2023-08-16 11:21:54 ET
Summary
- Charles Schwab demonstrated continued growth with an increase in client assets to an all-time high of $8.24 trillion.
- Net new assets for the month came in at $12.9 billion, with an adjusted reading of $13.7 billion.
- The company added 303,000 new brokerage accounts in July, maintaining a trend of new accounts exceeding 300,000 for the 9th consecutive month.
- There were some weak spots, but the overall picture and trajectory of the company is bullish.
In what is undeniably an uncertain and volatile environment, achieving any amount of growth can be a win. That is what I have come to accept. One company that, for the most part, continues to demonstrate this kind of growth, is brokerage giant Charles Schwab ( SCHW ). On August 14th, the management team at the company announced some new financial data covering the month of July. What they showed was that, for the most part, the company continues to expand. For those who are bullish the company like I am, this is definitely a positive. Though, it is worth noting that even management acknowledged that there have been some headwinds that have prevented growth from being what it ultimately could have been.
Upwards and onwards
Those who follow my work closely know that Charles Schwab has been one company of only a few that has been included in my portfolio. I started buying shares earlier this year in response to the banking crisis. Its units followed the downward trajectory that almost all financial institutions experienced during that time. But every good thing must run its course and, by late July, I had started selling off my position to allocate the capital elsewhere. I don't remember the exact profit that I made off the units. But it was solid for the short window of time that I owned the stock. I even wrote an article around that time discussing my decision to downgrade the company from a ‘strong buy’ to a ‘buy’.
Even though I downgraded the stock, the ‘buy’ rating that I assigned it reflected my belief that shares should still outperform the broader market for the foreseeable future. And that belief was fueled by the fact that, over time, the company should continue to expand. The data just released is the first glimpse into the health of the company we have seen since July when shares spiked after management reported financial results covering the second quarter of the 2023 fiscal year. And for the most part, the results are encouraging.
First and foremost, it's important to note that the value of client assets that the company has hit an all-time high of $8.24 trillion during the quarter. That's an increase of $225.2 billion, or 2.8%, over the $8.02 trillion reported in June. It also represents an increase of $936.2 billion, or 12.8%, over the $7.30 trillion reported in July of 2022. Most of this growth came from continued strong performance for the investors that trusts the company with their assets. Net market gains for the month totaled $212.3 billion. That follows $331.8 billion worth of net market gains one month earlier.
Another component behind that increase is what management calls net new assets. This represents the amount of assets that come on from clients as a result of deposits. This came in at $12.9 billion for the month, with an adjusted reading of $13.7 billion. Most months, net new assets range between about $20 billion and $45 billion, with the vast majority of the months seeing readings above $30 billion. But the $12.9 billion reported was not unprecedented. In April of this year, net new assets came in at $13.6 billion. And on an adjusted basis, the company actually saw an outflow during that time of $2.3 billion.
Undoubtedly, part of what helped the company during this time was the fact that it added 303,000 new brokerage accounts in July. This was the lowest we have seen since the 303,000 that the company reported in November of 2022. But it's well within the historical average of what we have seen from month to month over the past year. Total active brokerage accounts came in at an all-time high of 34.43 million. This is 52,000 above the 34.38 million reported for June. While this is also lower than what the company had seen in prior months, it's actually above what the company has reported in five of the past 12 months. So this would definitely not be a bad showing as far as I'm concerned.
This is not to say that everything that the company reported was positive. There were some weak spots. For instance, the total value of average interest earning assets that the company had on its books came in at $466.66 billion. That's down from the $479.75 billion reported for June. In fact, it represents A continued trend that the company has experienced for over a year now. For context, back in July of last year, average interest earning assets totaled $605.75 billion. That means that the level we have today is 20.8% lower than it was last year. Higher interest rates should help the company make up for this to some extent. But at some point, the outflow of average interest earning assets needs to die down.
Some of the pain that Charles Schwab experienced stemmed from the fact that bank account deposits continue their descent. In July, they came in at $102.4 billion. This also marks yet another month of sequential declines that the company is having to contend with. In July of last year, for instance, bank account deposits totaled $152.8 billion. But the good news here is that the business does continue to see money flood into its money market funds. The company hit an all-time high balance of $405.1 billion for the month. That's up from the $395.6 billion reported for June and it compares favorably to the $177.3 billion reported only one year ago. Money market funds might not be terribly profitable for the enterprise, but to see assets increase there as opposed to leaving the company entirely is encouraging.
The management team at Charles Schwab did mention in the update that the company was seeing attrition regarding TD Ameritrade clients as the company continues to transition them onto the Charles Schwab platform. This natural attrition, combined with the company’s decision to ‘resign’ from certain custodial relationships that it viewed to be atypical, is expected to result in the loss of about 4% of the revenue and about 1% of combined total client assets as of the end of 2022, associated with TD Ameritrade. This seems to be in line with, or is perhaps slightly better than, what management anticipated when they first announced the deal. Even with that negative news, the firm lauded its performance during the month, specifically the fact that the 303,000 new brokerage accounts represented the 9th consecutive month in which the company has seen new accounts exceed 300,000. They even went so far as to say that the results achieved in July demonstrate ‘healthy client engagement and momentum’ and they stated that they believe that deposit growth will resume sometime later this year.
Takeaway
Based on the data provided, I must say that I am content with the results reported by management for the month of July. The data that was revealed shows continued growth, even though there were some areas of weakness. It was nice to get management's commentary on the matter and, thanks to strong market performance, as well as continued client inflows, assets did hit an all-time high. In the long run, I suspect this trend will continue. Though, I also do believe that the easy money has already been made.
For further details see:
Charles Schwab: The Perpetual Growth Machine