SCHW - Charles Schwab stock sinks even after upgrade to Buy at Citi

2023-03-13 09:16:52 ET

Charles Schwab ( NYSE: SCHW ) stock dropped 10.6% in Monday premarket trading, extending a 23% slump over the last two sessions, as market participants weigh the Federal Reserve's new lending facility for banks to stem the damage from the failures of Silicon Valley Bank ( SIVB ) and Signature Bank ( SBNY ). Citi thinks this pullback "creates a compelling entry point," upgrading the stock to Buy from Neutral.

While analyst Christopher Allen sees near-term revenue and earnings headwinds from increased funding costs and client cash sorting, he reckons these are already priced into the current stock price, he wrote in a note.

For cash sorting, which occurs when clients move their cash into higher-paying money market funds from lower-yielding bank deposits, Allen sees "the magnitude at a higher level than prior cycles," but "we do not see a material risk to deposits leaving SCHW given the composition of its deposit base and customer protections."

Trading at 15 times his 2023 EPS estimate, SCHW represents a more than 30% discount to historical averages, the note said.

In a separate note, Morgan Stanley analyst Michael Cyprys believes the Fed's new Bank Term Funding Program is a positive for Charles Schwab ( SCHW ) because it provides another source of liquidity and eliminates the need for the company to sell their securities portfolio at a potential loss to meet withdrawals.

He estimates around $275B, or ~85%, of SCHW's securities portfolio could be eligible under the new discount window. Last week, Cyprys called Charles Schwab's ( SCHW ) stock rout overdone given its strong liquidity profile and diverse deposit base.

Meanwhile, Seeking Alpha contributor The Value Investor is cautious to buy the dip, giving SCHW a Hold rating .

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