Schwab Deposits Dropped 30% But Shares Rise On Earnings Beat

Shares of Charles Schwab Corp. (SCHW) rose as much as 4% Monday—even as deposits shrank 30% and the company said it would "pause" buying back shares—after the brokerage giant's first quarter profit beat analyst expectations.

Schwab said its first quarter adjusted net income totaled $1.8 billion, up 12% from the same period a year ago. On an adjusted basis, Schwab's profit equaled 93 cents per share, up 21% over the same quarter in the prior year. Adjusted profit was also two cents more than consensus-adjusted estimates from Visible Alpha and 10 cents more than consensus projections based on generally accepted accounting principles (GAAP).

Revenue for the quarter rose 10% from a year ago to $5.1 billion, roughly in line with consensus projections. Net interest revenue of $2.8 billion also essentially met consensus expectations, rising 27% from a year ago as Schwab took advantage of higher interest rates.

The good report and subsequent share price bump was a respite after a tumultuous few months. Schwab's investors endured a brutal slide in the company's stock in March, when concerns about unrealized balance sheet losses created turmoil throughout the banking industry.

Deposit Drain

Schwab, much like banks, relies on deposits from brokerage clients to help fund its operations, and it invests portions of those deposits in securities not immediately available for sale. That's the balance sheet line item that piled up unrealized losses for many financial institutions, including Schwab.

As a result, Schwab's shares plunged along with many in the banking sector. They fell 37% in the quarter, losing a third of their value in March alone, their worst performance since 1987.

Amid the turmoil, many bank depositors withdrew cash, parking it instead in money-market accounts with higher yields.

In its quarterly report, Schwab said its deposits dropped for the fourth straight quarter to $325.7 billion, down 30% from the same period a year ago and $3.9 billion shy of consensus expectations. The deposit flight cut revenue from bank deposit account fees in half to $151 million.

When the banking system strife surfaced in March, Walt Bettinger, Schwab's chief executive said the company had enough liquidity to operate—without selling any securities—even if depositors withdrew 100% of their funds.

Monday, Peter Crawford, the firm's chief financial officer, said "maintaining the capital and liquidity required" to support growth remains the firm's "primary balance sheet objective." He cited the recent market uncertainty as a firm has "decided to pause" its share buyback program. Companies can sometimes use buybacks to prop up falling share prices, an option that Schwab is choosing not to exercise by pausing buybacks.