Charles Schwab & Co. is, unfortunately, back in the financial news. This time for announcing layoffs and office closures.
This past April, we posted thoughts on Schwab (here) following Silicon Valley Bank’s demise and increased scrutiny on regional banks.
Then, as now, we reiterated that the safety and security of client assets is always of paramount importance to BSW. Consequently, we closely monitor the financial condition of our primary custodians: Schwab and Fidelity.
Then, as now, you can be reassured that your funds are safe at Schwab. We are in communication with Schwab leadership — and also do our own, ongoing analysis and monitoring of Schwab’s condition. If this reassurance is sufficient, feel free to skip the remainder of this post below. It is our job to mind the details so you can go about your life. If you’d like more detail, read on, and please contact us if you have any additional questions or concerns.
Updated Thoughts On Schwab – As of 08.23.23
Importantly, there are three separate but inter-related issues affecting Schwab: 1) Schwab bank (a subsidiary of Schwab corporate); 2) Schwab corporate; and, 3) Schwab brokerage customer assets;
On item 1, Schwab Bank: Schwab came into the news following increased scrutiny of regional banks after SVB’s collapse. Although Schwab is primarily a brokerage firm, it does own a bank to facilitate mortgages and pledged-asset loans for its brokerage clients (which also generates net interest margin for Schwab). Schwab Bank’s net-interest margin was very lucrative for Schwab until the spike in interest rates did two things: a) Prompted bank clients to move assets from low-yielding Schwab bank accounts to higher-yielding Schwab brokerage positions (especially position-traded money funds, like Schwab Value Advantage); and, b) Increased scrutiny on Schwab corporate’s bond holdings, which were underwater at then-current rates. With regard to A, keep in mind that the customer assets are just moving from Schwab bank sweep to Schwab brokerage – not leaving Schwab. With regard to B, Schwab invested its corporate cash into bonds at low interest rates pre-2021, only to see interest rates spike (which caused the market value of those bonds to decline). Here, keep in mind here that if Schwab simply holds these bonds to maturity, they will not realize losses.
For item 2, Schwab Corporate: Schwab is a publicly-traded company, so a good proxy for “Schwab the company” is its stock, SCHW. Schwab’s stock price came under pressure this past April with the banking items discussed above. It is back in the news now because of layoffs and office space reductions. Here, it is very important to note that Schwab acquired rival TD Ameritrade in 2020. As with all big mergers and acquisitions, the integration road has not been without some bumps and potholes. The layoffs in the news are largely TD Ameritrade employees, and the office closures are a nod to Schwab’s decreasing need for office space with remote work, and to closing their offices in more expensive cities (like San Francisco) in favor of less expensive places (like Arizona). The layoffs and corporate office footprint reduction will save Schwab ~$500 million annually, but it is incurring a one-time charge of ~$500 million to pay severances, lease terminations, etc. So it is basically a wash in 2023 – but it makes for great headlines / clickbait! From an overall financial health perspective, Schwab corporate has $8 trillion of assets and generates $21 billion of gross profit, it has raised funds (via corporate bonds) to further bolster its balance sheet, it has access to more cash (if needed) from the Federal Reserve, and it has the highest capital ratio under the Fed’s “severely adverse scenario” stress test.
On item 3, Schwab brokerage customer assets: Thus far, none of the items above are putting Schwab brokerage customer assets at risk. At the end of the day, Schwab is custodian. The ebbs and flows of Schwab corporate do not impair the value of the underlying investments its brokerage customers custody with Schwab. Furthermore, additional layers of insurance and security (here) backstop Schwab brokerage customer assets.
So, in a nutshell, Schwab corporate is navigating a meaningful rough patch, but underlying Schwab brokerage customer assets are unaffected.