Charles Schwab quarterly profit tumbles on interest paid to clients and debt

Westlake, Texas — Financial services group Charles Schwab on Wednesday reported fourth-quarter profit fell 47% as bigger interest payments on its client deposits and debt dented gains from a jump in asset management fees.

The US Federal Reserve’s aggressive rate hikes have been a drag on financial firms such as Schwab, which primarily rely on clients’ deposits and uninvested cash balances to buy bonds and give loans.

Schwab, like major banks, has been dangling higher interest rates to avoid depositors from seeking better returns elsewhere. It paid an average rate of 1.37% on deposits, up from 0.46% a year earlier.

To supplement its funding sources, Schwab also borrowed from the Federal Home Loan Bank in the first half of 2023. It paid interest of $423m on those loans, four times higher than the year earlier.

The moves eroded Schwab’s net interest revenue, which fell 30% to $2.13bn in the three months ended December 31.

The pace of reallocation by clients has been decelerating, however, and the pressure to raise deposit rates further is also easing amid mounting bets that the Fed is most likely to cut interest rates.

Asset management and administration fees, earned from managing mutual funds and exchange traded funds, jumped 18% to $1.24bn as client assets reached a record.

The Westlake, Texas-based company reported a profit of $1.05bn, or 51c a share, compared with $1.97bn, or 97c a share, a year earlier.

The stock rose 1.2% in trading before the bell. It declined 17% in 2023, compared with the S&P 500 index’s gain of just over 24%.

Schwab is trading at a price:earnings ratio (PE) of about 17 times expected earnings over the next 12 months.

Some analysts expect the company to move back to its historical PE of 18-20, largely as a result cost cuts over the past year.

Reuters