Schwab authorizes $20-billion stock buyback and unshackles its sidelined 'capital intensity' -- downplaying previous TD Bank off-balance-sheet proclamations -- after reducing post-bank crisis obligations by $70 billion
Schwab still owes Federal Home Loan Bank and others $27.7 billion, but post-bank crisis fears have receded and the willingness to be aggressive is back to par.
6 min read
Brooke's Note: About half of the RIAs and RIA assets are parked at Schwab Advisor Services – a presumed Fort Knox for client assets. So when the 2023 banking crisis caused Schwab to borrow nearly $100 billion to shore up its balance sheet, RIAs noticed – though none fled to my knowledge. Schwab did not play down the threat even as it assured investors that it could weather the economic conditions that took down Silicon Valley Bank and First Republic. 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 Yet, Schwab's shares got hammered, anyway, a year ago [July 2024], when analysts surmised it might be overcompensating for the brush with crisis by imposing balance sheet guardrails sure to stunt its growth. Now, here we are, with Schwab executives throwing around talk of the opposite threat – “excess capital” – and authorizing ways to spend it, saying all that talk of third-party balance sheets will be used in only the rarest of circumstances.
What a difference a year makes when it comes to fears that the sky might fall on spiking interest rates.
The Charles Schwab Corporation board today authorized up to $20 billion of share repurchases, citing concerns about “excess capital," only 15 months removed from Schwab's brush with the Silicon Valley Bank cash crunch.
"These actions reinforce our commitment to delivering strong growth across all fronts while further enhancing long-term stockholder value through the opportunistic return of excess capital,” said Co-Chairman Walt Bettinger in the release.
The bullish move comes just one year after Bettinger, then CEO as well as chairman, sounded a very different note.
The rapid Fed interest-rate hikes saddled Schwab with $19.6 billion in unrealized losses. It avoided selling off deeply underwater fixed assets by relying on its substantial cash flow.
But the crisis forced Schwab to take out massive loans from the Federal Home Loan Bank (FHLB) to shore up its balance sheet – drubbed as its bond holdings were crushed in value by soaring interest rates.
Close call
Besides borrowing, Schwab envisioned preemptively placing more balance sheet risk onto third-party banks – not least long-time partner, Toronto-Dominion Bank. See: Wall Street hammers Charles Schwab Corp. shares and blasts management 'execution' after Tuesday's surprise unveiling of budding mega-outsource deal with its biggest shareholder, TD Bank
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
"We envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals: deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from third-party banks that make sense for us," Bettinger said a year ago.
“These various actions should lead — again over time — to a bank that is somewhat smaller than our bank has been in recent years while retaining the ability to meet our clients’ banking needs, lower our capital intensity and, importantly, protect the economics we’re able to generate from owning a bank,” he added during the 2024 Schwab Summer Update.
Shares cratered to near $62 after the Schwab assertion; investors read into the remarks that Schwab was perhaps permanently growth-impaired.
At the time, Jonathan Holtaway, president and manager of Ategra Capital Management, a private equity firm and asset manager in Vienna, Va., saw the crisis as a daunting bottleneck.
“Most of the premium in a stock is related to earnings growth, so investors are coming to terms with the fact that Schwab is not going to ‘just get back to where it was,’ but will be permanently changed by the interest rate crisis,” he explained in an RIABiz interview.
Growth driver
But just last week, Schwab's new CEO, Rick Wurster, reassured three Wall Street analysts that Schwab was no longer in such a conservative mindset regarding its balance sheet.
Story Timeline
“Of course, cash on a balance sheet is quite accretive,” he said. "So, it's really in those rare times where perhaps rates are extremely low [that Schwab might seek the use of a third-party balance sheet.]
."And therefore, when you think about use of the balance sheet, it's perhaps not economical. But I think about that off-balance sheet activity as more a tactical capability, not really a primary driver of our strategy, which is growth."
"Growth” is music to analysts' ears.
Schwab shares hit another all-time high of $96.50 today during trading hours, then jumped higher after-hours to $97.55 on the release of the board's repurchase directive.
Wall Street hammers Charles Schwab Corp. shares and blasts management 'execution' after Tuesday's surprise unveiling of budding mega-outsource deal with its biggest shareholder, TD Bank
The company's new Chief Financial Officer, Mike Verdeschi, also endorsed Schwab's current cash gusher, saying it is enough to satisfy a host of objectives.
“The combination of our strong balance sheet, diversified financial model, and robust capital levels keeps us well-positioned to continue supporting client growth while concurrently returning excess capital to our stockholders in multiple forms as a part of our through-the-cycle financial growth story,” he said.
Paying the piper
Backing Verdeschi's and Bettinger's statements is the vast reduction in Federal Home Loan Bank (FHLB) and other borrowings designed as a balance sheet band-aid.
Schwab's bank shore-up funding, including FHLB advances, declined to $27.7 billion, down $10.4 billion during the quarter ending June 30, 2025.
Wurster acknowledges the need to pay down those borrowings – and the need to “resume securities purchases” i.e. buy bonds to put bank deposits to work.
“Obviously, we've made a lot of progress in paying down those borrowings,” he says "And at some point, we will be resuming, I would say, more securities purchases.
“And so when we think about that balance sheet growth, it is going to be to support our client needs. We've seen a good pickup in lending activities [to obviate the need to buy bonds.]
”That continues to be a strong factor for us, both in our margin lending activity, as well as in the bank.”
Buying power
Schwab's high-cost supplemental funding was reduced by $15 billion to $50 billion in the three months ended Dec. 31, 2024, primarily comprising retail-brokered CDs, FHLB advances, and repurchase agreements.
Schwab's FHLB borrowing peaked at $45.6 billion at the end of Mar. 2023, up from $12.4 billion at the end of Dec. 2022. Charles Schwab's “Bank Supplemental Funding” reached an overall peak of $97.1 billion in May 2023.
Schwab did not say when it would start spending $20 billion on its own shares and in fact framed the authorization partly as a bookkeeping matter.
Its prior authorization had been whittled down to $6.9 billion of share repurchases remaining, and now it has $13.1 billion more in relutive buying power.
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