previous year.

• High Net Worth Retail Client Engagement: High net worth retail clients with a financial consultant brought in more than 3x the average household net new assets, indicating strong relationships and client satisfaction.

• Mobile App Enhancements: The Schwab mobile app received high ratings and enhancements, including a customizable dashboard, improving the client experience.

Pessimistic Highlights

• Ameritrade Client Asset Flows Below Target: While former Ameritrade retail clients have started bringing in assets on a net basis, their level of net new assets remains below Schwab's target range of 5% to 7%.

• Seasonal Pressures and Behavioral Differences: Seasonality and behavioral differences in the former Ameritrade client base have influenced asset gathering in the near term, impacting the overall growth rate.

Company Outlook

• Transition Year with Strong Growth Ahead: 2024 is defined as a transition year, with expectations of improving earnings results and strong growth into 2025 and beyond. The completion of Ameritrade integration and positive client metrics position Schwab for continued success.

• Focus on Lending Services and Banking: Schwab remains committed to offering lending services and banking needs, planning to make the application and approval process more streamlined and efficient.

• Strategic Focus Areas: Schwab will continue to advance its four strategic focus areas, including increasing scale, driving efficiency, win-win monetization, and investing in technology to support long-term growth.

Q & A Highlights

• Q: Can you talk about your view on how you make deposit rates as the Fed cuts? (Brian Bedell, Deutsche Bank)

  A: Deposit betas tend to be a bit higher in an easing cycle than in a tightening cycle. While decisions on deposit rates have not been made, it's reasonable to expect that deposit betas will be higher as rates come down. (Peter Crawford)

• Q: How much of your bank assets might migrate to third-party banks over time? (Ken Worthington, JPMorgan)

  A: It's early for definitive answers, but the economics can be very attractive for Schwab without the need for capital. The level of migration will ensure sufficient deposits at Schwab Bank to fund loans and maintain appropriate liquidity levels. (Walt Bettinger)

• Q: On Ameritrade attrition abating and net new assets getting back to historical levels, do you have any expectation of when you could get back into that range? (Kyle Voigt, KBW)

  A: The behavior from Ameritrade clients is changing as expected, moving from outflows to inflows. Introducing Schwab's model to Ameritrade clients is expected to accelerate net new asset formation, aligning with Schwab's organic growth rate over time. (Walt Bettinger)

• Q: Can you elaborate on your assumptions on what's going to drive the sequential growth from Q3 to Q4? (Dan Fannon, Jefferies)

  A: The scenario is based on a single Fed cut in September, with client cash realignment activity continuing to moderate. The primary driver for the expected growth is the moderation of client transactional cash realignment activity and the paydown of supplemental borrowing. (Peter Crawford)

• Q: On the potential opportunity to accelerate pay-downs of high-cost liabilities by repositioning the securities portfolio, what are some constraints? (Steven Chubak, Wolfe Research)

  A: While repositioning trades can accelerate the paydown of supplemental borrowing, Schwab is mindful of not jeopardizing client trust for the sake of moving forward something that is expected to happen on its own. (Peter Crawford)

• Q: Regarding the shift to third-party banks for deposits, what led to this strategic shift? (Brennan Hawken, UBS)

  A: Over time, there may be more efficient approaches than maintaining 100% of the deposits at Schwab Bank. This strategy aims to maintain sufficient deposits to fund loans and have appropriate liquidity levels while exploring opportunities to lighten the capital load. (Peter Crawford)

• Q: Can you provide an update on your expected pace of securities maturing off of the balance sheet? (Benjamin Budish, Barclays)

  A: The pace of cash flows off the investment portfolio is in the $10 billion to $11 billion a quarter range, expected to decrease commensurate with the size of the portfolio over the next several quarters. (Peter Crawford)

• Q: How are you thinking about the normalized framework for growth in Schwab's deposits? (Alex Blostein, Goldman Sachs)

  A: In a stable environment, client transactional cash is expected to grow with the growth in accounts and total assets. Over time, this growth aligns with the growth in assets and accounts, with variability influenced by market engagement and rate-driven allocations. (Peter Crawford)

• Q: How much of the gap in lending compared to the industry can Schwab close? (Bill Katz, TD Cowen)

  A: Schwab sees significant runway to expand lending capabilities by creating an easy, straightforward, and client-friendly process. This includes enhancing the mortgage process and lending to high net worth clients, aiming to make Schwab the preferred borrowing source for clients. (Walt Bettinger)

• Q: Could you clarify the magnitude of cash in fiduciary accounts and how you think about the risk over the long term that industry practices evolve? (Michael Cyprys, Morgan Stanley)

  A: In Schwab's fiduciary relationships, cash assets are invested in a sweep government money fund, avoiding the exposure seen in the Wells Fargo announcement. Schwab has been offering money market fund sweep cash for an extended period. (Walt Bettinger)

• Q: I wanted to ask about the 3% NIM outlook for 2025. What are the parameters you're baking in to get there? (Chris Allen, Citi)

  A: The primary driver for the NIM approaching 3% by the end of 2025 is the moderation of client transactional cash realignment activity and the paydown of supplemental borrowing. This does not include changes related to shortening duration as mentioned earlier. (Peter Crawford)

• Q: Just had a question about lending and the opportunity to close the gap with the industry. (Devin Ryan, Citizens JMP)

  A: Schwab is focused on expanding lending capabilities by creating an industry-leading process and experience for clients. This includes digital enhancements and exceptional rates, aiming to make Schwab the preferred borrowing source for clients and advisers. (Walt Bettinger)