Charles Schwab Corp Spring Business Update Call
And yet despite negative investor sentiment this wasn't reflected in our clients' engagement with us.
Clients entrusted us with over 130 billion in core net new assets with the monthly level, increasing each of the three months of the quarter.
Speaking with over $50 billion in March and achieving an organic growth rate in excess of 7%. Once again validating our long term track record of growing client assets in every economic environment.
And in addition to growth in client assets clients remained engaged with us in other areas.
With another quarter of over 1 million new client accounts.
Over 5 million daily average trades, a client promoter score or net promoter score of 66, and almost $9 billion moved into our investment advisory solutions.
Let's go ahead and transition from our client results to discuss some of the corporate financial areas that have been in the press.
On the minds of investors.
And in too many cases.
Falsely described by some competitors, who have tried without much success as evidenced by our near record March level of net new asset flows to scare clients into leaving Schwab.
Again, our franchise and financial model are strong.
We have substantial liquidity.
We have capital well in excess of regulatory requirements and our strong profit margins deliver ongoing organic capital formation, which can be used to meet future capital needs.
We have industry, leading levels of FDIC insured balances at our bank our investors bank.
Our balance sheet and investments were and our conservatively managed and managed in a manner consistent with how we have managed our bank balance sheet for the last two decades.
And for our long term stockholders, we have great confidence in our ability to deliver a combination of growth and capital return.
Just as we have for almost 50 years.
So I'd like to go into a bit more detail now on each one of these statements.
I have publicly stated multiple times and in multiple formats that we cannot foresee any plausible scenario, where we would have to sell securities to meet the liquidity needs of our clients and that's not an accident.
We have always planned for the potential of time periods, where high liquidity needs exceed our available cash.
Of course, these time periods tend to occur when the fed is raising interest rates rapidly.
And while this cycle of interest rate increases has been historically rapid <unk>.
Leading clients to realign their investment cash more quickly than we had predicted.
Our advanced planning ensured that we would have the necessary liquidity to meet their demands.
We prepare in part by minimizing the issuance of Cds <unk> borrowing from the FHL be during more normal times.
<unk>, keeping that dry powder for periods of higher liquidity needs.
Of course accessing this higher cost funding is not something we expect to be anything other than temporary.
Currently projected to wind down over the next seven quarters and be largely gone by year end 2024.
I would certainly hope that by this point in time the.
The short driven speculation that we would find ourselves in a position where we would be forced to sell securities that have temporary paper losses has been put to bed.
From a capital standpoint, we have solid levels today, well in excess of regulatory requirements.
And we understand the possibility that the OCI opt out might well be eliminated and.
And the questions that that raises about the potential need for capital.
At this point if this scenario does play out.
In a reasonable timeframe has afforded to build the capital to support this change.
We feel confident today in our ability to build the necessary capital organically.
Given our strong profit margins.
Even in a stressed market environment this past quarter.
We achieved an adjusted pre tax margin of almost 46%.
And even under some of the most pessimistic scenarios for the future we are at least 40% pretax.
And of course, our unrealized marks on certain securities decline over time and they are also declined as interest rates have modestly moderated.
Declines that Youll see happening when you review, our first quarter 10-Q.
The conservative nature of our Bank management is also reflected in the very high percentage of deposits insured under the FDIC limits at quarter end, approximately 86% of our bank deposits were under the FDIC insured limits.
In addition, these deposits are spread among tens of millions of investor accounts.
And lastly, there are no groups of investors or advisers, who directly influence or encourage collective behavior.
The 10, RIAA firms, whose clients hold the greatest amount of cash on our bank balance sheet.
<unk> for barely 2% of total bank deposits.
And the average transactional cash per account for those firms is less than $13000.
I hope these facts remove any concerns about.
Some sort of coordinated action potentially happening that would meaningfully impact our bank deposits.
This is a very important slide and I'd like to dive deeper into our clients' cash behaviors. I know this is a critical area of interest.
Particularly as it could apply to future levels of bank balance sheet cash and client cash realignment.
As I've discussed in the past when interest rates are near zero.
Clients tend to co mingle their transactional cash.
And there are longer term investment cash together.
Of course, there's very little incentive during times like that to move their investment cash into solutions that offer higher yields than bank sweep.
Clients and suggests they consider realigning their investment cash into other solutions whenever the client sees fit.
That would be a purchase money fund the purchase money market fund, a CD or treasury security or.
