Shares of the large broker Charles Schwab (SCHW -0.41%) traded as much as 3.2% higher after the company reported a business update this morning, indicating that third-quarter results are trending as expected. The company also showed good net new asset growth.
Good third-quarter trends
Schwab reported net new asset growth of $32.8 billion in August, $4.9 billion more than in August of 2023. August also included expected attrition ahead of a client conversion weekend in September, the biggest transition weekend of five held throughout the year.
Transactional sweep cash (client funds yet to be invested) fell several billion from $371.8 billion in July to $366.8 billion in August, a significant improvement over August 2023 and 2022. Schwab has struggled in the high-interest-rate environment as clients have moved their sweep cash into higher-yielding financial instruments. Bank deposits had fallen roughly 17.5% year over year as of June.
Schwab is also likely benefiting this morning as more traders bet on the Federal Reserve lowering interest rates by a half point when they conclude their meeting on Wednesday. Not only would this help with the cash-sorting issues that Schwab has experienced in recent years, but the company is also sitting on billions of unrealized securities losses from investing in low-yielding, longer-dated securities before interest rates rose. These will recoup their value faster if interest rates begin to fall.
Is the stock a buy?
In a lower-rate environment, Schwab should benefit from less pressure on its sweep balances -- and potentially growth as well. As the company recoups paper losses on its securities book, equity will improve.
In the unlikely scenario that inflation reemerges and the Fed has to hike again, or if it doesn't lower interest rates as much as expected, Schwab may experience more cash sorting issues. The bank also plans to use a new strategy, given what just happened in the rising-rate cycle, so it may not have the earning power it once did.
Ultimately, I think it's OK for investors to dip their toes in the water because there is a trade on the recuperation of paper losses in the securities portfolio and therefore equity. But I would wait for more clarity on the strategic path forward before making this a significant position in your portfolio.
