Schwab's Balance Sheet Woes May Overshadow Q1 Profit Gain

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.

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.

Source: Visible Alpha