And other appropriate cash solution that the client is interested in.
And of course this has been taking place predominantly inside schwab as rates have been rising over the past year or so.
The rate.
Pes and ultimate level of this realigning has a large impact on our near term financial results so not surprising.
Study it closely and we have models that estimate how it will unfold.
By several measures we study.
We believe that this cash realigning process is now slowing and getting closer to its endpoint.
Which should then likely reverse to a stage where bank balance sheet cash begins to grow as a result of our organic <unk>.
Net new asset growth as well as new accounts that we attract.
Now in terms of the slide we've included a chart that goes back to 2004.
And it illustrates multiple timeframes, where interest rates were relatively high.
As well as several timeframes, where interest rates were near zero.
Often referred to as <unk> periods.
When we studied this information on a per account basis.
What we see as the most accurate way to model. This.
Transactional cash per account is down to an average of approximately $10 $4000.
Level as low as we have seen in the past 20 years.
And down about 50% from the peak period during the Covid pandemic.
From a percent standpoint transactional cash per account is that a 20 year low of approximately 5%.
Now.
Could it go lower yes of course, but we believe it is closer than ever to finding its ending point.
Here's why.
If you look at daily Schwab Bank cash movements, a key metric for identifying trends far more important than a quarterly summary.
February of this year was lower than January .
And if we adjust for the single day after the Silicon Valley Bank failure, where cash movement was modestly elevated March was lower on a per day basis than February .
And through the first half of April .
Even allowing for tax payments.
<unk> is also lower than March Meg.
Measurably lower.
Lastly, it's important to recognize that while some clients did readjust their cash allocations in response to the Silicon Valley Bank failure.
Buying treasuries or Cds are moving from prime money funds to treasury or government money funds. We also saw a sharp increase in new cash coming into Schwab.
<unk> with being a safe port in the storm.
Now this slide is also a particularly important one as it provides factual information around the topic.
That has been fraught with inaccuracies in the press and blogs alike that incredibly to me often relied on speculative information from short sellers and competitors.
Schwab Bank as a bank for investors.
We manage client cash at our bank conservatively and consistently.
We manage this cash in the same way we've managed it for the 20 years that we've had our bank.
We make what we consider to be conservative loans on.
Almost exclusively to our existing investment clients now these loans are either backed by our client securities portfolio.
<unk> loans against their personal real estate this makes up about 12% of our assets.
We do not make commercial loans as speculated by one of our competitors on national TV.
The balance is invested primarily in securities and with this balance we look to manage credit risk by investing between 85 and 90% in securities backed by the U S government or its agencies.
That's our approach to credit risk.
Now, let's talk about duration risk again, an area that has been fraught with misinformation.
First let me begin by saying, it's important not to confuse as unfortunately, some less than savvy alleged researchers and analysts have.
That maturity or weighted average life is not the same as duration.
We have many floating rate securities that have a long life, but essentially zero duration, and therefore do not contribute to negative marks with higher interest rates and of course offer increased yields as rates rise.
Second we do not now and never have tried to guess future interest rate movements.
Doing so is a fools game, it's like trying to guess stock market movements, we don't guests.
And we don't try to time interest rate movements.
Our approach is very straightforward.
We have historically managed our bank investment portfolio to a duration range between $2 75, and four years and.
And we were approximately three and a half years as rates began to rise in mid 2022, admittedly nearer the higher end of our historic range than the lower end a fair criticism.
Importantly, our overall duration across the firm's aggregate balance sheets, which include the banks and the broker dealers was about two and a half years.
That is it not five not 10, but two and a half years.
And we all know that even at two and a half years. This is not low enough to avoid temporary paper losses when rates rise close to 500 basis points in the year.
We just felt it was important to be transparent on where we were as this rising rate cycle began so again, we did not change our historic approach during the Covid pandemic.
Contrary to some items I have read and heard we did not buy securities that would take us out of our historic duration range.
But even more bluntly, we did not go out and load up our securities portfolio with long dated bonds during the pandemic.
<unk> now.
Now.
It can be a fair criticism that we should have changed our two decade approach to consistently maintaining a relatively short term duration bank portfolio during the COVID-19 pandemic in favor of holding primarily cash that's fair to say.
And if we would have known that the federal reserve is going to raise rates.
Faster than they ever have in history.
In retrospect that would've been a brilliant move to make.
