(Bloomberg) — Shares of Charles Schwab Corp. suffered their biggest intraday drop since the depth of last year’s regional banking crisis, as the investment giant warned it would have to shrink to protect profits.
Most Read by Bloomberg
Going forward, Schwab is planning to rely more on off-balance sheet arrangements to house customer deposits, Chief Executive Walt Bettinger said on a conference call with analysts. By relying on partners like Toronto-Dominion Bank, such deals would enable Schwab to use capital more efficiently, he said.
“These various actions should lead – again over time – to a bank that is somewhat smaller than our bank has been in recent years, while maintaining the ability to meet the banking needs of our customers, to reduce intensity of our capital and, most importantly, to protect the economy we are able to generate from owning a bank,” said Bettinger.
The warning comes a year ago, when investors began to sour on Schwab after the Federal Reserve’s moves to rapidly raise interest rates left the company with paper losses as the value of its bond investments took a big hit. At the same time, consumers were reducing their bank deposits as they sought higher-yielding alternatives, causing the company to seek more expensive sources of funding.
The company is now looking to pay down some of the high-cost debt it took on, though it may have to use some of the excess capital it would have used for buybacks to do so, executives warned on Tuesday.
The company will also begin restructuring its balance sheet in order to shorten the duration of a portion of its investment portfolio. Bettinger warned that such a move could lead to more earnings volatility in the near term, but would reduce the company’s need to rely on additional forms of borrowing.
“This definition of a transition year is coming to fruition,” Bettinger said. “All of these issues position us for a period of strong growth in customer metrics and financial results in the coming years.”
The company’s shares were down 8.9% at 11:56 a.m. in New York, the biggest intraday drop since March 2023 and making it the worst performer on the S&P 500 Index. The stock had risen 9.1% this year to close of trading on Monday.
Crowded space
The latest moves come after the investment giant reported that fewer clients opened new brokerage accounts in the second quarter than analysts expected.
New brokerage accounts in the quarter rose to 985,000, the company said Tuesday in a statement. While that’s up from 960,000 in the same period a year ago, it’s less than the 1.04 million analysts in a Bloomberg survey were expecting.
However, Schwab reported $1.33 billion in net income for the three-month period, beating an average of $1.23 billion in analyst estimates. Earnings per share for the quarter were 66 cents, which also beat expectations.
The retail brokerage space has become more crowded as consumers flocked to markets during the pandemic and stuck with their new trading habits. Schwab has maintained its more traditional approach to retail investing compared to crypto-friendly competitors such as Robinhood Markets Inc., but will open an alternative investment platform to qualified, self-directed individual investors this year. Bettinger said on Tuesday’s call with analysts that six out of ten new customers are under the age of 40.
The Westlake, Texas-based firm announced in May that Mike Verdeschi, a three-decade veteran of Citigroup Inc., will take over as chief financial officer from Peter Crawford. Crawford helped Schwab through last year’s financial turmoil that hit the banking division.
Schwab, founded by Charles “Chuck” Schwab more than 50 years ago, oversees more than $9.4 trillion in total client assets.
Shrinking bank
With off-balance sheet deals, customers would still open a bank account with Schwab, but their money would stay at a third-party bank. Such a deal would mean Schwab wouldn’t have to hold as much capital as it would if it kept deposits — which are considered liabilities to banks — in-house.
The moves would make Schwab look more like rivals LPL Financial Holdings Inc. and Raymond James Financial Inc., whose shares outperformed Schwab last year because investors judged both companies faced less funding risk, according to analysts at Keefe Bruyette & Woods.
Executives are still planning to lean more heavily on lending as they look for additional ways to boost profits in the coming years. For example, the company is still planning to expand its offerings such as residential mortgages, home equity lines of credit and asset pledged lines in order to win more customers.
“Most of our significant competitors have the ability to assist customers with both their investment needs and their borrowing needs,” Bettinger said. “We believe that firms that do not offer credit services are at a strategic disadvantage. This will appear more and more over time, so we are committed to providing quality lending services.”
(Updates with the latest share price in paragraph eight, further information about off-balance sheet arrangements in paragraph 15.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg LP