Schwab Downgraded by Morgan Stanley for First Time, Target Slashed

Charles Schwab Corp.’s clients are pulling cash out of the firm’s low-interest-rate bank accounts at twice the rate that Morgan Stanley expected, prompting the firm’s analyst to yank his buy-equivalent rating on Schwab for the first time since he began covering the brokerage stock seven years ago.

Client money is moving from so-called sweep accounts into money market funds at a rate of $20 billion a month, analyst Michael Cyprys wrote in a report Thursday cutting the stock to equal-weight from overweight.

He reduced his target for the share price over the next year to $68 from $99. Schwab’s shares, which have fallen 29% this month, slipped 1.3% to $54.51 in premarket trading.

“While clients aren’t leaving and SCHW has other sources of liquidity, earnings face more pressure than we had expected,” Cyprys wrote, lowering his forecast for profit this year and next by 30%.

The downgrade reflects the heightened risk that analysts see in financial companies like Schwab, which is struggling with some of the same forces that hammered the now-collapsed Silicon Valley Bank.

Schwab invested in long-term bonds at a period of record-low interest rates and is now sitting on losses on those investments after the Federal Reserve jacked up rates.

Depositors, meanwhile, are pulling money from bank accounts in search of higher yields, depriving companies like Schwab of cheap funding and raising concern that it will have to sell bonds at a loss to cover outflows.