Schwab's Stock Sinks After It Vows to Shrink Bank

New brokerage accounts in the quarter rose to 985,000, the company said Tuesday in a statement. While that’s up from 960,000 in the same period a year earlier, it’s less than the 1.04 million that analysts in a Bloomberg survey were expecting.

Still, Schwab reported $1.33 billion in net income for the three-month period, beating a $1.23 billion average of analyst estimates. Earnings per share for the quarter were 66 cents, which also topped expectations.

The retail brokerage space has gotten more crowded as consumers flocked to the markets during the pandemic and have stuck with their new trading habits.

Schwab has maintained its more traditional approach to retail investing as compared with crypto-friendly competitors like Robinhood Markets Inc., but will roll out an alternative investments platform for qualified, self-directed individual investors this year.

Bettinger said on the Tuesday call with analysts that six out of 10 new clients are under the age of 40.

The Westlake, Texas-based firm announced in May that Mike Verdeschi, a three-decade veteran of Citigroup Inc., will take over as chief financial officer from Peter Crawford. Crawford helped Schwab through last year’s financial turbulence, which hit the banking division.

Schwab, founded by Charles “Chuck” Schwab more than 50 years ago, oversees more than $9.4 trillion in total client assets.

Shrinking Bank

With the off-balance sheet arrangements, customers would still open a bank account with Schwab but their money would actually reside with a third-party bank. Such a deal would mean Schwab wouldn’t have to hold as much capital as it would if it kept the deposits — which are considered liabilities for banks — in house.

With the moves, Schwab would look more like rivals LPL Financial Holdings Inc. and Raymond James Financial Inc., whose stocks outperformed Schwab’s last year because investors appreciated that both companies faced less funding risk, according to analysts at Keefe Bruyette & Woods.

Executives are still planning to lean more on lending as they look for additional ways to boost returns in the coming years. For instance, the company is still planning to expand its offerings like residential mortgages, home equity lines of credit and pledged asset lines in order to win over more clients.

“Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs,” Bettinger said. “We believe firms that do not offer lending services are at a strategic disadvantage. That will show itself more and more over time, so we are committed to offering quality lending services.”

(Credit: Bloomberg)