Walt Bettinger comes out swinging during analysts' call, and shares pop, on assurances Schwab can ride out gale force interest rate pressure on its balance sheet

Walt Bettinger offered an impassioned defense by going on the offense to justify Charles Schwab Corp's stock price and the now sideways bets the company made on cash balances at its bank. 

The Schwab CEO made his case during an analysts' call and placed the blame for his company's share price plummet – and an unrelenting barrage of harsh criticism – on a series of outside factors.

They include gale force market conditions, misinformation and misreadings of good information – particularly regarding Schwab's decision to lock in low rates with long-term bonds that plunged underwater after interest rates skyrocketed.  

“First, let me begin by saying it's important not to confuse -- as, unfortunately, some less than savvy alleged researchers and analysts have -- that maturity, or weighted average life, is not the same as duration,” Bettinger said during the analysts' call.

Bettinger said the importance of the call was to cut out the distorting third-party sources, so Wall Street could analyze Schwab based on “facts.”

“This is an important opportunity for our team at Schwab to speak directly with all of you, to speak with accuracy and facts, and to speak with clarity and transparency,” he said. 

Stock bounce

Yet, Schwab wasn't looking for an in-depth discussion. It limited analysts to one question, without the follow ups, during a 15-minute Q&A session in the one-hour call.

Clearly, Schwab was trying to execute both a strategy of “transparency” and message control, said Alois Pirker, founder of Pirker Partners, a firm that provides strategic advice and thought leadership for wealth managers.

“I am sure it must be a difficult balancing act for the Schwab management team to be transparent, but at the same time not risk upsetting the markets, given how much the Schwab share price is under pressure already." 

Schwab's share price has lost almost 40% since the start of the year and suffered more than a 30% drop in March, but got a Bettinger bounce today. 

Shares spiked 3.94%, or $2, to close at $52.77 in today's (Apr. 17) trading, but still straddling its 52-week high of $86.63 and its low of $45. 

Schwab's better-than-forecast financial results for the quarter ended March 31 undoubtedly contributed to the bounce as well.  

Net income rose 14% to hit $1.6 billion - from $1.4 billion in the first quarter of 2022. 

“Simply put, our franchise strength and financial model remain very much intact," Bettinger said.  

“Second, we did not, and have not changed our multi-decade approach to conservatively managing our bank balance sheet.” 

Hooked on loans

Schwab's ultra-conservative approach – putting hundreds of billions of dollars in safe, but low-interest bearing bonds and mortgage notes, is drawing the most scrutiny.

The Federal Reserve's rapid series of interest rate hikes sent those investments deep under water to the tune of tens of billions of dollars.  

Bettinger called the unrealized losses a red herring, considering the losses are certain to remain “unrealized.”

“I've publicly stated multiple times and in multiple formats that we cannot foresee any plausible scenario where we would have to sell securities to meet the liquidity needs of our clients," he said.  

"And that's not an accident, because we have always planned for the potential of time periods where high liquidity needs exceed our available cash.”

Indeed, Schwab has also been relying on loans, according to Bloomberg. 

It took a more aggressive balance sheet management approach – borrowing money in 2022 at the same time it was making share repurchases and raising dividends, the financial site reported. 

Schwab last year became the largest borrower of the Dallas Federal Home Loan Bank, one of 11 regional member-owned corporations that provide lending institutions with liquidity, ostensibly to finance housing and economic development.

"Schwab borrowed $12.4 billion from it last year, and an additional $13 billion so far this year, according to its annual report,” the site reported. 

Standing pat

Goldman Sachs analyst Alex Blostein used his single question to suggest Schwab might want to window dress its balance sheet and move on.

“Why not sell a significant chunk of the securities portfolio? I understand it will crystallize the loss, but your tier-one leverage actually will not move significantly when you do that… since you know, $60 billion-plus of that securities book is massively underwater.”

Schwab hasn't shut the door on realizing bond portfolio losses at a future date – though right now there is “no reason to do so,” Peter Crawford, Schwab's chief financial officer, said on the call.

“Just don't want to really speculate or talk in hypotheticals about the conditions under which we would sell that security portfolio,” he says.

"But we're, you know, always, of course, thinking about what's the right thing for stockholders. But we see no reason to do so and certainly wouldn't do it right now."

Hurt more than help

Bettinger's message on Schwab's unrealized losses was consistent with joint statements he and founder Charles Schwab released last month and early this month.  See: Schwab assures it has financial muscle to shrug off billions of dollars in unrealized bank losses, but interest rate blunder exposes vulnerability if Fed hikes continue, analysts say

The March letter addressed the 800-pound gorilla in the room: An estimated $13 billion in paper losses, so far, on bonds and a $189 billion writedown on its mortgage holdings.

“Our firm has capital well in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio,” they wrote. “Focusing attention on ‘unrealized losses’ in a held-to-maturity portfolio is very misleading.”

Bill Katz, an analyst with Credit Suisse, asked whether Schwab might prevent future runs on cash deposits by offering a more competitive default rate.

“On the other side of the earning asset side, would you envision running a more liquid earning asset strategy?” he asked.

Crawford responded that it would likely hurt more than it helps based on Schwab's four decades of experience.

“What we've seen is that [it's] served us well for multiple, multiple decades. And whether we pay 45-basis-points, or 65-basis-points, or a hundred basis points for that transactional cash, [it] has very little influence on client behavior," Crawford says.

At 45 basis points, Schwab's rate is “a lot better” than what clients can earn in their checking accounts at traditional banks, Crawford noted. 

Schwab also offers "a range of options for their investment cash that are, in many cases, industry leading, whether that's access to treasuries or uh, or brokerage CDs, or purchase money funds or, or whatever," he added. 

Katz upgraded Schwab's stock to “Outperform” on Mar. 23. He's banking on an attractive risk/reward after the stock slumped with the failures of Silicon Valley Bank (SIVB) and Signature (SBNY).

Financial gales

Charles Sachs, chief investment officer at Kaufman Rossin Wealth in Florida, told Bloomberg his firm has been moving money from Schwab sweep accounts into its higher-yielding money-market funds, "on almost a daily basis.”

"This is a frustration,” Sachs said. “It creates unnecessary work for us.”

In contrast, Fidelity Investments offers more than 4% on some sweep accounts, 3.55 percentage points more than Schwab. See: Abby Johnson set financial services on fire with a 1.91% 'cash' offer, drawing 'first blood' in an 'accelerating war of rates,' analyst says

“Nobody likes to be sitting, not earning money on your dollars when you could be,” Sachs told Bloomberg, adding that he complained to Schwab. “They’re going to need to do something.”

Bettinger said he is captaining the Schwab ship with history as a guide rather than the exigencies of gale force winds and waves.

"And what we know from history is that when those storms end, the firms who stand tall are those who have a focus on clients. And that's something that I believe you can count on for Schwab as you have for many years in the past and can count on again…”

He also said he empathizes with Schwab stockholders because he is a major stockholder himself.

“We know that the past few weeks have been very challenging for long-term stockholders, which, of course, all of our executives at Schwab are, also me.”