Charles Schwab(SCHW) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue increased by 5% year-over-year to $4.8 billion, with adjusted pre-tax income also up by a similar amount, resulting in an adjusted pre-tax margin of over 41% and adjusted EPS of$ 0.77 [28][29][38] - Year-to-date net new assets crossed over the trajectory of net new assets in 2023, with net new assets more than doubling from the third quarter of last year [11][27] - Margin balances grew over $1 billion to end at$ 73 billion, reflecting a 17% increase from the end of 2023 [9][27] Business Line Data and Key Metrics Changes - Managed investing or retail advisory flows reached a record of $15 billion during the third quarter, with year-to-date managed investing net flows up 65% compared to last year [9][16] - Former Ameritrade clients contributed positively to net new assets for two consecutive quarters, with 44% of Pledged Asset Line (PAL) balance growth coming from these clients [12][17][56] - Client engagement remained strong across various services, with trades up about 4% from the prior quarter [9][21] Market Data and Key Metrics Changes - The third quarter saw a solid trading environment, with equity markets reaching all-time highs and investor sentiment remaining bullish [8][27] - Client cash realignment activity continued to decelerate, enabling strong growth in overall client cash and transactional cash for the quarter, particularly in September [27][34] Company Strategy and Development Direction - The company is focused on four strategic areas: Scale & Efficiency, Win-Win Monetization, Client Segmentation, and Brilliant Basics, which are expected to drive long-term growth [14][21] - The integration of Ameritrade clients is progressing well, with a focus on enhancing client relationships and service offerings [12][56] - The company aims to maintain a low-cost position as a competitive advantage while continuing to invest in operations and infrastructure [15] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about returning to historical growth levels, citing the normalization of client cash realignment activity and the reduction of supplemental funding [26][27] - The company anticipates full-year 2024 revenue to increase by 2% to 3% versus 2023, with adjusted expense growth expected to be approximately 2% [38][40] - Management highlighted the importance of client engagement and the positive momentum heading into 2025, despite uncertainties in the macroeconomic environment [39][40] Other Important Information - The company reduced high-cost supplemental funding at the banks by$ 9 billion, with supplemental funding balances down over 30% from peak levels in May 2023 [32][35] - The adjusted Tier 1 Leverage ratio expanded by over 70 basis points to 6.7%, approaching the operating objective of 6.75% to 7% [36] Q&A Session Summary Question: What drove the improvement in transactional sweep cash and deposits in September? - Management noted that organic growth of cash and variability in client activity contributed to the improvement, indicating a normalization of cash realignment activity [43][44] Question: Thoughts on the securities portfolio and potential restructuring? - Management stated that while restructuring is a topic of interest, it is not currently being pursued to avoid disrupting client relationships, focusing instead on paying down supplemental funding [46][47] Question: Clarification on mid-single-digit expense growth for 2025? - Management confirmed that the mid-single-digit expense growth expectation includes efficiencies realized in 2024 and aims to balance investments for sustainable growth [49][51] Question: Update on organic growth and Ameritrade client normalization? - Management indicated that Schwab-only clients are growing at a historical rate of 5% to 7%, while Ameritrade clients are expected to contribute positively to net new assets over time as they become familiar with the platform [53][55] Question: Comfort level for share repurchases in relation to supplemental borrowing? - Management emphasized the priority of paying down supplemental borrowings before considering share repurchases, with no specific level set for comfort [58][61] Question: Changes to funding strategy and funding arbitrage? - Management explained that diversifying funding sources is essential, with broker-dealer funding being an efficient source to meet client needs while achieving financial outcomes [64][66] Question: Expectations for NIM and long-term growth? - Management acknowledged that NIM is expected to be modestly below previous targets due to lower rate trajectories but anticipates continued expansion in 2025 [70][72] Question: Opportunities for expanding REA custody offerings? - Management highlighted the growth in the Advisor Services business and the potential for monetization through enhanced lending and asset management capabilities, while maintaining the current custody fee model [75][78]