But we did do was to begin to build up higher levels of liquid cash in late 2021 as transitory comments about inflation from the federal reserve waned and in early 2022 as the Federal reserve began discussing increases in interest rates.
We increased our normal cash allocation about $60 billion.
But given the pace that the federal reserve raised rates and therefore, the pace of the resolving client cash realigning again in retrospect $60 billion was not nearly enough.
And that led to our need to execute on our other liquidity measures.
I started my comments by making clear that our financial model and franchise strength are intact.
So the obvious question is.
How this manifests itself in terms of earnings growth and our ability to deliver for our stockholders.
It's well understood that the temporary cost of higher funding from Cds, and FHA loans will impact our near term revenue growth and earnings.
Hopefully it is also well understood that as these borrowings are paid off that will be an accelerant to our medium term earnings.
But as client cash realigning moderates and eventually reverses in.
And the headwinds from higher cost temporary funding sources diminishes over the next seven quarters.
What remains.
What remains is an extraordinary company.
We have a diverse client base spread across approximately 35 million accounts.
We have a track record of delivering exceptionally strong organic asset growth in every environment.
We are completing the integration of the former Ameritrade client base.
And adding world class trading capabilities.
Along with approximately 10 million new clients, who will be exposed to all the additional products and services that Schwab offers that were not available to ameritrade.
And millions of existing Schwab clients will be exposed to the world class retail trading platforms that were previously only available to ameritrade clients.
And as a result of the integration process winding down.
Along with investments that we have made in enhancing efficiency during this integration process.
We will be in a position to substantially reduce operating expenses.
Again as I stated.
Well beyond the remaining $5 million to $600 million, we originally committed to as part of the Ameritrade integration synergies.
It's a powerful formula.
The winning formula.
And I am confident that it will be a formula that delivers for our long term stockholders.
As it has since we went public in 1987.
So Peter let me turn it over to you to talk some more about our financial results and projections.
Well, thank you very much Walt.
So there are three key points I want you to take away from my portion of the presentation today.
First we're navigating this extraordinary period from a position of strength with robust organic growth high level of profitability strong and growing capital levels and access to significant liquidity.
Second although the volume of client cash allocation activity has exceeded the expectations embedded in our financial scenario. We shared a few months ago as Walt mentioned, we are seeing signs of the pace beginning to moderate and we continue to expect a resumption of deposit growth in 2023.
And third our focus at Schwab remains on our clients.
And while the various dynamics, we're working through create some near term headwinds our business continues to power ahead, reinforcing our confidence about the long term strength of our diversified model and our ability to keep delivering on our through the cycle financial formula.
Let's start by briefly reviewing our first quarter results, which we released earlier this morning.
Among the many advantages we have as we navigate through this period is our financial strength our sustained earnings power.
There has been so much attention to the balance sheet and dynamics influencing net interest revenue that it feels like some of lost sight of the fact that nearly 50% of our revenue comes from other sources, such as asset management fees and trading.
And while the remaining half is generated through net interest revenue.
One third of our interest earning assets are floating rate, meaning the yield on those assets has increased dramatically in the last 12 months.
That diversified all weather revenue model is reflected in our strong Q1 financial performance.
In which we grew revenue by 10% versus the first quarter of 2022.
We grew adjusted earnings per share by 21%.
And we delivered an adjusted pre tax margin of nearly 46%.
Level nearly unsurpassed in the financial services industry.
Turning to the balance sheet.
The evolution of our balance sheet during the quarter reflected continued client cash realignment.
We supported this by utilizing temporary funding sources, including issuing more Cds and securing additional advances from the FAA Shelby.
Our usage of these was was frontloaded in increased modestly by our decision consistent with our conservative management approach to build extra liquidity within our banks almost doubling the amount of cash on hand in the month of March.
We also opted to suspend our buybacks during the quarter.
And our strong earnings supported organic or organic capital formation, which allowed us to maintain our tier one leverage ratio at seven 1%.
Well above the regulatory minimum.
I know there has been there's been much written we'd argue too much written about the tangible common equity ratios our banking subsidiaries, but those ratios have all increased significantly from the 12 31 levels due to both a $2 billion reduction in the unrealized mark to market losses and continued.
<unk> capital formation.
Those of you who followed the company for Awhile know that we have a long term orientation.
Executing our strategy and business model that has delivered for clients and stockholders for multiple decades.
I want to emphasize that the current challenges, we're facing are quite manageable and the impact on our financial performance is near term.
