Walt Bettinger pulls $500 million rabbit from hat based on projected cuts to Schwab 'headcount' and 'real estate savings' -- assuring analysts it wasn't previously 'baked in'

Schwab CEO Walt Bettinger unveiled a pile of semi-squishy, but good banking news and one rock-hard $500 million savings add-on that analysts took to the bank, helping send shares up 13% in today's trading. 

"Lower headcount" and “real estate savings” will account for the boost in profitability – above and beyond $500 million in savings already figured in, Bettinger revealed during an earnings call today (July 18).

“In addition to the remaining $500 million of synergy savings that we originally committed to as part of the TD Ameritrade acquisition, we now anticipate achieving at least an additional $500 million in future expense savings," he said. 

The revelation essentially doubles the synergy savings to $1 billion from $500 million previously estimated from  the merger – a bonus and a welcome boost to Schwab's recovery from a classic interest rate squeeze that sent its stock into a swoon. 

Schwab's bank got whipsawed by the Federal Reserve's rapid interest rate hikes, catching it with a boatload of underwater, fixed-income assets.  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

Bettinger attached a fresh metaphor to his firm's post-integration, post-rate-whipsaw future.

“Today, the fog represents the short term challenges brought on by the near record pace [of] interest rate increases by the Federal Reserve.

”But as we all know, the fog clouding Treasure Island ultimately lifts, and the beauty of Treasure Island becomes clear.” he waxed poetically. 

Freshly cooked 

Schwab's broad strokes to cut costs were revealed in an email memo obtained by RIABiz last week (July 12) and confirmed today in the earnings call.  In apparent reversal, Charles Schwab Corp. is telling thousands of staffers in five cities to work from home -- six more cities, including its old San Francisco headquarters, are on the chopping block

Schwab outlined the closure of offices in five cities and cuts in office space in six others, including San Francisco. 

The office closings were surprising in the sense that Schwab, a week earlier, had just proclaimed the importance of having people work in offices – not at home  – to reinforce corporate culture. See: Citing concern for its 'uniquely rich culture,' Charles Schwab Corp. is curbing remote work, according to an internal memo, causing some to grouse about returning to the office, despite COVID's official end

Bottom-line focused Wall Street loved Schwab's fresh clarity. The Westlake, Texas, firm's stock bounced 12.57% to close at $66.01 from $58 on Monday.

Piper Sandler analyst Patrick Moley did a  double-take on the $500 million in savings and wondered whether it had already been factored into projections.

"If you could maybe quantify the impact from that reduction in real estate footprint and maybe how much of that was already baked into the [TDA] integration cost savings,” he asked.

Bettinger said the $500 million in savings was positively fresh information considering it hadn't been “baked in” to the earlier synergies proposals.

Juggling expenses

Schwab likely waited to spring the $500-million savings until it could confidently name a hard number, says Wally Okby, strategic advisor at Datos Insights.

“I believe the company knew much earlier that it would have to realize additional savings, but it did not have a precise figure for said additional savings," he says. 

"I am pleased to see that the company has now come out with more precise guidance, essentially supporting its strong growth trajectory.” 

Bettinger revealed cuts “from a variety of areas, real estate savings, [and] lower headcount from efficiencies gained via automation built and implemented as part of the integration work.”

Previously, the company had been focused solely on providing a smooth transition for the 2019 merger, he said.  

“One of the items that's important to understand is that over the last several years, as we began preparation for the integration, we recognized having that go smoothly for the new clients from Ameritrade… was the single most important thing we could do,” he explained.

“…If you look at our current expenses today and compare them to the sum of what Schwab and Ameritrade's expenses were at the time of the announcement of the acquisition, they're about 20% higher than they were at that date,” he noted. 

"This fairly significant ramp-up of hiring and expenses that we have incurred in the last three years to ensure this integration went well; we now will be faced with the opportunity to unwind that," he said. 

New realities

The reason for the pivot on the headcount and real estate is that priorities have shifted from focusing on ensuring the merger transition would go perfectly for TD Ameritrade's staff and clients to reducing costs going forward. 

The firm has been operating with a bloated annual expense budget. Schwab's budget was 20% higher than when the deal to purchase TD Ameritrade was announced in 2019  -- out of caution -- to be sure the transition went smoothly, Bettinger explained during the earnings call and summer update.  

The Schwab hiring philosophy stands out for how much it contrasts with its chief rival, Fidelity Investments.

The Boston company has been hiring every qualified prospect it can land and now has 72,000 staff to Schwab's 32,000. It's supporting $11 trillion in assets to Schwab's $8 trillion.

“Both organizations are adapting to their new realities in different ways," Okby says.

"Fidelity had to hire aggressively over the last few years to keep up with demand. Schwab had, and continues to have, the luxury of drawing on and rationalizing deep pools of talent across the combined Schwab/TD Ameritrade organization to meet client demand.” 

There is significant pressure to slash offices across the industry, says Okby.  “Physical real estate office locations will continue to consolidate across the industry." 

TD Bank, in particular, found itself caught in the trap of managing an excessive number of unprofitable branches, amid pandemic-related sharp increases in digital client adoption.

Bettinger didn't offer numbers on how much his firm's 32,000 head-count would change, but said  savings will be “substantial.” 

Schwab synergies

Schwab will gain additional savings by persuading TD Ameritrade clients to purchase Schwab's advice products, Peter Crawford, chief financial officer, said Tuesday morning. 

“The other part of the revenue synergies are – we're very, very excited about -- those from allowing the legacy Ameritrade clients to have access to Schwab's broader array of wealth management solutions, lending, advice, etc," Crawford says.

Schwab president Rick Wurster said clients migrating to Schwab are showing an appetite for Schwab advice offers. 

"When we look at net flows into our managed investing solutions here, to date, more than $280 million came from legacy TD Ameritrade clients after they migrated to Schwab,” Wurster added.

“It is also worth noting that 20% of flows in Schwab Wealth Advisory in the first half of the year were from Ameritrade financial consultants, validating our belief that there is a large untapped demand among Ameritrade clients for more help and advice. 

Currently, 19% of Schwab clients use an advice product and at TD Ameritrade, it's only about 7% or so. 

Schwab Wealth Advisory had 5.9 billion in net flows for the first half of 2023, an increase of 89% compared to last year.