Charles Schwab also released Q3'25 earnings and hosted its 2025 Fall Business Update late last week. CFO Mike Verdeschi tells us, "Client cash levels continue to reflect normal behavior, inclusive of organic growth, seasonality and strong client engagement as equity markets reached record levels. We made further progress in reducing supplemental borrowings, which ended the quarter at $14.8 billion or just within the upper bound of our business as usual range.... Bank deposit account fees moved higher year-over-year due to an improved net yield as lower-yielding fixed-rate obligations continue to mature and converted into the floating rate bucket. September marked an inflection point for the BDA as we transition into the new $60 billion to $90 billion operating range for the remainder of the agreement and we gained the flexibility to move balances between the BDA and our balance sheet. During the third quarter, we transferred $3 billion worth of balances to Schwab to accelerate the paydown of bank supplemental borrowings."
He says, "Transactional sweep cash trends continue to reflect normal client behavior. Following modest outflows during July and August related to typical seasonality and client net buying activity, we saw $19 billion of cash inflows in September to bring the quarter end balance to $425.6 billion, which represents a quarter-over-quarter increase of $13.5 billion or approximately 3%. This sequential building cash, along with the use of investment portfolio proceeds and balances transferred from the BDA allow us to further reduce high-cost funding at the banks. We'd expect normal cash behavior to continue in 4Q including typical seasonality, such as adviser payments in October and the December cash build."
Verdeschi adds, "During the summer business update in July, we provided an updated financial scenario informed by several inputs, including a mid-July forward interest rate curve calling for 225 basis point cuts to the Fed funds target rate.... Moving forward to today, the interest rate curve now calls for a total of 325 basis point cuts during 2025 versus a previous expectation for only 2 cuts. Markets continue to move higher during the third quarter and client trading remains robust. However, the last couple of weeks remind us the environment can shift quickly. So in terms of the remainder of the year, we are likely to see various puts and takes as both rates and the broader markets evolve with the macroeconomic backdrop."
During the Q&A session, a question was asked on the topic of tokenization. CEO Richard Wurster answers, "First thing I'd say is for 50 years, it's been our mission to help investors get invested and to help them achieve their financial goals and dreams. So if we find an investor wants to hold securities on the blockchain, and that brings more investors into investing, then we're going to find a way to offer clients the opportunity to hold their securities on the blockchain and hold them as tokens."
He continues, "Now we're always going to give clients great execution. But there's definitely a put there. On the take side, maybe it's incrementally easier to move cash. I don't think it's overly hard to click one button at Schwab today and move your money from sweep into a purchase money fund. And not only that, we proactively remind you to do that when we see large balances in your account. When you log into schwab.com, it's very often the first thing you see is move your cash. So there [are] not many barriers to doing that today. It might be incrementally easier on the blockchain because you could do it instantaneously. So it's possible there's a shift there. But I think there's going to be puts and takes on the blockchain. And if clients want to participate and hold securities that way, we certainly will ... accommodate that and are working towards that."
State Street (STT) also posted its latest earnings release and hosted an earnings call recently. CEO Ron O'Hanley comments, "State Street has long been a leader in technology-driven innovation. Today, our investment services team is building on that legacy by developing the tools and client capabilities that will empower our clients to succeed in an evolving market. For example, in the digital assets ecosystem, State Street already provides fund administration and accounting services for digital assets today."
He says, "As we look ahead, we are strategically positioning State Street to be the bridge between traditional and digital finance as well as the connection point between digital asset platforms. To that end, we are excited about the forthcoming launch of our digital asset platform, which will enable tokenization of assets, funds and cash for institutional investors."
CFO John Woods tells us, "Management fees increased 16% year-over-year to a quarterly record of $612 million, primarily driven by higher average market levels and net inflows. Assets under management increased 15% year-over-year to a record $5.4 trillion, supported by higher period-end market levels and client inflows. Net inflows totaled $26 billion for the quarter, reflecting solid momentum across ETFs, cash and institutional index fixed income."
He comments, "Net interest income of $715 million was down 1% year-over-year. This performance reflects an 11 basis point decline in the net interest margin to 96 basis points, primarily driven by lower average short-end rates and deposit mix shift, partially offset by the reinvestment of securities portfolio cash flows at higher yields and higher interest-earning assets supported by higher deposit balances."
Finally, Woods says, "On a sequential basis, net interest income declined 2%, primarily due to a reduction in the interest earning assets resulting from lower deposit balances compared to elevated second quarter levels as well as lower average short-end rates. These factors were partially mitigated by the reinvestment of securities portfolio cash flows at higher yields, along with continued client-driven loan growth which contributed to an improvement in interest-earning asset mix supporting a stable net interest margin on a linked-quarter basis."
