2023-04-21 12:12:53 ET
J.P. Morgan contended in a note Friday that Charles Schwab ( NYSE: SCHW ) stock could trade at a higher multiple over the long run if the brokerage giant were to address investors' views of the risks surrounding its bank by de-banking.
SCHW fell victim to last month's collapse of Silicon Valley Bank and two other regional bank failures, dropping to the lowest levels since January 2021, as shareholders priced in cash sorting risk amid rising interest rates, bank run risk, regulatory risk and valuation risk, Kenneth Worthington and team noted. The stock has been gyrating between $50-$60 since the banking turmoil, down from the mid-$70s mark just days before the drama began.
While divorcing its bank would likely result in a material decline in Schwab's ( SCHW ) earnings, Worthington continued, "we believe Schwab would trade at a higher (possibly meaningfully higher) multiple, which would/ could justify a higher value than the stock is trading at today."
The "feasible" process of de-banking, and thus focusing on sweeping cash into money market funds and raking in management fees, is not expected to be supported by management as such a move would hinder earnings too much, the note said.
Speaking to CNBC, Schwab ( SCHW ) CEO Walt Bettinger said the company has considered de-banking, though "in the end as we look at it and weigh all the different factors, it's not something that we're going to look at in the short run."
If the company moved all the cash sweep balances to a money market fund rather than its own bank, Bettinger added, "we would have zero revenue on those cash sweeps because we would waive our management fee to ensure clients didn't have a negative yield."
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Charles Schwab stock could be worth more if broker de-banks, analyst says