Which means that <unk> long term financial model of growth plus capital return remains firmly intact.
So as we've discussed there are some early signs of moderation of the client cash allocation activity. The overall level to start the year has exceeded the assumptions incorporated within the scenarios shared the winter business update.
That means we have utilized a higher level of supplemental funding with the vast majority of that now expected to be paid off by the end of 2024.
This temporary emphasis temporary mix shift toward higher cost of funds.
<unk> is expected to pressure the next few quarters of revenue at which point the impact should start to decrease reverse and.
And we now expect Q2 revenue to be down mid to upper single digit percent versus the second quarter of 2022.
But it will have very minimal impact on our long term financial performance with our NIM net interest margin still poised to increase throughout 2024 and approached 3% by the end of 2025, even if rates fall from current levels as the market anticipates.
Now it's important I think to put that NIM outlook into perspective.
As I mentioned earlier net interest revenue only account for half of our revenue and with an adjusted pre tax margin well in the upper Forty's. We can continue to produce margins that would be the envy of most other financial services firms, even as we navigate these dynamics.
And remember that as all of this has been happening we have been adding clients, adding net new assets, increasing adoption of advice in lending and moving forward on the Ameritrade integration.
Regarding expenses disciplined expense management has been a hallmark of our financial formula and throughout our history, we have taken steps to pull back on our spending while we're facing environmental headwinds without sacrificing the client experience or undermining long term growth.
As Walt said early earlier, we feel very confident about our ability to deliver over $500 million of expense synergies by the end of 2024 as we complete the integration of Ameritrade.
And as we do so.
Also a good opportunity for us to take a step back and examine our overall spending levels to look for additional efficiencies as we continue our decades long focused on on driving down our expense on client assets or <unk>, which we view as a key competitive advantage.
And finally.
Our capital ratios, our capital position our capital ratios remained very strong.
As Walt noted in his remarks, even if we have to eventually absorb OCI into our regulatory capital ratios, we see a clear path organically.
For our tier one leverage ratio inclusive of OCI to exceed 5% within the next year and crossed six 5%.
By the end of 2024, even if rates stay flat.
Thanks to our strong earnings a reduction in balance sheet assets, even after the deposit growth rebounds, as we pay off the supplemental funding.
And the continued reduction of our OCI as our securities portfolio matures.
And I note that again, even if rates remain flat, we'd expect those mark to market losses to decrease by a further $7 billion between now and the end of 2024, and obviously more if rates all as the market is expecting.
Putting it all together.
Not blind to the near term dynamics, we're navigating but we're very confident that our financial formula will reassert itself as we emerge from this period.
And that Formula of course starts with taking care of clients growing accounts and assets deepening relationships building our capabilities expanding our moat.
That is what builds long term earnings power and will be the driver of performance for our stockholders over time and.
And to tell you more about the strength of our franchise and how we're continuing to serve our clients. It's my pleasure to turn it over to Rick.
Thank you Peter and Hello, everyone.
The winter business update I described how well schwab is positioned to sustain our organic growth rate of 5% to 7% over the long term through a combination of growth from existing clients, attracting new clients and growth from our strategic initiatives.
First quarter was a great example of this as we grew net new assets by over 7%.
As I share with you our business results I'd like to leave you with three takeaways first our business is thriving and we again delivered strong organic client growth.
Second through the volatility in March we saw an increase in net new assets and client engagement and asset flows at the bank remained steady we.
We emerge from the crisis not weaker but stronger.
Third our strategic initiatives are paying off and lots of opportunity remains.
Dive into the results in more detail.
To put it simply we are winning across all fronts, we're winning with existing clients with new clients and on both the retail and RIAA sides of our business.
Within Investor services, we attracted $60 billion in core net new assets. In addition, we saw an 18% year over year increase in high net worth net new assets in the quarter.
Our no tradeoffs approach continues to attract clients and engender trust from our existing clients and that was particularly true in a period of uncertainty.
As I mentioned in our winter business update our client base continues to get younger with 56% of new to firm households under 40 this quarter.
This is notable because with an average age under 50, our clients are still accumulating assets.
Within the advisor services, we had an outstanding quarter of growth with $71 billion in core net new assets.
When the going got tough in March our growth accelerated with $32 billion in M&A in March alone and advisor services.
In periods of uncertainty and heightened volatility advisors win they.
