Second quarter earnings releases are revealing the impact of lower yields on brokerage sweep programs and confirming the continued shift from money market mutual funds into lower-yielding FDIC insured programs. Charles Schwab's earnings, released Monday, quote CFO Peter Crawford, "Our sustained business momentum helped us achieve our strongest second quarter ever, even as we weathered shifts in client asset allocations and activity levels, as well as the interest rate environment. Overall, revenues were up 8% from a year ago at $2.7 billion, which was just under last quarter's record mark. Net interest revenue rose 14% year-over-year to $1.6 billion, largely driven by higher interest-earning assets relating to the transfer of sweep money market fund balances to bank and broker-dealer sweep."
He continues, "In addition, our net interest margin rose 10 bps from a year ago to 2.40%, reflecting the Fed's 2018 rate hikes. Asset management and administration fees decreased 3% year-over-year to $786 million as a result of lower money market fund revenue due to the sweep transfers as well as ongoing declines in Mutual Fund OneSource balances.... Trading revenue declined 3% to $174 million due to a decrease in average revenue per trade, which more than offset higher activity."
Crawford adds, "Additionally, we transferred just under $200 million from sweep money market fund balances to bank and broker-dealer sweep, marking the completion of a 12-year process during which we moved approximately $130 billion. With sweep transfers done, tax season disbursements and some client sorting between invested and transactional cash allocations contributed to consolidated balance sheet assets declining by approximately $6 billion during the quarter to $276 billion."
Schwab's release shows net interest revenue of $1.609 billion during Q2, asset management and admin fees of $786 million, and $210 billion in bank deposits. Crane Data's monthly Money Fund Intelligence XLS shows Schwab's money market fund assets totaling $166.2 billion as of June 30, 2019, making it the 7th largest manager of money funds. Schwab's money fund assets have increased by $4.7 billion, $8.3 billion and $33.8 billion over the past month, 3-months and 12-months, respectively, shocking gains given the huge assets being shifted out of MMFs and into bank deposits during these periods.
Barron's writes in a recent article, "Interest-Rate Cuts Could Hit TD Ameritrade and Charles Schwab Stock," that, "[F]or brokers, who make money in large part from interest on customer deposits, that means an already rocky year could be about to get worse. Deutsche Bank's Brian Bedell thinks TD Ameritrade is the best positioned broker to deal with rate cuts, and suggests buying the stock while betting against Charles Schwab in a pair trade."
The article continues, "Morgan Stanley's Michael Cyprys took the opposite view, favoring Schwab because of its ability to attract deposits and downgrading TD Ameritrade in a Thursday note. The back story. Both stocks have struggled so far this year, although Schwab's relative performance has been the worse of the two. Its shares have slumped 3.6% so far in 2019, compared with a 2.5% gain for TD Ameritrade and an almost 20% gain for the broader S&P 500 index."
The Barron's piece adds, "Bedell wrote in a note to clients Thursday that among e-brokers, we see Charles Schwab as most negatively exposed to lower short-term rates and long-term yields, along with the prospect [that] client cash balances stay low, and we think management may place a more cautious outlook on [net interest margin] and deposit balances at its business update call on July 19.... In contrast, he thinks TD Ameritrade has already effectively signaled that the money it makes off customer deposits in the second quarter will be 'flattish'.... Rate cuts will make lower-yielding bank sweep products less attractive, he wrote, which could drive cash back to brokers, even as they are able to make relatively less money off those deposits."
In related "sweep" news, Financial Planning magazine also recently wrote about a shift by LPL in their default sweep vehicles. Their article, "With money market rates on the rise, LPL cuts them from cash sweeps," says, "If LPL Financial clients want higher yield money market funds for their cash, they'll need to opt out of the firm's bank deposit sweep programs.... The No. 1 independent broker-dealer no longer offers money markets for sweep accounts -- where clients' cash yields between 15 and 75 basis points for them and an average of 220 bps for LPL. The firm cut money markets from cash sweep accounts, effective May 18. Clients looking for a money market for a better yield on their cash should speak to their advisors about keeping it in their own investment accounts, according to a disclosure by LPL."
It continues, "Clients will 'start making dramatic moves to harvest yield on cash' if money markets keep climbing above the 2% range to 300 or 400 bps, says Tim Welsh of Nexus Strategy. Otherwise, the convenience of sweeps often causes people to forget about the accounts, he says. 'The trend is down for costs and fees and revenues in investment management products,’ Welsh says. 'Cash is the easiest one to attack. They're just making a very logical revenue move.'"
According to the piece, "On April 1, LPL stopped offering funds with yield rates of up to 230 bps for new accounts eligible for the cash sweeps. Existing clients' assets remain in the money markets, but the firm removed the offerings for deposits in May and began using money market assets first to pay cash debits."
Watch for more on brokerage sweeps in coming days, let us know if you'd like to see our latest Brokerage Sweep Intelligence product and see these Crane Data's News articles: Sweep, Deposit, MF Rates All Inch Lower; JPM MF Symposium Highlights (7/2/19), Brokerage Sweep Rates Flat; MS, E*Trade Earnings; TD Lowers Rates (4/23/19), BNY Keeps Dreyfus Name on Money Funds; Brokerage Sweep Rates Flat (3/5/19), Edward Jones Latest to Shift to FDIC Sweeps; ICI: MMFs Break $3T in '18 (1/31/19), Schwab, Brokerages Discuss Sweeps, Money Funds on Earnings Calls (1/25/19), SF Chronicle on Brokerage Sweeps; Bloomberg on Europe Rejecting RDM (11/28/18), TD Ameritrade, Morgan Stanley on Sweeps; Money Fund Assets Rebound (10/26/18) and Money Fund Yields, Sweep Rates Move Higher; WSJ on Savings, Deposits (10/18/18).
