Will 2024 be a better year for Charles Schwab?
for someone Charles Schwab (NYSE:SCHW) investors, 2023 was a year in the rearview mirror, with the stock down 16% in a year in which the S&P 500 rose 24% and the Nasdaq Composite surged 43%.
The problem began with the financial crisis last March. Schwab has seen significant deposit outflows as investors seek higher rates elsewhere, forcing it to turn to higher-interest funding sources to shore up liquidity, which has hurt its profits. Trading on the platform also slowed as investors flocked to the money markets, while the company dealt with layoffs and some issues related to integrating TD Ameritrade accounts into the Schwab platform.
Now that 2024 is upon us, can investors expect smoother flows?
It wasn’t a good start
The same was true for Schwab, the financial services giant and the largest U.S. brokerage firm as of 2024. Shares are down about 7% year to date, having plummeted since the company reported poor fourth-quarter results last week. Schwab beat revenue estimates, but the bar wasn’t set high, as net income for the quarter was down 29% year-over-year to $1 billion, or 51 cents per share.
Unfortunately, Schwab failed to beat revenue estimates, generating $4.46 billion in revenue, down 19% from the fourth quarter of 2022. Interest income rose 3% to $3.94 billion, but Schwab took a huge hit of $1.8 billion in interest expense. That was up from $812 million a year ago. As a result, the company’s net interest income fell 30% year over year to $2.1 billion.
That’s not bad news, as Schwab added 3.8 million brokerage accounts this year, bringing its total account count to 34.8 million. The company also added $306 billion in core net new assets, including $43 billion in December alone.
Schwab officials said 2023 is a year of navigating the challenging environment facing banks and financial services companies and a year of large-scale integration of TD Ameritrade accounts into Schwab. However, even though some minor issues were corrected, 90% of accounts were transferred without major problems as of the end of the year.
So what’s next? Will 2024 be a better year for Charles Schwab?
“Transition Year”
CEO Walt Bettinger didn’t sugarcoat Schwab’s earnings call, saying, “It’s unrealistic to think that the challenges of 2023 will simply disappear because the calendar flips over.” Rather, he called 2024 a “transition year” for the company as uncertainty remains in the economy and interest rates.
The outlook for 2024 was also very broad and uncertain. Revenue forecasts ranged from a 5-6% decline to 5-6% growth relative to 2023, depending on a variety of factors. After the TD Ameritrade integration is fully complete, costs are expected to remain flat as the company sees additional operating cost savings and adjusted pre-tax margins are expected to be between 38% and 45%. This compares to an adjusted pre-tax margin of 41.5% in fiscal 2023.
So, with the uncertain outlook for 2024, you can see why investors are a bit uncertain and somewhat bearish about Schwab’s post-mortem returns. But Bettinger was much more optimistic about the long term.
“As we look ahead to 2025, 2026 and 2027, we are confident that the power of our client franchises will shine through in terms of financial results. There is much work to be done in 2024 and beyond. No one at Schwab is joking that everything is perfect now. But I have high confidence,” Bettinger said on the call.
After the earnings, Schwab’s stock price fell below $60 per share, but has since rebounded slightly to $63 per share. The stock isn’t very cheap and trades at 25 times earnings, up from 15 times earnings for most of 2023. Nonetheless, Schwab has had solid long-term performance, with annual returns of 9% over the past decade as of Jan. 22. , and will rebound again in the second half of the year and into 2025 as TD Ameritrade deals begin to increase revenue.
However, investors may want to be cautious for now as the next few months could be rough during this transition period.
