Charles Schwab Stock Plummeted 19% in the Days Following Its Earnings Announcement. Here's Why.

Core Viewpoint - Charles Schwab is taking steps to shrink its bank and mitigate capital and funding-related risks due to significant deposit outflows and rising interest rates, which have negatively impacted its earnings and stock performance [1][5]. Group 1: Financial Performance and Challenges - Charles Schwab has experienced deposit outflows totaling $50 billion, or 32%, from August 2022 to April 2023, as customers shifted funds to higher-yielding assets amid rising interest rates [3]. - The company's net interest revenue fell by 6% year-over-year, and bank deposits decreased by 4% in the recent quarter, indicating ongoing challenges in the current interest rate environment [5]. - Analysts, including those from Bank of America, have lowered their price target for Schwab to$ 66, citing limited earnings upside and a shift in strategy that could impact future growth [5][6]. Group 2: Strategic Response - CEO Walt Bettinger announced plans to utilize third-party banks to manage excess deposits, aiming to reduce capital intensity and improve liquidity while extending FDIC insurance for clients [5]. - The strategic shift is expected to take years to fully implement and aims to reduce volatility in capital levels and reliance on supplemental borrowing during periods of rising interest rates [6]. - While the strategy is deemed necessary, it is anticipated to weigh on short-term growth and earnings as the company transitions away from its bank-centric model [6].