A number of asset managers, brokerages and banks reported second-quarter over the past week, and the glimpses of money fund and bank deposit trends so far show that the massive "cash sorting" and shift into money funds from bank deposits continued but slowed. Charles Schwab CFO Peter Crawford states, "While navigating significant near-term headwinds, we generated second quarter revenues of $4.7 billion, down 9% on a year-over-year basis. This top-line result was driven primarily by a temporary increase in the utilization of supplemental funding to facilitate client cash allocation decisions during the current rising rate cycle. Net interest revenue declined 10% from the prior year to $2.3 billion as the incorporation of higher cost liabilities brought our net interest margin down by 32 basis points sequentially to 1.87%. While anticipated client cash realignment, along with net equity buying during June, pushed cash levels lower, we observed a continued and substantial deceleration in the daily pace of cash outflows versus prior months. The continuation of this trend through the end of the quarter further strengthens our conviction that this realignment activity will inflect before the end of 2023, unlocking growth in client cash held on the balance sheet."
A "Supplement" to Schwab's Q2'23 earnings release, entitled, "The Charles Schwab Corporation Supplemental Monthly Client Metrics for June 2023 shows Bank Deposits totaling $102.7 billion as of June 2023, vs. $155.6 billion a year ago, a decline of $52.9 billion (-34.0%). Total Money Market Funds were listed at $395.6 billion as of June 2023 vs. $168.5 billion a year earlier, a jump of $227.1 billion (135%).
Morgan Stanley also reported earnings. Their Q2'23 conference call featured CFO Sharon Yeshaya commenting, "Net interest income of $2.2 billion was virtually flat versus the prior quarter. The impact of lower sweep balances and higher funding costs were offset by higher rates. Looking towards the rest of the year, we do not expect NII to expand. Results will be a function of our deposit mix and the trajectory of various rates."
Asked about the composition of the shift from sweeps, she answers, "In terms of the shift in terms of moving out of sweeps into savings or seeing savings products, we still have over 80% of our actual deposit base is coming from our own client base. What's interesting in terms of the movement of sweeps, which might be your question, I'm not sure I'm totally answering it, ... is that we began to see some of those sweeps not just -- remember, we used to see them move into money markets or other cash alternatives -- in June, we began to see some of those dollars actually move into markets, so various assets. We hadn't seen that trend since January. So that just shows that some of the clients are actually also deploying excess cash or cash equivalents actually into the marketplace as well."
On BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "[C]ash management net inflows of $23 billion in the second quarter were led by U.S. government money market funds. We're actively working with clients on their liquidity management strategy, providing technology, market, and operational insights, and, of course, a full range of cash management capabilities. Looking ahead, we see significant opportunity to grow our market share and consolidate our position with clients as they choose to do more with BlackRock. We're the only asset manager delivering platform as a service."
Asked about pending reallocations to bond funds awaiting the Fed to pause, President Rob Kapito responds, "The two answers are yes and yes. And that is because, currently, yields are back. But I think, in general, most people think that yields are going to continue to rise. So, they are preparing for what I would call a generational change in the fixed income market because you can actually earn attractive yields without taking much duration or credit risk.... We are well positioned for that, both with our $3.4 trillion fixed income and cash platform. So, to give you some numbers, 80% of all fixed income is now yielding over 4%."
He continues, "This is a pretty remarkable shift in our history. We're calling this a once-in-a-generation opportunity. There is finally income to be earned in the fixed income market, and we are expecting a resurgence in demand. Now, you touched on something very important, the cash market. This is not the last stop for that cash. And there are trillions now, I think the number is around $7 trillion [sic], in money market accounts. That is ready when people feel that rates have peaked to flood the fixed income market, and we need to position ourselves to capture that. How do you do that? `One is by product and the other is by performance."
When asked about the new Money Market Fund Reforms, Kapito says, "We're supportive of any efforts to improve the resiliency and transparency of U.S. money market funds, but nongovernment institutional money market funds, which were really the main focus of the rules, are a very small part of our cash business. Ours is U.S. government funds and separate accounts, that's really the bulk of our assets. And, of course, we have a diverse set of cash offerings, including money market funds and separate accounts, [and] ETFs [with a] short-duration strategy."
He adds, "So, we're going to work together with our clients as they consider the best tools for their liquidity management, and we will continue to review the regulatory rules to see what impact that could have on our business, which I think is quite limited. But remember, in asset allocation, when there's money in motion, it moves to cash, it moves to longer-term assets, it's something you must have as a liquidity tool to do all the things that clients need to do."
Finally, Kapito states, "And since we're going to be, I think, a beneficiary of the long-term assets, going after corporations and treasury management and other institutions for their cash, [that] puts us in the game in a much better way than if they're just coming into our products from the outside.... So, we're very optimistic, and we will continue to really build our sales force to continue to be a leader in the cash management business, knowing that it's also going to lead to other opportunities for us."