They win because they are trusted fiduciaries with clients' best interest in mind, and we win because we are the trusted partner of <unk> and partner with them to deliver for clients in all environments.
Our <unk> ratio remained high and was in excess of two for the quarter.
We are committed to helping <unk> of all sizes grow by delivering the leading custody platform with no fees alongside practice management support industry advocacy and relationship support can count on there are no tradeoffs.
In summary, our business is thriving.
Our no tradeoffs approach was recognized by the industry. The third party accolades you see on the screen speak to the way we serve our clients each and every day.
We were recognized by Investor's business daily as the number one online retail broker overall by J D power as the number one full service broker and for the sixth consecutive year Schwab was named one of Fortune magazine's top 50 world's most admired companies.
I'd like to turn now to our strategic initiatives of scale and efficiency win win monetization and client segmentation.
We are continuing to advance these initiatives within our strategic focus areas and as I mentioned these are paying off with tangible wins in the first quarter of this year, let me start with scale and efficiency.
Integration remains our top priority, we successfully completed our first client transition group in February bringing over around 500000 client accounts, including a small number of advisors.
Service teams achieved an average speed to answer of just six seconds. During the conversion a good indication of how seamlessly the transition went after years of preparation.
We remain on track to bring over 13 million clients. This year, representing 97% of Ameritrade clients with the remaining 3% our most active traders coming over in 2024 and as Walt mentioned earlier, we are on track to achieve one $8 billion to $2 billion and run rate expense synergies by the end of 2024.
Sure.
Most important is the client benefit we see in retail clients will benefit from the combination of our modern wealth management platform alongside the leading trading and education platform in the industry.
For advisors, we will add I rebalancing pipes to capabilities advisers love to and offer that as it stands as no tradeoffs.
Turning now to win win monetization one of our priorities is growing our wealth business.
It is an area in which we delight clients as the client provider promoter scores of wealth clients are typically the highest at schwab.
Our clients are increasingly asking for help and advice, providing us with a growth opportunity.
And wealth offers a diversifying source of economics to us as a business.
We've been investing heavily to deliver for clients and accelerate our growth and we saw meaningful progress in the first quarter.
Net flows into the wiser Schroeder strategies were $1 5 billion in asset Sunder management surpassed $17 billion.
This is a clear example of a win win opportunity for our clients and Schwab.
<unk> brought down the cost of access to fixed income managed accounts on schwab's platform and interest from clients has been strong as <unk> represented the majority of net flows into fixed income managed accounts.
We launched several key enhancements to schwab personalized indexing, including more customization and digital capabilities.
Retail clients, who work with us Schwab FC can now exclude more individual stocks as well as entire industries and sub industries from their portfolios.
We also launched a digital dashboard for retail clients that shows a real time view of their account value and highlights clearly the value of tax loss harvesting.
And clients continue to turn to Schwab for advice during market volatility Schwab wealth advisory had $3 2 billion in net flows in the first quarter the highest quarter of net flows in the history of the offer as both Schwab and ameritrade clients increasingly find the offer attractive.
Finally, we continue to meet the specific needs of our client segments. We are launching this year Schwab private client services and Schwab private wealth services for our high net worth and ultra high net worth clients.
We are winning with this client segment today and the differentiated service support and offering will further add to our no tradeoffs experience for this client segment.
Our world class trader offering remains unparalleled in the industry.
We released new features on Thinkorswim, while preparing to convert thinkorswim clients and preparing to make the offer available to schwab clients. This year.
Another key priority in this focus area is to provide tailored solutions and experiences for <unk> of all sizes.
In the first quarter, we acquired family wealth Alliance a membership organization that provides resources to the family wealth community, serving ultra high net worth clients. The acquisition continues the relationship that has existed between the two companies for years and together, we'll be able to expand the services we offer for multifamily offices.
And single family offices.
We are thriving and our growth initiatives are paying off.
I shared in the winter business update some of the statistics you see on the left side of this page.
This show, we have lots of opportunity in front of us.
We remain confident we can close the share of wallet opportunity I described by introducing clients to the collective capabilities of our integrated firm.
We also believe we can accelerate the growth of our wealth business, both at Schwab and by introducing it to Ameritrade clients. We saw very positive signs this quarter as it was our strongest quarter flows ever in the full service wealth solutions and 95% of eligible Ameritrade Fcs enrolled at client into a well see.
<unk>, a very promising sign for the future.
We continue to invest in our lending platform to increasingly be there for clients in the future.
