Schwab slides 7% as net interest revenue falls short of expectations

Charles Schwab (SCHW) reported Q2 earnings with results that were mostly in line with analyst estimates, though some key metrics missed expectations, causing concern among investors. Adjusted EPS came in at $0.73, slightly above the estimated $0.72, while net revenue was $4.69 billion, matching expectations. However, net interest revenue fell 6% year-over-year to $2.16 billion, missing the $2.19 billion estimate, contributing to a pre-market drop in SCHW shares by about 6%.

Bank deposits also fell significantly, decreasing 17% year-over-year to $252.4 billion, below the expected $257 billion. This decline is a key point of concern as it indicates continued pressure on Schwab's banking operations. The company noted that it may look to reduce bank-level debt, which could impact its stock buyback plans, further weighing on investor sentiment.

Schwab's trading revenue excluding DVA performed better than expected, coming in at $777 million compared to the $762.5 million estimate. Additionally, equities trading revenue was $1.94 billion, exceeding the $1.73 billion estimate. However, FICC trading revenue was slightly below expectations at $2.74 billion versus the $2.8 billion estimate. Asset management and administration fees were also slightly underwhelming at $1.38 billion compared to the $1.4 billion estimate.

The company's overall client assets reached a record $9.41 trillion, surpassing the $9.36 trillion estimate. New brokerage accounts, however, came in at 985,000, falling short of the expected 1.04 million. Total active brokerage accounts were slightly above expectations at 35.61 million, indicating steady client growth despite the challenges in other areas.

Credit quality remained a focal point, with provisions for credit losses at $1.51 billion, just above the $1.5 billion estimate. Net charge-offs totaled $1.53 billion, slightly higher than the estimated $1.45 billion, reflecting continued caution amid economic uncertainties. The company reported that the allowance for loan and lease losses stood at $13.2 billion, representing 1.26% of total loans and leases.

Schwab’s CFO highlighted that the company expects net interest income to climb in Q3 and Q4, despite the current quarter's challenges. The outlook for sales and trading remains constructive, driven by geopolitical and rate uncertainties which drive client activity and repositioning. The CFO also noted that the interest rate environment has settled down somewhat, providing a more stable backdrop for future operations.

In conclusion, while Schwab's Q2 earnings report showed resilience in certain areas like trading revenue and client asset growth, the miss on net interest revenue and significant decline in bank deposits are points of concern. The company's strategic focus on reducing bank-level debt and adjusting its long-term bank strategy will be crucial moving forward. Despite these headwinds, analysts remain generally optimistic about Schwab's medium to long-term earnings potential, with expectations of improved performance as economic conditions stabilize.