Everything Everywhere All at Once scooped up most of the major awards on offer at the Oscars but its title could also aptly describe the past week’s shenanigans in the banking industry. Seismic events unfolded with several banks collapsing in rapid succession. In the aftermath, bank stocks raced to the bottom, with the segment’s credibility badly damaged.
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One name investors felt could be exposed to liquidity issues is Charles Schwab (NYSE:SCHW). However, Deutsche Bank analyst Brian Bedell thinks liquidity risks here are overblown.
“Throughout this banking crisis that began Thursday, we believe SCHW did not have credible risk of a rapid and substantial client drawdown of deposits that would create significant pressures on its liquidity,” the analyst explained. “This is due to both the nature of SCHW’s deposit base (over 80% FDIC insured, diversified, core to its users) and our view that client cash sorting to higher yields is a gradual process that is in its later stages at the company.”
Having said that, the new environment that has developed since the weekend’s bank failures will probably impose greater liquidity constraints, forcing SCHW to raise more money through wholesale borrowing and retail CD issuance and to keep a “shorter duration balance sheet profile” over the short term as well as, to some degree, the longer term.
As such, although during the second half of this year Bedell believes SCHW will be able to “wind down” the majority of its FHLB borrowing along with retail CDs, he anticipates the company will maintain a significantly higher cash position throughout 2H23 (and the remainder of his forecast period through 2025), while also “gradually shortening the duration” of its securities portfolio.
These actions have “material earnings implications,” says Bedell, who expects earnings estimates for SCHW to “swing more significantly” for at least the next several months. That, over the near-term, should drive “more volatility in the stock and adversely impact its P/E multiple.”
On account of the upheaval, Bedell has lowered his price target on SCHW from $109 to $83. However, his Buy rating for the stock remains unchanged as there is still 46% upside potential from the current levels. (To watch Bedell’s track record, click here)
Most analysts agree with Bedell’s prognosis; based on 13 Buys vs. 3 Holds and 1 Sell, the stock claims a Moderate Buy consensus rating. Shares sell for $56.68, and the average price target of $88.03 indicates an upside of 55%.(See SCHW stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
