Schwab’s $7 Trillion Empire Built on Low Rates Is Showing Cracks

From bloomberg: www.bloomberg.com/news/articles/2023-03-27/schwab-s-7-trillion-empire-built-on-low-rates-is-showing-cracks

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On the surface, Charles Schwab Corp. being swept up in the worst US banking crisis since 2008 makes little sense.

The firm, a half-century mainstay in the brokerage industry, isn’t overexposed to crypto like Silvergate Capital and Signature Bank, nor to startups and venture capital, which felled Silicon Valley Bank. Fewer than 20% of Schwab’s depositors exceed the FDIC’s $250,000 insurance cap, compared with about 90% at SVB. And with 34 million accounts, a phalanx of financial advisers and more than $7 trillion of assets across all of its businesses, it towers over regional institutions.

Yet the questions around Schwab won’t go away.

Rather, as the crisis drags on, investors are starting to unearth risks that have been hiding in plain sight. Unrealized losses on the Westlake, Texas-based firm’s balance sheet, loaded with long-dated bonds, ballooned to more than $29 billion last year. At the same time, higher interest rates are encouraging customers to move their cash out of certain accounts that underpin Schwab’s business and bolster its bottom line.

It’s another indication that the Federal Reserve’s rapid policy tightening caught the financial world flat-footed after decades of declining rates. Schwab shares have lost more than a quarter of their value since March 8, with some Wall Street analysts expecting earnings to suffer.

“In hindsight, they arguably could have had more prudent investment choices,” said Morningstar analyst Michael Wong.

Chief Executive Officer Walt Bettinger and the brokerage’s founder and namesake, billionaire Charles Schwab, have said the firm is healthy and prepared to withstand the broader turmoil.

The business is “misunderstood,” and it’s “misleading” to focus on paper losses, which the company may never have to incur, they said last week in a statement.

“There would be a sufficient amount of liquidity right there to cover if 100% of our bank’s deposits ran off,” Bettinger told the Wall Street Journal in an interview published Thursday, adding that the firm could borrow from the Federal Home Loan Bank and issue certificates of deposit to address any funding shortfall.

Through a representative, Bettinger declined to comment for this story. A Schwab spokesperson declined to comment beyond the Thursday statement.

The broader crisis showed signs of easing on Monday, after First Citizens BancShares Inc. agreed to buy SVB, buoying shares of financial firms including Schwab, which was up 3.1% at 2:29 p.m. in New York. The stock is still down 42% from its peak in February 2022, a month before the Fed started raising interest rates. Unusual Operation

Schwab is unusual among peers. It operates one of the largest US banks, grafted on to the biggest publicly traded brokerage. Both divisions are sensitive to interest-rate fluctuations.

Like SVB, Schwab gobbled up longer-dated bonds at low yields in 2020 and 2021. That meant paper losses mounted in a short period as the Fed began boosting rates to stamp out inflation.

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