Charles Schwab reported Q4 earnings and hosted its "2025 Winter Business Update" yesterday (see the transcript here). New CEO Rick Wurster tells us, "The one-word summary of our ... quarter is growth. Net new assets growth was strong, up 20% for the year and 51% for the quarter. Total new brokerage accounts in 2024 were up 10% from the prior year. Revenue was up 4% for the year and up 20% over the fourth quarter of 2023. Fourth quarter earnings per share increased nearly 50% on an adjusted basis versus Q4. Clients were active. We had strong levels of trading activity, record engagement with our trading, coaching, and education, and record flows into our managed investing and lending solutions. Client promoter scores reached all-time highs for the firm. I'd also note that client cash grew in the fourth quarter and supplemental borrowing is down to $50 billion."
He explains, "Our award-winning bank was purpose built for investors and helps us stand apart by offering among the lowest lending rates in the industry, FDIC insured cash, access to pledged asset lines in a day, and strong transactional capabilities. In combination with our fixed income and money fund capabilities, there is no better place for liquid assets than here at Schwab."
CFO Mike Verdeschi says, "2024 brought encouraging trends around transactional cash levels. Realignment activity continued to decelerate as we moved towards more business-as-usual client activity. At the same time, we made meaningful progress on reducing the level of bank supplemental funding to approximately $50 billion, down about 50% from peak levels. And our capital ratios increased within our targeted operating range. In summary, our success during 2024 enables us to enter this year with a lot of momentum, and we have a clear plan to drive meaningful business and financial growth in 2025 and beyond."
He continues, "Moving to our balance sheet, we continue to support our clients, with both margin and bank loans to clients up significantly during the year, including 34% growth in margin balances at the broker dealer and low-double-digit bank loan growth.... We saw a continuation of the build in transactional sweep cash during the fourth quarter, including $25 billion of net inflows in December. This strong seasonal inflow during the last month of the year is consistent with the historical trends."
Verdeschi states, "And if history remains a guide, we would anticipate much of this seasonal build to flow back out into the markets during the first couple of months of 2025. The combination of the principal and interest coming off of the securities portfolio plus the cash inflow on the full quarter enabled us to reduce high cost supplemental funding at the banks."
During the Q&A, Schwab was asked about "client cash trends." Verdeschi responds, "Based on everything we've seen over the past couple of quarters, [this suggests] we're entering that more normalized environment for client cash. If you just go back to the previous year, the first half of the year was really that continued normalization of realignment. And of course, the second half of the year, we did see two consecutive quarters of cash growth. And while that December number reflects seasonality, again, more indicative of that normalized environment, I think as you go forward, I think of that deposit level, of course, [is] in part being influenced by new account growth."
He says, "Of course, there will be other macroeconomic variables like the role of central banks as well impacting levels of liquidity in the system, but I do think we are in that more normalized environment at this time.... We've always seen month-to-month, quarter-to-quarter ... you will see impacts of seasonality. But again, I would suggest we are in that more normalized environment.... We're encouraged by the last couple of quarters."
On deposits, Verdeschi comments, "Again, we're encouraged by the trends we're seeing in deposits, two consecutive quarters of growth. And as I highlighted, I think the account growth that we've seen historically really is associated with that new account openings and the portion of assets that come to us that's in the form of cash.... There could be a percentage that's off-balance sheet versus on-balance sheet. But ... we're seeing indicators that the realignment activity has certainly decelerated ..., and we're looking at that new account formation now being the driver of that cash. Keep in mind, it's been a long time since the Fed had hiked rates previously. Of course, the Fed began lowering rates at the back end of the year. So, we think, again, that's represents a lower propensity to realign. So again, encouraging trends.”
Another question asked, "Does the recent positive trajectory on sweep cash balances, lower supplemental funding and the current reinvestment rate levels with yields moving higher make this a more attractive option now than even compared to a quarter ago? And given the progress you've made with the balance sheet already, could you just outline any remaining concerns with potentially executing this in 2025?"
Finally, Verdeschi answers, "As we've talked about in the past with the securities portfolio, we're just very mindful of doing something that creates headlines and disrupts the trust ... that our clients have in us. So, we've been reluctant to do that at this time. That being said, we're keeping a close eye on that portfolio and its performance. Restructuring is not something we're taking off the table. We do evaluate that. But I think you raised an important point, which is, if you think about the proceeds of a portfolio sale, how might you use that?"
He adds, "One of our priorities is to continue to make progress on the reduction of supplemental borrowings. And we are making that progress just after the principal and interest payments, and certainly, alongside cash stabilization. So, that is an important consideration. And of course, we're mindful of the level of rates in the marketplace as well and what the trajectory of that rate market may look like over the course of the year. So, I think at this point, we feel good about the strategy that is unfolding."
