Has Charles Schwab Successfully Addressed Its Deposit Outflow Challenges?

Low-cost deposits have been crucial for Charles Schwab

Charles Schwab provides customers with various financial services, including banking, brokerage, financial planning, and wealth management. The company has historically performed well for investors, thanks to its limited credit exposure and cost-efficient business models.

Over the past decade, Schwab's average return on equity is 13.5%, outpacing banks and other financial institutions, JPMorgan Chase (12.2%), Morgan Stanley (9.6%), and Bank of America (8.2%).

Rising interest rates led to a drastic decline in customer deposits at Schwab

In 2017, Schwab felt the impact of rising interest rates held low by the Federal Reserve for several years following the Great Recession. Rates were cut amid the COVID-19 pandemic. However, inflation began to rear its ugly head, and in March 2022, the Federal Reserve raised interest rates again and proceeded to increase them at the fastest pace in 40 years.

Schwab felt the worst of it from August 2022 through April 2023, when its bank account deposit balances plummeted by nearly $50 billion, or 32%. In other words, clients pulled funds from their bank accounts at Schwab at a pace of $5.6 billion per month to take advantage of higher-interest-earning assets.

Investors will want to keep an eye on inflation and interest rates

Charles Schwab continues to manage outflows, and one risk is that inflation remains stubbornly high, which could push back interest rate cuts further into the future.

As a result, the expectation for interest rate cuts in 2024 has fallen dramatically. Markets now expect just one rate cut for the rest of the year, per CME FedWatch Tool.