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Charles Schwab(SCHW) - 2024 Q2 - Earnings Call Transcript
SCHWCharles Schwab(SCHW)2024-07-16 16:34
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Financial Data and Key Metrics - Revenue in Q2 2024 increased by 1% year-over-year to 4.7billion[28]−AdjustedexpensesinQ2wereupjustunder24.7 billion [28] - Adjusted expenses in Q2 were up just under 2% year-over-year, but would have been down more than 1% excluding onetime and unusual items [28] - Adjusted pretax margin was roughly 41% and adjusted EPS was 0.73 in Q2 [28] - Total assets dropped by 4% in Q2, driven by tax-related outflows and slower client cash realignment activity [29] - Net new assets year-to-date were over 150billion,withQ2assetgatheringofabout150 billion, with Q2 asset gathering of about 60 billion, up 17% from the same period last year [10] - New brokerage accounts reached almost 1 million during the quarter [10] Business Line Data and Key Metrics - Managed Investing net flows year-to-date were nearly 25billion,a5625 billion, a 56% increase over last year [19] - Schwab Wealth Advisory grew by 40%, Wasmer Schroeder by 53%, and Schwab Personalized Indexing by 127% [19] - Total assets under management for Wasmer strategies reached 25 billion, with a compound annual growth rate of 23% since acquisition in 2020 [20] - Net flows in Wasmer strategies were 4billionyear−to−date[20]−Equitybuy−sellratiowasabout1.1,anddailyaveragetradesremainedatrelativelyhighlevelsforQ2[10]MarketDataandKeyMetrics−FormerAmeritraderetailclientsnowmakeupaboutone−thirdofoverallenrollmentsinadvisorysolutions[9]−PromoterScoresforformerAmeritraderetailclientsincreasedbyabout50pointsninemonthspost−conversion[9]−PromoterScoresforadvisoryservices,includingformerAmeritradeadviserclients,returnedtopre−conversionlevels[9]−ClientengagementwassolidinQ2,withhighinterestinManagedInvestingsolutions[10]CompanyStrategyandIndustryCompetition−ThecompanyistransitioningfromtheAmeritradeintegration,withstrongclientengagementandprogressonstrategicfocusareas[24]−Thecompanyaimstoincreaseemphasisontransactionalbankdepositslikecheckingbalancestoimproveliquidityandstabilizethedepositbase[15]−Thecompanyplanstousethird−partybankslikeTDBanktoextendFDICinsurance,lowercapitalintensity,andimproveliquidity[15]−Thecompanyiscommittedtoofferingqualitylendingservices,includingresidentialmortgages,HELOCs,andpledgedassetlines[14]−Thecompanyisinvestingintechnology,includingartificialintelligence,tolowercostsandimproveoperationalefficiency[18]ManagementCommentaryonOperatingEnvironmentandFutureOutlook−Thecompanyexpectsfull−yearrevenuetorangebetweenflattoup24 billion year-to-date [20] - Equity buy-sell ratio was about 1.1, and daily average trades remained at relatively high levels for Q2 [10] Market Data and Key Metrics - Former Ameritrade retail clients now make up about one-third of overall enrollments in advisory solutions [9] - Promoter Scores for former Ameritrade retail clients increased by about 50 points nine months post-conversion [9] - Promoter Scores for advisory services, including former Ameritrade adviser clients, returned to pre-conversion levels [9] - Client engagement was solid in Q2, with high interest in Managed Investing solutions [10] Company Strategy and Industry Competition - The company is transitioning from the Ameritrade integration, with strong client engagement and progress on strategic focus areas [24] - The company aims to increase emphasis on transactional bank deposits like checking balances to improve liquidity and stabilize the deposit base [15] - The company plans to use third-party banks like TD Bank to extend FDIC insurance, lower capital intensity, and improve liquidity [15] - The company is committed to offering quality lending services, including residential mortgages, HELOCs, and pledged asset lines [14] - The company is investing in technology, including artificial intelligence, to lower costs and improve operational efficiency [18] Management Commentary on Operating Environment and Future Outlook - The company expects full-year revenue to range between flat to up 2% versus 2023 [32] - Adjusted expenses are expected to be approximately 2% higher than 2023, with half of the change due to unanticipated onetime items [32] - The company anticipates a return to normal earnings power, with strong growth in revenue and earnings in the back half of 2024 and beyond [27] - The company expects NIM to reach the mid-2.20s in Q4 and approach 3% by the end of 2025 [33] - The company is confident in its long-term organic growth rate and expects to see 5% to 7% annualized NNA growth from existing and new clients [24] Other Important Information - The company completed the last client transition group from the Ameritrade acquisition in Q2, involving almost 2 trillion in assets and 17 million client accounts [8] - The company is focusing on enhancing the Schwab mobile app, which has a 4.8-star rating on the App Store and was ranked number one by Corporate Insight for the second year in a row [23] - The company is committed to maintaining zero custody fees for RIAs and has no intention of changing that [21] Q&A Session Summary Question: Deposit rates and Fed cuts [38] - The company's scenario assumes a single Fed rate cut in September, with deposit betas expected to be higher in the easing cycle than in the tightening cycle [39] Question: Use of third-party banks [41] - The company is exploring the use of third-party banks to reduce capital intensity and improve liquidity, with economics similar to the IDA agreement with TD Bank [42] - The company does not see the Wells Fargo issue as having meaningful implications for its fiduciary-driven investment advisory solutions [43] Question: Ameritrade attrition and net new assets [44] - The company expects to move Ameritrade clients from being net detractors to contributing at the same level as Schwab clients over time [47] Question: Sequential growth drivers [49] - The company expects sequential growth in Q4 to be driven by a single Fed cut, moderating client cash realignment activity, and continued margin balance growth [51] Question: Repositioning the securities portfolio [55] - The company is cautious about repositioning the securities portfolio to accelerate paydowns of high-cost liabilities, as it could jeopardize client trust [56] Question: Shift to third-party banks [58] - The company is considering a strategic shift to using third-party banks for deposits over the long term, with the goal of reducing capital intensity and improving liquidity [60] Question: Pace of securities maturing [63] - The company expects cash flows off the investment portfolio to be in the range of 10billionto10 billion to 11 billion per quarter over the next several quarters [64] Question: Normalized deposit growth framework [66] - The company expects client transactional cash to grow with the growth in accounts and total assets over the long term, with variability influenced by market engagement and rate-driven activity [70] Question: Ameritrade asset pools and bank size [72] - The company brought over about 2trillionofAmeritradeclientassets,withtotalassetsnowat2 trillion of Ameritrade client assets, with total assets now at 9.4 trillion [73] - The company is optimistic about future growth, with client satisfaction improving dramatically post-conversion [75] Question: Fiduciary accounts and money fund yields [77] - The company does not have the same exposure as Wells Fargo, as cash assets in fiduciary relationships are invested in a sweep government money fund [78] Question: NIM outlook for 2025 [79] - The company expects NIM to approach 3% by the end of 2025, driven by the moderation of client cash realignment activity and the paydown of supplemental borrowing [80] Question: Lending opportunities [82] - The company is focused on expanding its lending capabilities by creating a client-friendly process, with significant enhancements in pledged asset lines and mortgage processes [84] - The company sees lending as a way to deepen relationships with adviser clients and close the gap in lending assets [85]