Charles Schwab has revealed plans to reduce operating expenses through a series of cost-cutting measures, including job cuts and office closures or downsizing. Amid a turbulent year for the company, Schwab aims to achieve at least $500 million in annual cost savings. Additionally, the company expects further savings from streamlining operations following its acquisition of TD Ameritrade.
While Schwab acknowledges that short-term expenses will be incurred due to severance pay for laid-off employees, these measures are necessary for long-term financial stability. The firm currently employs approximately 36,000 full-time staff.
The cash-sorting process has contributed to higher expenses for Schwab this year. As a significant banking institution, Schwab channels uninvested customer cash into low-interest bank accounts (currently at 0.48%). However, as short-term savings rates have increased, customers have opted for higher-earning alternatives. Consequently, Schwab has had to rely on costlier funding sources like Federal Home Loan Bank borrowings, accumulating $41 billion in FHLB loans as of June 30, up from $12 billion in the same period last year.
In light of these circumstances, Schwab remains committed to its restructuring efforts, aiming to achieve financial efficiency and mitigate the challenges faced throughout this eventful year.
Cash-Sorting Situation Improving
Despite a decrease in bank deposits during the second quarter, cash-sorting appears to be easing for Schwab. The company’s bank deposits dropped to $304 billion from $326 billion in the first quarter and $442 billion from the same period last year.
TD Effect
This year marks an important milestone for Schwab as it integrates TD Ameritrade, which it acquired in 2020. Schwab is currently in the process of migrating clients and advisors from Ameritrade’s platform to its own. However, not all Ameritrade customers are willing to make the transition.
Schwab recently reported a decline in net new money for July, attributing it to a small amount of attrition among TD Ameritrade clients and advisors. In July, core net new assets totaled $13.7 billion, down from $33.8 billion in June and $31.5 billion in the same month last year. Schwab stated that the attrition was as expected.
While the stock had been recovering since May, it has experienced a recent slide since the announcement of these developments.
Analysts Remain Bullish on Schwab Stock
Despite the challenges faced by Schwab, analysts remain optimistic about the stock. They believe that the shares are attractively valued and view the company’s issues as short-term. Morningstar’s Michael Wong recently raised his fair value estimate for Charles Schwab to $80 from $70. In an Aug. 17 research note, Wong wrote that the company is “turning the corner” on its cash-sorting problems.
Wong further added, “We currently expect deposits to stabilize around the end of 2023 and that the company can then pay down more of its high-cost funding that will boost net interest income and earnings. However, an eventual decline in the federal-funds rate that lowers the yield on bank assets will offset much of the benefit from lower funding costs.”
