Charles Schwab (NYSE:SCHW) recently guided for a 10-11% year-over-year decline in its second-quarter 2023 revenues. The company’s CFO, Peter Crawford, attributed this decrease to several factors, including a contraction in net interest margin (NIM), a smaller base of interest-earning assets, and a soft trading market.
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It is worth mentioning that the news came after the Federal Reserve kept the benchmark interest rate unchanged on Wednesday but hinted at its intention to raise the rate by 50 basis points in the near term.
Key Factor Impacting NIM
In the latest commentary provided on SCHW’s website, Crawford mentioned that the company has been facing the challenge of navigating through the most rapid interest rate tightening cycle witnessed in the past four decades. To address this situation, the company has opted for costlier funding options, such as borrowing from the Federal Home Loan Bank and utilizing retail certificates of deposit.
The ongoing impact of these balances is anticipated to have a continued negative effect on Charles Schwab’s net interest margin (NIM) until the majority of these loans are repaid by the end of 2024. As a result, the company expects a sequential contraction of 35 basis points in NIM for the second quarter.
May Metrics Reflect Strong Momentum
In its monthly update released yesterday, Charles Schwab disclosed total client assets of $7.65 trillion as of May 31, 2023. This compares favorably with $7.63 trillion in the previous month and a 5% growth from May 2022.
Furthermore, SCHW’s core net new assets brought in by new and existing clients totaled $20.7 billion in May, versus an outflow of $2.3 billion in April. Also, client cash as a percentage of assets was 11.5% as of May-end, compared with 11.3% in April 2023.
Following the release of the monthly report, Morgan Stanley analyst Michael Cyprys reaffirmed a Hold rating on SCHW stock. Despite witnessing improvements in the numbers, Cyprys noted that the rebound in net new assets for the month of May fell short of expectations.
Will Charles Schwab Stock Go Up?
The recent growth in core net new assets provides reassurance regarding SCHW’s future performance. Although there are some short-term challenges to address, Charles Schwab appears committed to enhancing its performance in the near term.
Overall, Wall Street has a Moderate Buy consensus rating for the stock. This is based on 12 Buys, three Holds, and two Sell. The average stock price target of $64.46 suggests about 18.6% upside potential from current levels. Shares have declined 33.1% year-to-date.
Remarkably, Credit Suisse analyst William Katz is the most accurate analyst for SCHW. Copying the analyst’s trades on this stock and holding each position for one year could result in 72% of your transactions generating a profit, with an average return of 15.33% per trade.
