Charles Schwab reported its latest quarterly earnings yesterday, and its earnings release, entitled, "Schwab Reports Record Quarterly Net Income briefly discusses money funds and the brokerages' continued shift of sweep assets into bank accounts. Schwab is the 8th largest manager of money market mutual funds with $142.9 billion in assets as of March 31, 2018. The brokerages' money fund assets declined by $8.9 billion in March, by $18.5 billion in the first quarter, and by $17.8 billion, or 11.1%, over the past 12 months. We review their earnings release, and also the latest brokerage sweep rates, below. (See our Feb. 16 News, "Schwab Changes Brokerage Cash Sweep, Adds Bank, Cuts Money Funds," and also our Jan. 4 News, "Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump.")

CEO Walt Bettinger says, "[W]e initiated a 'Sweep Tower' for uninvested cash, offering eligible clients extended FDIC insurance of up to $500,000. (A footnote here says, "Bank Sweep deposits are held at one or more FDIC-insured banks that are affiliated with Charles Schwab & Co., Inc. Funds deposited at Affiliated Banks are insured, in aggregate, up to $250,000 per Affiliated Bank, per depositor, for each account ownership category, by the Federal Deposit Insurance Corporation.) This enhancement broadens Schwab's range of cash solutions for our clients, which provide smart features, competitive yields, and transparency that helps investors make informed decisions."

CFO Peter Crawford comments, "We've achieved another quarter of record financial performance, driven in part by sustained business momentum, higher interest rates, and lower corporate taxes. Net interest revenue grew 26% to a record $1.3 billion due to larger client cash sweep balances as well as the impact of the Fed's 2017 and March 2018 rate hikes -- our net interest margin expanded to 2.12%, up from 1.87% a year earlier. Asset management and administration fees increased 3% to $851 million due to growing balances in advised solutions, equity and bond funds, and ETFs, partially offset by lower money market fund revenue as a result of bulk transfers and 2017 fee cuts."

He adds, "During the first quarter, we actively utilized available capital to further our client cash strategy. As part of this process, we transferred approximately $25 billion from sweep money market funds to bank sweep and paid off $15 billion in Federal Home Loan Bank advances. The net effect of these moves and client activity lifted our consolidated balance sheet assets to $248 billion at quarter-end. We still anticipate crossing the $250 billion threshold in the first half of 2018."

The release shows Schwab's bank deposits totaling $190.2 billion as of March 31, up from $166.9 billion a year earlier. It also shows Schwab with average client assets of $156.4 billion in money funds during the first quarter, with revenue of $182 million on this total and an average fee of 0.47%. This compares to average client MMF assets of $162.8 billion a year earlier with revenues of $231 million in Q1'17 and an average fee of 0.58%. There were no fee waivers this quarter vs. fee waivers of $8 million a year ago.

According to our Brokerage Sweep Intelligence report, Schwab is currently paying 0.15% on balances up to $1 million and 0.5% on balances over. This is up from 0.12% on all tiers earlier this year and up from 0.xx% at the end of 2017. (Yields on Schwab taxable money market funds range from 1.05% to 1.74% currently, as of 3/31/18.) The average rate for brokerage sweep account balances of $100K is currently 0.17%, up from 0.12% earlier this year and 0.07% towards the end of 2017 (11/30/17).

In other news, J.P. Morgan Securities' latest "Taxable money market fund holdings update," which was published Friday, comments, "Taxable money fund AUM fell $50bn in March. Government/Agency funds fell $32bn, Treasury funds shrank $8bn, and prime funds declined $7bn. After February's unusual inflows, MMF outflows in March were roughly in line with past years.... Balances have recovered post-quarter end, however, rising $37bn in April month to date."

It continues, "We suspect that corporations are building liquidity in their portfolios in response to tax reform and directing their free cash flow and proceeds from bond maturities into MMFs, contributing to the unusual flows we've seen this year. MMF yield have also become increasingly attractive given the rising rate environment."

JPM's Alex Roever, Teresa Ho, and Ryan Lessing tell us, "Government/Agency funds continued to see growth in Treasury holdings, especially in bills, amidst continuing heavy supply, while substantially reducing their exposure to Agencies and repo.... Treasury-only funds slightly increased their Treasury coupon and FRN holdings, but actually reduced their bill holdings slightly. Across both types of funds, total bill holdings increased by $37bn, suggesting that these funds took down a much smaller portion of the net bill supply than in February."

They explain, "Prime funds also saw growth in their Treasury holdings, which rose $29bn or 66% month over month, and a substantial rotation away from banks, corporates, and Agencies.... With bills now yielding above Fed funds, they represent an attractive way for prime funds to meet their liquidity requirements. The decline in bank exposure was concentrated in European banks, and was especially pronounced in time deposits, as is typical at quarter-end, though bank CP and CD holdings also fell."

J.P. Morgan's update says, "Repo balances with MMFs behaved somewhat unusually in March. Typically, dealer repo balances have fallen sharply at quarter-ends as Yankee banks pull back for regulatory reasons, and RRP usage has risen. This time, however, RRP usage by MMFs actually fell $8bn to $23bn, the lowest level since at least December 2014.... Repo ex-RRP fell $81bn, as MMFs rotated their repo exposures into Treasury holdings and/or reduced their repo exposures to meet outflows."

Finally, they add, "The weighted average life of bank CP/CD held by prime MMFs rose 4 days to 94 days, led by Australian banks, whose WALs rose 6 days to 154 days.... Australian and Canadian banks continue to have the longest WALs at 148 and 120 days, respectively. We estimate that allocations to floating rate instruments in prime funds also rose slightly, from 27.2% of holdings in February to 27.7%."

Email This Article

Use a comma or a semicolon to separate

captcha image