And finally, the combination with Ameritrade allows us to enhance our trading capabilities for a highly engaged and important client segment.
Investing in the Thinkorswim platform.
And bringing the powerful platform tools and education of our trader clients will be an important differentiator for schwab as we look to the future.
I'd like to wrap up where I started we are in a position of strength our business thrived in the first quarter and our growth accelerated through the recent market volatility.
The virtuous cycle will continue to help us sustain our attractive organic and M&A growth from both new and existing clients.
We're continuing to execute on our key strategic focus areas of scale and efficiency win win monetization and client segmentation, we saw meaningful impact from some of those initiatives in the first quarter, while other initiatives will help accelerate the growth of our business into the future.
We are delivering wins for clients and the firm each quarter the future is bright.
With that I will turn it over to Jeff for Q&A.
Operator, let's turn to the Q and please remind everyone. How they can ask a question if they'd like.
Thank you for those on the phone line. If you would like to ask a question. Please ensure that your phone is muted press star one and record your name clearly when prompted if you would need to withdraw. Your question you May Press Star two again that is star one to ask a question over the phone.
And our first question is from.
Dan Fannon with Jefferies. You May go ahead.
Hi, Thanks, good morning.
A lot of debate that the cycle has raised.
The client awareness for cash and given the ease of access and movement today.
The historical cash allocations are likely to be different going forward. So as you look over the long term how do you think about sweet cash and the percentages and how that maybe different than what we've seen historically.
Thanks, Dan I'm going to go ahead and comment on this so I think when you when you look at.
Client cash realigning.
We feel fairly confident that the metrics we've shown.
Uh huh.
Have good basis and history, I guess I would encourage you to think of a client cash aligning its an event, it's not a process. So I am going to illustrate that by an example.
If you ever.
Retail client that has say build up $50000 in cash during the pandemic period, and they look at that and say well I want to keep 20000 of that liquid and available for immediate trading or other uses.
Paying bills.
They don't take that $30000 and say well I'm going to move 10000, this quarter and 10000 next quarter and then 10 several quarters in the future. It's an event they reinvest for $30.
And so what you generally will see is you'll see a rapid acceleration of client cash realigning early in the process of rate rise, let's call. It in the first year.
And then you begin to see it go the other way and we think as it goes the other way. It goes the other way in a relatively accelerating manner because again the event has occurred the client in my example has moved their entire $30000.
So we understand the question, we think that the cash as we indicated the cash realigning processes is slowing.
We are very encouraged by what we see in April with measurable slowing.
Again, we're looking at three consecutive months of declines.
And we feel very good about the chart and the results we're able to share with you.
And does that conclude your questions Mr. Fannon.
Yes. Thank you.
Thank you. The next question is from Rich Repetto with Piper Sandler you May go ahead.
Yeah, Good morning, Walt and Peter first thank you for joining the time recall.
At least I'll hope you consider this format.
Going forward, but I guess my question is sort of related to <unk>.
First question.
Hi.
There was 40.
About our calculate 44 billion I guess decline in balance sheet cash.
Cash or Uninvested sweep cash.
And helped by organic closed in March.
My question is.
And your terminology change a little bit.
But anyway, do we still expect 8% to 12% decline.
And the average interest, earning assets, Peter and that's factoring in sort of this protection.
<unk>.
Does that factor in it.
Or even at all trying to keep aware of that or manage that risk.
Yes.
12% average interest, earning assets declined by December versus December .
Thanks Rich for your question. So yes, we still do think that the that 8% to 12% decline interesting assets as is the right way to think about it.
That we fund those assets may be a bit different than what we had.
Anticipated when we shared at the winter business update, but the overall asset decline.
As a function of the assets rolling off and that miserable.
<unk> roll off of our of our securities portfolio.
Thank you. The next question is from Alex <unk> with Goldman Sachs. You May go ahead.
Hey, good morning, Thanks, everybody.
Was hoping we could double click on some of your capital management comments. It sounds like if you were to start conclude a OCI changes in capital.
You expect it to be a bit of an organic build and you provided some set of stats around that why not sell a significant chunk of the securities portfolio I understand it will crystallize the loss but.
Your tier one leverage actually will not move significantly when you do that so help us think through maybe some puts and takes.
From doing something like that taking a loss, but also at the same time.
Inefficiently enhancing the firm's earnings power since $60 billion plus of that Securities book, especially on the water.
