Charles Schwab Should Have Enough Equity and Liquidity To Ride Out Current Storm

Charles Schwab Stock at a Glance

• Current Morningstar Fair Value Estimate: $87
• Charles Schwab Stock Star Rating: 4 stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Charles Schwab Stock Update

Charles Schwab’s SCHW stock price decreased 12.77% on March 9, as concerns rippled across a large swath of the financial sector due to an announcement from Silicon Valley Bank. Silicon Valley Bank announced that it sold substantially all of its available-for-sale securities portfolio, was booking a $1.8 billion after-tax loss related to the sale, and that it was raising equity capital.

Many banks and companies with related banking entities, such as Charles Schwab, also have a material amount of fixed income securities on their balance sheet with unrealized losses, as recently rising interest rates have decreased the value of fixed income securities. Based on our initial analysis, we don’t have concerns over wide-moat Charles Schwab’s liquidity or capital levels, don’t plan to make a material change to our $87 fair value estimate, and assess shares are undervalued.

At the end of 2022, Charles Schwab had $36.6 billion of shareholders’ equity and a tier 1 leverage ratio of 7.2%, which are fairly good. The company has an internal target of 6.5% to 6.75% for its tier 1 leverage ratio and the regulatory minimum is 4%. Included in the company’s shareholders’ equity is about $28 billion of unrealized losses, so shareholders’ equity would be upward of $60 billion without the unrealized losses.

Based on how bank regulatory capital ratios are calculated for Schwab, the 7.2% tier 1 leverage ratio currently excludes the unrealized losses. Schwab will continue to be able to exclude these losses until its balance sheet is consistently above $700 billion, and its balance sheet was around $550 billion at the end of the fourth quarter.

The value of Schwab’s securities portfolio should increase over the medium term with the unrealized losses significantly reducing. As long as Schwab holds the securities until they mature, it will realize the full value of the securities. The unrealized losses from rising interest rates are different from losses related to credit issues.