By Andrew Welsch

Charles Schwab has been bedeviled over the past year by clients moving their cash out of low-yielding sweep accounts and into higher paying options, which has put pressure on the company's earnings and pummeled its stock this year. Now, there may finally be relief on the horizon.

The company reported that the average daily pace of net outflows from bank sweep and deposit accounts declined for the fourth consecutive month to approximately $350 million as of May 23. That's a month-over-month improvement of 65%, according to Charles Schwab (ticker: SCHW). Back in February, the average daily pace of net outflows was $1.62 billion.

"The trajectory in client cash realignment further supports our belief that this activity will abate during the second half of 2023," Chief Financial Officer Peter Crawford said in a statement.

In addition to its large brokerage business, Schwab operates a sizable bank and sweeps customers' uninvested cash into bank accounts that pay as little as 0.45%. But when interest rates soared last year, what's known as cash sorting kicked in -- that is, customers began moving their uninvested cash to higher paying options, which are less profitable for Schwab.

As of the end of the first quarter, Schwab had lost more than $100 billion in deposits in the prior year. It reported first quarter bank deposits of $325.7 billion, down from $465.8 billion for the same period a year ago. When deposit outflows exceed Schwab's cash on hand, the company has to rely on other funding sources, primarily Federal Home Loan Bank (FHLB) borrowings and retail certificates of deposit. But those are costly solutions.

When the regional bank crisis hit in March, investors began scrutinizing Schwab -- and the stock plummeted and is still down about 33% this year. Shares were trading around $55.31 as of mid-day Wednesday, up 1%, and below their 52-week high of $86.63.

"While we plan for the vast majority of these more expensive balances to be repaid before the end of 2024, they are currently weighing on our near-term net interest margin," Crawford said.

Schwab expects its second quarter net interest margin to contract by approximately 35 basis points and anticipates a second quarter revenue decline of 10% to 12%.

Bank of America equity analysts recently cautioned that cash sorting woes could linger into 2024. The analysts said it has never been easier for customers to move cash and high interest rates may persist for longer than expected, giving clients ample reason to put their cash to work elsewhere. While cash sorting at Schwab may slow in the coming quarters, "we believe it will continue at a level that prevents deposit growth until 2024 due to the wide gap between deposit outflows and liquidity inflows," the BofA analysts said.

On Wednesday, Schwab also reported total client assets stood at $7.65 trillion as of May 31, up 5% from May 2022 and flat compared to April 2023. Client cash as a percentage of assets was 11.5% as of month-end May, compared with 12% in May 2022 and 11.3% in April 2023, according to the Westlake, Texas-based company.

Write to Andrew Welsch at andrew.welsch@barrons.com

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(END) Dow Jones Newswires

June 14, 2023 13:39 ET (17:39 GMT)

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