Charles Schwab Faces Double Downgrade Reflecting Client Cash Sorting & End To Fed Rate Hike

  • BofA Securities analyst Craig Siegenthaler downgraded Charles Schwab Corp SCHW from Buy to Underperform and lowered the price target from $92 to $75.
  • The double downgrade reflects continued client cash sorting at an elevated pace in 1H23 (pressuring liquidity, interest-earning assets & bank deposit account levels).
  • The re-rating also reflects the Fed ending its interest rate hiking cycle by this summer, removing a powerful near-term profit driver.
  • SCHW generated strong relative financial results in 2022 when U.S. equities declined 20%-30%. 
  • Given that ~60% of SCHW’s revenues stem from interest-rate-sensitive fee streams, SCHW is arguably the biggest beneficiary of higher interest rates across diversified financials. 
  • However, the analyst believes SCHW’s revenue and profit growth will decelerate in 2023, led by balance sheet shrinkage combined with a declining tailwind from rising short-term interest rates. 
  • The analyst expects this deceleration to occur in parallel with an improving fundamental backdrop for his asset manager coverage with the alternative asset management industry currently trading at trough valuations on trough EPS. 
  • Accordingly, the analyst thinks now is the time to migrate away from interest-rate-sensitive brokers.
  • Meanwhile, the analyst remains bullish on the less interest rate-sensitive brokers.
  • Barclays analyst Benjamin Budish maintained Charles Schwab with an Equal-Weight and lowered the price target from $92 to $87.
  • Price Action: SCHW shares traded lower by 7% at $75.68 on the last check Thursday.
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