2023-09-18 12:09:16 ET
Summary
- The Charles Schwab Corporation reported a decline in client assets in August due to market losses, but net new assets still grew by $8.1 billion.
- The company added 311,000 new brokerage accounts in August, slightly lower than the previous year.
- Average interest-earning assets continue to decline, posing a challenge for Charles Schwab's profitability.
- But growth in some key areas are setting the stage for long-term growth.
Although I am a fan of and a believer in The Charles Schwab Corporation ( SCHW ) from an investment perspective, one thing that investors should understand is that not every development provided by the company will be positive. That is especially true in this uncertain economic environment. The latest example of this can be seen by looking at data that management reported covering the month of August. While the company was successful in some key areas, there were some others in which weakness reared its ugly head. And while that is not great to see, nor is it comforting for those who have money in the firm, what is most important is to know that the overall trend for the company, for the most part, is positive.
A mixed month
Whenever I look at data provided by the management team at Charles Schwab, there are a few key metrics that I prioritize. First and foremost would be the overall value of client assets that the company has on its books. In July of this year, the firm reached an all-time high of $8.24 trillion of client assets. That was 2.8%, or $225.2 billion, higher than what the business reported in June, and it represented a year-over-year increase of 12.8%, or $936.2 billion. Unfortunately, August could not be as kind. By the end of the month, client assets had fallen to $8.09 trillion. However, the key driver behind this was a $154.4 billion hit caused by market losses. Such volatility should be anticipated.
More importantly, net new assets, which represent the value of assets that customers deposited into the company's accounts, grew by $8.1 billion. Although this looks like a significant amount of money, it's actually the lowest monthly deposit that Charles Schwab experienced in at least the past 12 months. Core net new assets, which adjusts for significant one-time inflows and outflows, was even lower with a gain of $4.9 billion. This is the second-worst month that the company experienced over the past year or so. In its press release regarding the matter, management spun this in a positive way. They actually said that, if we exclude TD Ameritrade brokerage originated clients, then core net new assets would have grown by $28.1 billion. The difference here can be chalked up to attrition, with some customers at TD Ameritrade not migrating assets from their accounts over to the accounts at Charles Schwab. Management even went so far as to say that the results significantly exceeded what they anticipated. So that is something to be happy about.
Also during August, the company succeeded in adding 311,000 new brokerage accounts to its platform. This was up from the 303,000 reported in July, though it is down from the 332,000 reported one year earlier. The typical range for the company over the past year or so has been about 300,000 to 350,000, with some months coming in above or below these levels. In March of this year, for instance, the company saw 378,000 new brokerage accounts, while last September a reported 287,000.
Of course, this is different from active brokerage accounts. By the end of the month, the company had 34.44 million of these. That was up only six thousand compared to the month prior, and it represented the weakest month that the company has experienced since it reported a decline of 260,000 active accounts in November of 2022. Not surprisingly, activity ebbs and flows based on market conditions. And when the market falls, we should see some weakness on this front.
This also shows up when you look at net buying and selling activity from month to month. In August, for instance, the company saw net equities sales of $278 million. Meanwhile, hybrid sales saw a net reading of $1.04 billion. And at the same time, bonds reported net purchases of $4.70 billion. In fact, the bond purchases were the highest the company has seen since March of this year.
Another incredibly important metric to pay attention to is the value of average interest earning assets. This was actually a big negative for the company, with the consistent month-over-month downtrend that began well over a year ago continuing. In August, this figure totaled $449.48 billion. That's down from the $466.66 billion reported in July, and it is significantly lower than the $586.15 billion that the company had in August of 2022. Even though total assets are rising, it is problematic to see average interest earning assets drop like this. And that is because these are assets that, by their very definition, allow Charles Schwab to generate a profit off of. Even though this may not seem like much, a net interest margin of even 2% can translate to nearly $9 billion per year off of the average scene in August. Using the figure from August 2022 instead, we would get $11.7 billion. So that is a $2.7 billion swing in that hypothetical scenario. To be very clear, I did not pick the 2% estimate out of thin air. In the most recent quarter , the net interest margin for the company was 2.03%. But it does fluctuate from quarter to quarter.
When it comes to declining assets, one of the areas investors need to watch closest would be the bank account deposits. This has been a source of pain for Charles Schwab for at least the past year. Back in August of 2022, the company had $143.1 billion in bank account deposits on its books. Not a single month has gone by in the past 12 months in which deposits have actually increased. They had been slowing down, with declines of only between $0.2 billion and $0.3 billion per month from April of this year through July. But in August, they dropped by a hefty $0.9 billion from $102.4 billion to $101.5 billion. With high interest rates, depositors are getting more selective about where they put their capital. And bank accounts don't even come close to keeping up with inflation. The good news is that some of this pain has been offset by continued growth in money market funds. These are far less valuable to Charles Schwab on a dollar-for-dollar basis. But we did see a hefty increase from $405.1 billion in July of this year to $423.5 billion in August.
Takeaway
To be perfectly honest with you, August was not exactly a great month for Charles Schwab. I wouldn't go so far as to call it a horrible month, either. But it is clear that we will see volatility like this from time to time. We are unfortunate enough to see continued weakness in some key areas, particularly when it comes to average interest earning assets. But when you focus on some of the other very important aspects of the company, like the brokerage side of the equation and the money market funds, we see that overall client assets, net of fluctuations caused by market forces, continue to increase. And in the long run, that is what will drive value for shareholders.
For further details see:
Charles Schwab: Don't Let Mixed Results Distract From Long-Term Growth