Fed’s New Banking Support Effort Adds to Confidence Around Charles Schwab’s Outlook

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 SCHW has always had multiple levers to increase its liquidity, and the Federal Reserve’s newly announced Bank Term Funding Program, or BTFP, should provide additional confidence in Charles Schwab and U.S. banking institutions. The BTFP will offer loans of up to one year to eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. At the end of 2022, Schwab had about $300 billion of close to credit-risk-free U.S. Treasuries and agency mortgage-backed securities at amortized cost (around $275 billion at fair value). This $300 billion of assets that can be used as collateral plus the $40 billion that the company has on its balance sheet compares with $367 billion of deposits, so wide-moat Charles Schwab should be fine from a liquidity perspective.

While we believe Charles Schwab’s liquidity and capital are fine, funding costs are moving up and that will pressure revenue growth and operating margin expansion. Charles Schwab has been taking steps to increase its cash levels, such as borrowing from the Federal Home Loan Bank and issuing retail brokered certificates of deposits. The rates on these sources of funding have recently been around 4.5% to upward of 5%. It’s possible that these funding sources could increase funding costs by over $2 billion in 2023. Under this scenario, we would still expect revenue to grow a mid- to upper-single-digit percentage and adjusted earnings per share to grow over 10%. We don’t anticipate making a significant change to our $87 fair value estimate for Charles Schwab and assess shares are undervalued.