Thanks for the question so.
So I guess I'd say a couple of things certainly you are right that if we were to sell the securities.
A meaningful portion of our securities portfolio, it would actually be accretive to our capital levels.
If you included that are ultimately accretive to our tangible capital levels. We've said multiple times that we see.
No no reason no need to to be forced to sell securities given the strong with ample access to liquidity and the nature of our deposit base and so forth.
Beyond that.
Don't want really want to speculate or or sort of talking hypotheticals about the conditions under which we would sell that securities portfolio I, just would say that we see no need to do so.
But we're always of course, we're always going to be thinking about what's the right thing for stockholders, but we see no reason to do so and certainly wouldn't do it right now given.
Sort of the.
Some of.
The volatility if you will in the market around firms that have made that decision.
Thank you the next.
Question is from Ken Worthington of Jpmorgan you May go ahead.
Good morning, Thanks for taking the question.
Broke the BDA investments I think in the third party Pdas this quarter with BDA balances down $20 billion and <unk> 23 floating rate securities down to $2 2 billion in the quarter do you foresee having to break the TD manage BDA investments.
So is this a charge that you would be responsible for and what do you foresee as the charges needed to maintain this program given your outlook for sorting this year.
Hey, Kevin its Jeff obviously that.
There's a lot of nuance with that question and just kind of an interesting time why don't we circle up kind of offline and we can walk through kind of what's available there and all the public disclosures.
So I'll give you a chance if you have one other question you want to touch on.
Thank you. The next question is from Brian Bedell with Deutsche Bank You May go ahead.
Great. Thanks, Thanks for taking my question.
Peter if you could just comment.
On the pace of wholesale borrowing.
If we are seeing.
Cash sorting slow.
Throughout the year, why not winding that down more quickly.
Instead of having that conclude more in 2024, it seems like if you're in a position where the balance sheet will start growing again later in the year.
You would be in a position between the organic growth of cash coming in from the securities portfolios and cash growth from clients that you could potentially most of that down certainly by year end or at the beginning of 2024.
Any comment on the pace of that.
Sure. So so some of the certainly the Cds that we issue our termed out it's not like we can recall those necessarily in the end.
The <unk> advances have different terms.
But as I mentioned, we the decision to build up cash in and March meant that we front loaded some of that activity. So of course, if we as we see the pace of of this client realignment slow very reasonable to expect that of course, we will.
Initiate last advances and let those advances that we have roll off and so absolutely we could see.
We can see this roll off very very quickly even as as we start to see a resumption of deposit growth over the course of latter part of 'twenty three and then into 2024 and so I mean the.
Key point on these advances as these are these are limited and they're temporary this is not something that is going to be part of our our long term financial picture.
And we will certainly pay them off as quickly as we as we can.
Thank you. The next question is from Mike <unk> with Morgan Stanley You May go ahead.
Great. Thank you. Good morning, Thanks for taking the question I wanted to circle back to your commentary around the ability to deliver substantial expense savings beyond the 500 to 600 million or so.
So just hoping you might be able help quantify how meaningful that could be is that $1 billion 2 billion, maybe you could expand on where thats coming from what are some of the actions that you guys might be able to take to hit that and how do you ensure this doesn't hit the overall growth in customer.
Overall Asia.
Yeah. Thanks, Mike So I don't think at this point, we're going to quantify the extent that we believe that we can generate ongoing expense saves beyond the $5 million to $600 million that we have committed to and have remaining in the integration, but we think it is substantial.
<unk>.
And yes.
It's important to keep in mind that as we approach. This integration one of one of the decisions we made was that.
Getting the integration right.
It was our number one priority and therefore, we were willing to spend quite aggressively.
Along the way to ensure that there was nothing that got in the way of ensuring the integration win as well as smoothly as it could possibly go even if it meant.
Ratcheting up spending to a level that.
That was much higher than maybe we would have thought several years ago.
So we have we have the opportunities that I mentioned and then we have the opportunity after multiple years of allowing spending to grow relatively quickly to do a step back and.
Valuate it overall in our early work gives us the confidence to say that it is meaningfully higher than the remaining synergies, but I don't think we're ready to quantify it yet the one thing I will make clear though is.
As we have done in the past when we made a move.
Moves around expense that were significant.
We will protect the client experience. So we will not be looking at impacting.
The parts of the organization that that build relationships with clients to serve clients and that deliver that client experience.
