Bank Of America Downgrades Charles Schwab, Rate Headwinds Cloud Revenue Outlook

Over the past few years, net interest income (NII) has been Charles Schwab Corporation’s SCHW revenue growth engine.

With Fed rate cuts now on the horizon, the company’s revenue outlook looks murkier, according to Bank of America Merrill Lynch.

The Analyst

BofA’s Michael Carrier downgraded the rating on Charles Schwab from Buy to Neutral while reducing the price target from $49 to $43.

The Thesis

While bulk transfers are now in the rear view, Charles Schwab is faced with lower core balances as well as possible rate cuts by the Fed, Carrier said in the note.

The analyst reduced the EPS estimates for 2019 and 2020 from $2.75 to $2.65 and from $2.95 to $2.50, respectively. He explained that the estimates now incorporate two rate cuts in the back half of 2019 as well as further pressure on balances in the near term, which could have a bigger impact on the company’s 2020 performance.

While the NII outlook is challenging, Charles Schwab has invested in several businesses over the past few years, which gives the company some flexibility to control expenses going ahead, Carrier mentioned. He added that the recent investments in infrastructure and technology could result in savings over time.

Price Action

Shares of Charles Schwab were trading down 1.16% at $39.99 midday Friday..

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