Schwab's Balance Sheet Woes May Overshadow Q1 Profit Gain

Revenue, profit likely rose, but so did interest expenses and securities losses

Charles Schwab office building in SOMA district

Andrei Stanescu / Getty Images

Rising interest rates likely led to higher net income but increased balance sheet losses for stock brokerage giant Charles Schwab (SCHW) in the first quarter, according to financial results the firm will release Monday.

Schwab is the largest U.S. brokerage house with about $7.5 trillion in assets under management and is expected to report a profit of $1.7 billion, or 83 cents per share, according to estimates from Visible Alpha. That would represent an increase of 18% over last year's first quarter.

The firm's revenue likely rose 10% versus a year ago to $5.2 billion, buoyed by an expected 72% surge in interest revenue to $4 billion—even as the amount of interest-earning assets likely fell 24% to $490 billion.

However, interest expenses also likely rose tenfold to $1.3 billion from just $136 million in last year's first quarter, when the Federal Reserve first began raising interest rates from historic pandemic lows.

"Mismanaged Balance Sheet"

Those higher rates also dropped the value of certain securities in the firm's portfolio. As a result, their recorded balance sheet losses probably doubled to $22.2 billion from a year ago.

Similar unrealized losses led to the failures of Silicon Valley Bank and New York-based Signature Bank in the March. Concern about them spread throughout the financial sector, and investors responded negatively.

Schwab's shares experienced some of the worst selling pressure. They lost 37% of their value in the quarter, compared with a 6% decline for the broader S&P 500 Financials sector. In March alone, Schwab's stock plunged by a third, its worst monthly loss since 1987.

A graph of Schwab's total return compared to S&P 500 returns and S&P 500 Financials total return


Porter Collins, a portfolio manager with Seawolf Capital, told the Wall Street Journal the stock's slide reflected a "mismanaged balance sheet" from Schwab's relatively significant interest-rate bets that went "the wrong way on them."

Analysts noted Schwab also suffered additional challenges as worried brokerage clients reallocated from cash to higher-yielding money market funds.

Nonetheless, Walt Bettinger, Schwab's CEO, maintains that even worst-case scenarios contemplated by investors still would allow the firm to keep operating.

"There would be a sufficient amount of liquidity right there to cover if 100% of our bank’s deposits ran off... without having to sell a single security," Bettinger told the Wall Street Journal in an interview.

The rate and balance sheet woes overshadowed an expected 4.5% gain in the firm's asset management and administration fee revenue to an estimated $1.1 billion. Its trading revenue, however, likely fell 3.3% to $931 million.

Charles Schwab Key Stats
   Q1 2023 (est)  Q1 2022  Q1 2021
 Adjusted EPS  83c  67c  73c
 Interest Revenue  $4B  $2.3B  $2B
 Accumulated Comprehensive Income  ($22.2B)  ($11B)  $878M

Source: Visible Alpha

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. YCharts. "Charles Schwab Corp."

  2. Bloomberg. "Schwab Hit by Worst Month Since 1987 Amid Cash Sorting Woes."

  3. The Wall Street Journal. "Charles Schwab Says It Could Ride Out a Deposit Flight."

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.