One of Charles Schwab’s primary concerns is the unrealized losses on its securities portfolio, a problem that many regional banks have also faced recently. The company, which has a banking license, put money into securities at low interest rates and is now paying the price as the value of these securities has dropped sharply.
Given that Schwab’s core competency is brokerage services, it’s logical that the company would invest in traded fixed income securities. Normally, this wouldn’t matter as Schwab wouldn’t be forced to sell these securities during a down period. However, given the current situation, all bets are off.
Cash Sorting Issues
The second issue that Charles Schwab (NYE:SCHW) faces is “cash sorting”. Clients hold a lot of cash in their Schwab brokerage accounts, which the company typically pays very low interest rates on while investing it in fixed income securities at higher rates. As brokerages have moved towards low- or no-commission models, it has become ever-more-important for Schwab and other brokerages to make more money on fees and net interest rate margin.
Now, however, many clients are taking cash out of their Schwab accounts and putting it into other alternatives such as CDs, treasury bills, money market funds, and so on. As a result, Schwab’s bank deposits have fallen from $444 billion to $375 billion between 2021 and 2022.
Is Schwab at Material Risk of Failure?
Despite these challenges, Charles Schwab is not at material risk of failure. The company has a reported $69 billion of lending capacity at the Federal Home Loan Bank (FHLB), in addition to the $40 billion of cash and billions more of short-term money-good government securities that it owns. This is an enormous amount of firepower with which to defray a near-term deposit run on Schwab.
Furthermore, the majority of Schwab’s depositors are fully insured, and therefore have less reason to pull funds in a panic. In a traditional bank, depositors may run away from the institution en masse. However, as cash is needed to trade stocks and other financial instruments, there is less likelihood of this happening with a brokerage such as Schwab.
Should You Invest in Charles Schwab?
The question on many investors’ minds is whether Charles Schwab is worth investing in at present. While it is facing some challenges, it is not at material risk of failure. Furthermore, it earned $7 billion last year and can offset a meaningful portion of its unrealized losses in its loan securities book simply by using profits.
Investors who are looking for a reliable and trustworthy brokerage may find that Charles Schwab fits the bill. Its current challenges may be a concern for some, but the company has shown resilience in the past and is likely to continue doing so in the future. Overall, Charles Schwab is a stock to watch out for in 2023. Charles Schwab is a leading discount broker in the financial industry that has faced some challenges due to abrupt changes in interest rates and their secondary consequences.
Charles Schwab Corp Stock Analysis
According to 21 analysts’ forecasts for Charles Schwab Corp’s stock, the average target price for the company over the next 12 months is USD 90.14. The average analyst rating for Charles Schwab Corp is Buy. However, Stock Target Advisor’s analysis of Charles Schwab Corp’s stock is Slightly Bearish, based on 3 positive signals and 6 negative signals. As of the last closing, the stock price for Charles Schwab Corp was USD 51.91. The company’s stock price has decreased by -32.23% over the past week, -35.45% over the past month, and -35.31% over the last year.
STA Research (StockTargetAdvisor.com) is a independent Investment Research company that specializes in stock forecasting and analysis with integrated AI, based on our platform stocktargetadvisor.com, EST 2007.
