Charles Schwab generated a profit of $1.6 billion in the first quarter of the year, it said Monday, faring better than Wall Street expected and seeming to ease recent concerns about its financial health. Schwab\u2019s stock, which plunged after the company was swept into the banking turmoil following the collapse of Silicon Valley Bank last month, rose after the report.<\/p>\n
Still, the outlook was mixed: A meaningful share of Schwab\u2019s customers moved their deposits into accounts that paid more interest, which could put pressure on the company\u2019s earnings for the foreseeable future.<\/p>\n
Although Schwab is best known for its giant brokerage business, it also has a large banking arm. The bank\u2019s balance sheet held billions of dollars in bonds that dropped in value as the Federal Reserve rapidly raised interest rates. Silicon Valley Bank held similar bonds, and when it was forced to sell some at a loss, nervous depositors demanded their money in a classic run on the bank.<\/p>\n
That spooked investors in Schwab, who worried that the company could face similar pressures; its stock fell, rousing its top executives to rush in to defend its financial position. Schwab\u2019s shares rose more than 2 percent on Monday, but they were still down more than 35 percent since the start of the year.<\/p>\n
\u201cI would certainly hope that by this point in time,\u201d Walt Bettinger, Schwab\u2019s chief executive officer, said on a conference call, \u201cspeculation that we would find ourselves in a position where we would be forced to sell securities that have temporary paper losses has been put to bed.\u201d<\/p>\n
Schwab\u2019s profit in the first three months of the year was up 14 percent from a year earlier, while revenue rose 10 percent. Though its earnings surpassed expectations, analysts had been steadily lowering their forecasts since January.<\/p>\n
\u201cSchwab\u2019s first-quarter earnings should put much of the concerns about the company to rest,\u201d said Michael Wong, director of equity research, financial services, at Morningstar.<\/p>\n
Customer deposits dropped significantly in the first quarter, falling by $41 billion, or 11 percent, from the previous quarter. But client holdings in Schwab\u2019s money market funds rose by nearly $80 billion, or 28 percent. The company opened one million new brokerage accounts in the first quarter, which brought in $132 billion of net new assets.<\/p>\n
\u201cSo clients that took deposits out seemed to stay in the Schwab ecosystem,\u201d Mr. Wong said.<\/p>\n
JPMorgan Chase, the nation\u2019s largest bank, last week reported a small rise in deposits in the first quarter, while Citigroup and Wells Fargo revealed modest outflows. The banks, like Schwab, also announced bigger-than-expected profits, because they were able to charge more for loans than they paid out in deposits as the Fed raised interest rates.<\/p>\n
About half of Schwab\u2019s revenue last year came from so-called net interest revenue, which was $2.7 billion in the first quarter, down 9 percent from the fourth quarter but up 27 percent from the same period in 2022.<\/p>\n
Most of that is generated from its customers\u2019 uninvested cash. Schwab pays customers interest of, say, half a percent on their assets and then invests the money at higher rates, pocketing the difference. But as customers shift deposits into higher-yielding accounts at Schwab or elsewhere, it raises the company\u2019s cost of funding and pinches profits.<\/p>\n
Schwab\u2019s executives acknowledged that these higher costs would continue to hit profits in the immediate future, but that it was a manageable challenge \u2014 and one it expected to taper off over the next several quarters.<\/p>\n
For now, said Peter Crawford, Schwab\u2019s chief financial officer, the company will pause stock buybacks \u201cin light of recent events within the U.S. banking sector, and the resulting regulatory uncertainty.\u201d<\/p>\n