Thank you. The next question is from Bill Katz with Credit Suisse. You May go ahead.
Okay. Thank you very much for taking the question and also appreciate you tightening up the window between this and the earnings Super helpful. Walt.
Peter just a question as you think about lessons learned from this cycle versus prior cycles and I. Appreciate you are consistently running the franchise, but should we be assuming a higher core deposit beta all else being equal to avoid these kinds of dynamics. We've all experienced in the last month or so and on the other side of the earning asset side.
Would you envision running a more liquid earning asset strategy all of those vehicles. Thank you.
Yes. So thanks. Thanks for the question Bill So in terms of the deposit pricing. If you will I mean, our philosophy on that Hasnt Hasnt changed right. Our clients keep as we know from history that our clients have sort of two buckets of cash our transactional cash and our investment cash.
And our philosophy on the transactional cash is to offer a rate that is very competitive certainly today is at 45 basis points, it's a lot better than what clients can earn in our checking accounts that most of the traditional banks and then to offer our clients a range of options or their investment cash that are in many.
Cases industry, leading whether that's access to treasuries or our brokerage Cds, our purchase money funds or or whatever it might be.
And what we've seen is and Thats that served us well for multiple multiple decades, and why do we pay 45 basis points or 65 basis points or 100 basis points.
Alright, transactional cash doesn't make.
It makes very very little.
Very little influence on on client behavior, So I don't necessarily see that that aspect of.
<unk> of our philosophy changing.
Of course.
As we always do we will.
Learn from from the experience and what we learned about client behavior, and we will have to take into consideration potential regulatory changes and we'll adopt and but I have every confidence that will thrive as we have every time, we've faced changes around us previously whether it was.
When the dot com bubble burst in 2000 or whether it was when we launched the bank and came under fed supervision or went to zero commissions. In every single situation. We adapted and we came out the other end even stronger than we were going into it and that's because we safe as Ballston, Rick talked about we stay focused on our clients and doing.
Right by our clients and we do that everything else will take care of itself.
Great and operator, I think we have time for one last question.
Thank you. Our last question is from Ben <unk> with Barclays. You May go ahead.
Hey, guys. Thanks, so much for squeezing me in here I just wanted to ask kind of about your approach to buybacks you mentioned earlier on the call that you had suspended them for the meantime.
Data points, you're looking at are indicators that would cause you to get more positive and feel comfortable resuming there.
Yes, Thanks, Ben I think what we would like to see a little bit more clarity on the regulatory front and what's going to happen with it.
How capital is treated in a timeline there as I said, we feel very confident in our ability to build into that.
The potential inclusion of <unk> into our regulatory capital ratios, but we'd like to see a little bit more clarity there.
Before we would strongly consider.
Or look to resume the buybacks of course, our buybacks are always opportunistic not programmatic as we've said multiple times, but I think thats, probably the one of the key key points, we want to wait for.
I will turn it over to Walt to close us out today.
Thanks, Jeff.
Thanks, everyone for joining in and participating and thanks for the feedback on the timing of of this update relative to our earnings report and please continue to provide that feedback and will be look to be responsive to.
Excuse me to what we hear from from all of you around around the best the best time to do these two these updates.
I think as all of you know.
I've been doing this a long time. This is this is my 15th year as CEO of Schwab and during that time I've seen a lot of different environments.
Good is.
As well as much more more difficult ones, but when I look at that history. What's what's consistent to me is that long term success comes from maintaining a focus on clients.
There are always going to be circumstances that come up on a periodic basis that have more of a short term impact and we're well aware, we're not oblivious to what's going on we also know that we have driven.
Much of what has gone on that has affected our near term earnings because we've been proactively reaching out to our clients of all sizes for the last year and explaining to them the options.
Should consider with their investment cash.
But again I'd like to I'd like to put this in the context of what I led with around clients. It's the right thing to do and it's what we would do during this environment. If we're faced with this environment again.
We're well aware that long term success comes from our focus on clients and we're well aware that our bank is unique as it serves as a bank for investors.
We're also well aware that as storms come storms also go eventually they come to an end and what we know from history is that when the storms and the firms who stand tall or those who have a focus on clients and that's something that I believe you can count on for Schwab as you have for many years and the.
Past and can count on again in the future.
Thanks again for all of your time today, we very much appreciate it and we appreciate the thoughtful questions.
Thank you that concludes today's conference. Thank you all for participating you may disconnect at this time.