We wrote late last week about some of the money fund and cash mentions on fourth quarter earnings calls. (See our Jan. 19 News, "BlackRock, Schwab Earnings Discuss Shift to Money Funds; WSJ on Cash.") Today, we quote from State Street's recent earnings report and conference call, and quote from a Wall Street Journal article on Charles Schwab & Co. CEO Ron O'Hanley says, "At Global Advisors, we undertook targeted strategic actions aimed at gaining market share and driving occupancy growth in the coming years.... Our cash business had an exceptional year delivering record annual flows in 2023 with institutional money market fund AUM also reaching a record. Overall, we gained market share in a number of key areas, including institutional money market funds and U.S. low-cost equity and fixed income ETFs."
CFO Eric Aboaf states, "Fourth quarter management fees were $479 million, up 5% year-on-year, primarily reflecting higher average equity market levels and some performance fees, partially offset by a previously described shift of certain management fees into NII and the impact of a strategic product suite repricing initiative that has aided ETF flows.... Across our cash franchise, we saw quarterly cash net inflows of $29 billion, primarily into money market funds, which contributed to the record total full year 2023 cash net inflows of $76 billion and institutional money market fund market share gains."
He continues, "Fourth quarter NII increased 14% year-on-year but decreased 9% sequentially to $678 million. The year-on-year decrease was largely due to lower average deposit balances and deposit mix shift, partially offset by the impact of higher interest rates.... Some of the higher deposit balances may have been seasonal. But the Fed's quantitative tightening appears to have been offset by the reduction of the Fed's Reverse repo operation, which seems to have resulted in clients leaving higher bank deposit balances. It's hard to know how deposits will trend but we are pleased with this higher step-off going into the first quarter of 2024.... Average deposits increased 4% quarter-on-quarter with non-interest bearing deposits up 3% for the quarter."
During the "Q&A," Aboaf comments further on deposits, "I'll just say deposits and deposit levels continue to be volatile; they surprised to the upside.... We also saw interest bearing deposits up.... I think you did see, in the Fed reports, the banking system deposits are up 1%, 2% quarter-on-quarter from third quarter to fourth quarter. So it does seem like there's something happening in the market that's creating a little more stability.... There's some amount of seasonality that we always tend to see at the end of the year as folks accumulate cash.... A lot of that is just client engagement and helping put their cash to work. And sometimes they put cash to work in deposits, in repo, in money market sweeps ... each one of those is an important category and outlet for clients. What we're seeing is clients using ... all the above, including just holding Treasury securities."
He adds, "We expect to continue, and we think deposits will be roughly in this zone in the first quarter. What's a little harder to read is just how noninterest bearing deposits play out. We do expect those to continue to float downward. They tend to float downward for our clients with the largest funds, those are the ones that have been floating down over the last two years.... There continues to be a little bit of repricing that plays out into the first quarter or two as well. That's why I guided on an NII basis to flat to down 3% for the first quarter, just to give you a little bit of an indication, but we expect that to be on roughly flattish deposits."
Asked about the institutional money market space and a declining rate environment, O'Hanley responds, "Part of way we've attracted more money market funds ... is we just have a broader client base.... We've gained market share, not just in terms of assets, but we've just attracted more clients. And once you have them, whether the balances go up or down, typically you have them. I think historically ... the really sophisticated holders of institutional money market funds tend to hang on, because the fund itself, depending on its duration ... actually lags. So it's usually the opposite -- when rates are rising, the very sophisticated holders are toggling in and out depending on whether they see opportunities to go direct."
He says, "I would expect that we would see ... a continued risk on environment that itself will cause a little bit of reallocation of institutional money market funds.... Everybody is talking about that there's so much parked on the sidelines, [but] a lot of it is parked here [in institutional funds]. I would go back to where I began the answer, which is it really is about establishing more client relationships, servicing them very well and then continue to grow the number of clients based on that track record."
In related news, the WSJ's story, "Charles Schwab Just Survived a Year From Hell. The Trouble Isn't Over Yet," tells us, "Schwab, founded some 50 years ago, grew from a discount brokerage for Main Street into a personal-finance supermarket that came to rival Wall Street firms as an asset-gathering machine. While Schwab cut fees and made less revenue from trading, it minted money sweeping cash from its brokerage customers into bank deposits that paid out little interest. When rates were low, it worked well for Schwab. Customers were content keeping their money at the bank when there were few alternatives for better yield."
It states, "That business model was put to the test last year, when the Federal Reserve continued to aggressively raise interest rates. Yield-hungry customers moved money into options like money-market funds. Since early 2022, Schwab has lost some $175 billion in bank deposits, or nearly 40% of what it held at its peak. Trading activity also stalled, since customers could make robust returns just parking their money in cash-like investments. The company has said customer funds largely stayed at Schwab when clients moved money from bank deposits to other investments. Still, with bank deposits fleeing, Schwab had to turn to more expensive funding that cut into profits, like borrowing from the Federal Home Loan Bank system and issuing certificates of deposit."
The Journal piece continues, "Last March, the rapid collapse of several regional banks put Schwab in the spotlight. The company had invested chunks of its balance sheet in longer-term bonds when rates were low. When rates rose, the value of those bonds fell. Schwab's shares lost more than a third of their value in just a month."
Finally, they write, "The company said it has seen promising signs that customers' movement of cash out of bank deposits is nearing an end. Transactional sweep cash -- client cash that hasn't been invested yet -- increased month over month in November and December, Schwab reported. Bank deposits increased quarter over quarter at the end of 2023 for the first time since early 2022."
Another WSJ brief asks, "The Money-Market Bonanza Is Over. So Is Now the Time for Stocks?" It speculates, "One of the easiest, safest investments last year is losing its luster. And there really isn't an easy answer for what to do now. For much of 2023, the boring money-market fund became one of the hottest investments on Wall Street. These often-default funds where investors park their money before they decide what to actually do with their money were returning well over 5%. By the end of the third quarter, investors had more than $8.8 trillion in money-market funds and CDs."
