A buoyant Schwab CEO Walter Bettinger declares 'darkest' days past for Schwab as in-house RIA asset quarterly inflows surge 60%, but analyst's 'free-cash' question raises his ire

CEO Walter Bettinger took a cautious bow for not overreacting to 2023 adversity, but then reacted sharply when an analyst asked about “cash” deals competitors are making to lure investors.

The Charles Schwab Corp. CEO let analysts on this morning's (Apr. 15) first-quarter earnings call know Schwab is returning to form sooner than even he expected.

"I shared with our people that right when things often seem the darkest, they tend to turn around and begin to appear brighter. 

"Of course, I didn't know last fall just how accurate that would turn out to be,” Bettinger told analysts Monday (Apr. 15) morning.

Bettinger was referring to comments he made on a post-COVID national tour of Schwab offices last October when he counseled patience.

Seven months earlier, Schwab's stock was slammed – falling 33% between Feb. 28 and March 31-- after it faced an estimated $15.6 billion of unrealized Schwab Bank bond losses from an interest rate squeeze. 

“It's a wonderful lesson in not overreacting to things that are outside our control," Bettinger mused. 

"As I sit here today, and of course recognizing that there are certain environmental and geopolitical risks that remain… the green shoots of a turnaround in the environment are appearing,” he said. 

Pay to play

The call's kumbaya atmosphere took a momentary turn, however, when analysts went to work.

“Competitors… have been in the market with fairly attractive deposit matches, which appear to be driving cash inflows for the firms,” said Barclays analyst Christopher Ryan.

(Brokers like JPMorgan, M-1 and SoFi are offering from $700 to $1,000 to open and fund new accounts).

“Is this something that the firm is worthy of some sort of competitive response? Or is it something that Schwab isn't really worried about?” Ryan asked.

Bettinger expressed disdain at the very idea.

“Let me first say that the least innovative thing any company can do in our industry is to buy business by giving someone cash. 

“It is certainly a strategy that some firms employ. It is not a sustainable strategy over any period of time,” he said.  

Yet, Bettinger confirmed that in “rare circumstances,” Schwab has chosen to respond to offers clients received. 

“When we have responded, we have been able to retain the clients that we wanted to retain…" he said.

"Often, Schwab clients will take advantage of a competitor's offer to hold a certain stock, and once the offer has been granted, the client will move that individual position and move those assets back to Schwab," he added.  

Keeping it cool

Yet, again, Bettinger said Schwab's ability not to overreact can pay off.

“As an example, a client might have a significant holding of a given stock such as Microsoft… and they'll take advantage of one of those offers and move those individual positions while leaving the rest of their assets at Schwab knowing that they're not going to liquidate or trade or do anything with those assets and proactively telling us that as soon as the required holding period expires, they'll move those assets back to Schwab.” 

“Again, it's something that goes on in our industry, and we watch it very closely. But it is not innovative, and it is not sustainable as a means to grow.” 

“The only way to grow is to delight clients, offer them no trade-offs, and operate your business through clients' eyes. We like our track record at that and are incredibly optimistic about our future with those approaches." 

Stock rebound

Wall Street seemed to agree. 

The Westlake, Texas, brokerage and RIA beat earnings estimates and saw its stock rise 1.71% to close at $71.23. The stock has regained almost all of its lost ground from the crash. 

It closed at $77 in January a year ago and fell to $52.38 at the end of March with the crisis hit.  See: Briefs: Schwab shares soar past $71 as two negatives get more positive 

Schwab's stock took another hit last August --falling by nearly 5% to a one-month low -- on cost-cutting plans that included steep, one-time charges. See: 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'

Loan paybacks

Schwab is still suffering a hangover from last year's banking crisis, and analysts quizzed the executives on the loans the company took out during the banking crisis. 

“We believe the main driver of the company’s performance in the next one to two years will be how fast it can reduce its high-cost Federal Home Loan Bank borrowings and certificate of deposit balances,” Morningstar analyst Michael Wong wrote in an April 11 note.

J.P. Morgan Analyst Ken Worthington followed up with executives on the call, noting that Schwab had paid down $2.4 billion from the Federal Home Loan Bank loan and $9.1 billion on the certificate of deposit (CD) balances.

“Is this the pace of borrowing paydown that we would expect for the next couple of quarters? And to what extent are the higher markets, greater asset levels, and solid volume helping to boost the pace of payback versus your initial expectations?" he asked. 

No promises, said Schwab Chief Financial Officer Peter Crawford.

"We'll do it as quickly as we can. To the extent that we see greater contributions from new accounts and a greater level of deposit growth, that will accelerate that.”

Schwab has to thread a needle to get that kind of deposit growth, he explained.

“When markets are higher and moving higher, we do see clients more likely to change their asset allocation and move into the equity markets and that ends up being a negative for some of that cash. 

"On the other hand, when markets are higher, clients are more engaged, and so they're more likely to add to their accounts with money from outside of Schwab. And so that's certainly a positive for us as well,” he said. 

Starting to click

Though Schwab's top-line growth result was $100-billion-plus in net new assets for the three months ended March 31, its executives were pumped the most about the high-margin, recurring-revenue products that really started to click.

Indeed, Schwab executives had sold the TD Ameritrade (TDA) acquisition, not simply as a play for scale but as the harvesting of a vast pool of brokerage assets ripe to be migrated to “wealth advisory” offerings. 

“Former TDA clients have already begun participating in Schwab wealth programs, which has also been a boon for Schwab,” Bettinger said.

“These clients are now beginning to bring new assets to us, and their trading volumes now exceed the levels of trading they were doing pre-conversion when they were exclusively at Ameritrade.” 

It's still an open question just how much of that asset conversion will play out.

Schwab President Rick Wurster put a fine point on it.

“We saw a record $14 billion in net flows into [wealth offerings], a 60% increase over [the first quarter of] last year” he said.

Record inflows

Schwab Wealth Advisory [formerly Schwab Private Client] attracted a record $4.4 billion in net flows for the first quarter with an estimated 30% of those enrollments coming from legacy Ameritrade households.

The majority of assets have gone to Schwab Wealth Advisory or [to RIAs though] Schwab Advisor Network, Wurster said.

“That's exactly the power of the combination that we thought we'd see, and we're seeing it. 

"What's most gratifying about that for us is that, on the other end of that, is a client whose life we're making a big difference in. So, we're excited about these trends."

He says that 97% of legacy TDA financial consultants have opened up “some form of wealth or advice solutions in the first quarter.” 

Mergers on pace

Bettinger says Schwab's steadfast approach has helped the firm while it completes the TDA merger, which was first announced in the fall of 2019. 

The majority of clients were moved to Schwab's platform last year, and the last group -- 10% of clients -- will be merged on the platform next month. 

“This group is incredibly important, and it's also unique,” Bettinger says. “It's made up of our most active traders and many are power users of the thinkorswim platform.” 

Money Markets

Citizens JMP Analyst Devin Ryan asked whether Schwab can retain the $350 billion currently in its money market funds. 

Crawford said it would take a fairly radical move in rates to have a big effect.

“What I'd say is if interest rates fall modestly under 100 basis points or something like that, you'd see a… little bit of a shift in the proportion of cash that's sitting in those transactional cash solutions like bank sweep and the broker-dealer cash solution versus money funds,” Crawford says. 

So it is sort of some dry powder… that helps mitigate the revenue -- potential revenue impact from a very low interest rate environment.”