Charles Schwab Earnings: Firing on All Cylinders Amid Heavy Trading

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $109.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Charles Schwab’s Earnings

Charles Schwab SCHW reported third-quarter results on Oct. 16, with investors looking for signs of retail trading strength, ongoing improvement in net interest margin, and guidance regarding the long-term balance sheet strategy.

Why it matters: Management commentary during the call validates our view that the firm is likely to prioritize growth at Schwab Bank, having paid down the lion’s share of its high-cost supplemental borrowing from 2023. We believe the market continues to underestimate the earnings power of Schwab’s banking franchise.

• During the regional banking crisis in 2023, Schwab’s leadership exhibited more willingness to pursue a balance-sheet-light sweep deposit approach, which reduced its exposure to interest rate risk.
• We’re increasingly confident that in an environment of higher investment yields, management will prioritize growth at Schwab Bank, with net interest margin swelling to 2.86% during the third quarter, already ahead of our year-end target.
• Going into this quarter’s earnings release, our midterm forecast for net interest income of $27.5 billion in 2029 was well above the S&P CapIQ consensus estimate of $20 billion, reflecting our constructive view. We expect that gap to narrow.

The bottom line: After digesting third-quarter results, we’ve raised our fair value estimate for wide-moat Schwab to $109 per share from $105, driven by a quicker-than-expected paydown of high-cost funding (with higher net interest income hitting earlier in our forecast), still-strong retail trading volume, and time value of money.

• Our long-term view remains nearly intact. We’ve raised our estimate for 10-year compound annual growth in revenue and operating profit by 20 basis points and 30 basis points, respectively, to 11.5% and 15.1%.
• We’ve also upgraded our Morningstar Uncertainty Rating to Medium from High, qualitatively reflective of a stabilizing macroeconomic environment and quantitatively aligned with our internal tool.