Adam Hejl
4 min read
What Happened?
Shares of financial services giant Charles Schwab (NYSE:SCHW) fell 3.1% in the afternoon session after the company reported third-quarter revenue that was roughly in line with analyst projections and guided toward the lower end of its full-year interest-margin target. According to the company’s release, net revenue was $7.17 billion, up 17% from a year earlier, roughly in line with consensus. Adjusted earnings were $1.69 a share, above the $1.66 consensus, and core net new assets were a record $190.4 billion. The net interest margin widened to 3.04%.On the earnings call, chief financial officer Mike Verdeschi said loan growth has run ahead of deposit growth this year, so Schwab has drawn more on its other funding sources.
With one quarter left, he said full-year revenue growth and net interest margin expansion should finish toward the lower end of the ranges from the summer business update. Those ranges were revenue growth of 17.5% to 18.5% and a full-year net interest margin of 3.00% to 3.10%, with the fourth-quarter margin at 3.25% to 3.30%. He also said expenses should come in at the low end of the prior range, and that the firm expects about 800 basis points of positive operating leverage for the year, about twice what it expected in January.President and chief executive Rick Wurster said demand for tax-focused long/short strategies grew faster than Schwab expected, in part because a competitor had less capacity. The firm throttled that growth in mid-September by raising minimums. He said advisor net new assets kept growing, and that Schwab is building its own long/short product so it can meet the demand without straining capacity.
After the initial drop, the shares shed some of the losses and rose to $94.03, down 2.9% from the previous close.
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What Is The Market Telling Us
Charles Schwab’s shares are not very volatile and have only had 3 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The previous big move we wrote about was 23 days ago when the stock dropped 5.4% on the news that investors kept bidding the group lower after last week’s Federal Reserve hike. On September 16, the Fed raised the federal funds target range by 25 basis points to 3.75%–4.00%, its first increase since 2023, according to the Federal Reserve’s FOMC statement.The Fed said economic activity and domestic spending remain resilient, but stressed that inflation is still elevated and that the increase is intended to support a return to its 2% inflation goal.Higher policy rates can lift yields on interest-earning assets for some lenders. The tape has stayed focused on the less favorable side of a more restrictive backdrop: slower loan demand, higher borrowing costs for consumers and businesses, potential credit deterioration, and softer capital-markets activity. Those risks are still being marked into growth-sensitive financial earnings, which is why the selling has not stopped at last Wednesday’s announcement.
