Q4 2023 Charles Schwab Corp Earnings Call
Texas, where I think it was 15 degrees when I.
Opt in the vehicle this morning to come to the office, but happy new year and again. Thank you all for joining us.
So as we close the book on 2023 and begin thinking about 2024, it seems like a natural time to reflect on the year that just closed.
It was certainly a challenging year for our clients for our stockholders and for us.
Perhaps it was the most challenging in my time at Schwab certainly the most challenging since the bursting of the Internet bubble in 2000 and.
And yet at the same time I couldnt be more excited about the opportunities before us.
In 2024, Youre going to see an emphasis on execution.
But with consistency around our strong client fundamentals and strategy.
I recognize that 2024 is going to be a transition year from a financial standpoint, albeit one with steadily improving financial results throughout the year in a very strong exit into 2025.
It's unrealistic to think that the challenges of 2023 simply disappear because of the calendar flips over.
But when I look ahead to 2025, 2026, and 2027 I'm quite confident that the power of our client franchise is going to shine in terms of financial results.
There is much work to do in 2024 and beyond and no. One at Schwab is kidding themselves that everything is perfect right now, but my confidence is high.
Incredibly encouraged by what I see whether it's our positioning our client relationships. The solutions that we offer our clients are the focus of the entire organization on the future.
If I could take you back in time to the mid two thousands that was a period when Chuck first began speaking with me about the possibility of becoming CEO someday.
And as a result of those discussions.
Went on a listening tour of former very senior executives of Schwab. My goal is simply to ask them their views on the firm and our prospects for the future.
It's important to keep in mind that many of them had been let go or terminated in the turmoil that followed the internet bubble bursting and.
Now they would experience this incredible run up in the value of the firm.
Followed by the pain of multiple rounds of employee layoffs in our stock price had collapsed from the fifties to mere single digits.
And although each of them use different words, they all basically said the same thing.
They were fearful that schwab's best days were in the past.
I tried to absorb their counsel and their feedback objectively of course I was balancing the personal challenges they had each been through as I listen to their feedback.
Feedback.
But I fundamentally did not believe that the firm's best days were in the past there were far too many strange for me to believe that in over a few years with a lot of hard work by many people I believe it's pretty clear that we prove them wrong as our stock price grew over 10 fold and assets the clients entrusted us with.
Grew similarly.
I understand that today, there are some who might be asking similar questions, but I am confident that our best days are ahead of us.
In my opinion after four decades in this business there is no firm better positioned for the future.
No firm has our breadth of client solutions investing trading custody advisory workplace and all delivered with an incredible value for investors and advisors.
I expect us to make steady progress in both client flows and financial performance throughout this upcoming year, and then I fully expect us to deliver outstanding results over the following years.
So let's go ahead and dig into 2023, it was a year of many twists and turns for our investor clients as well as for our stockholders.
And all the while we made substantial progress on the largest acquisition related conversion in the history of our industry.
Coming off a difficult 2022 for investors the first quarter of 2023 begin with turmoil in the regional banking world.
Investor sentiment bounced between negative and positive throughout the year before eventually ending quite positive.
Equity returns were strong in 2023, although largely concentrated in a modest number of stocks.
First Rob stockholders it was a difficult year, our stock lost about 17% of its value.
The core reasoning behind most of this decline is our commitment to proactively following our through clients' eyes strategy.
Because throughout 2022, and 2023, we reached out to our clients and encourage them to move their yield sensitive.
Or what we sometimes refer to as longer term investment cash into higher yielding alternatives and they did to the tune of several hundred billion dollars.
And as an aside although these actions have temporarily impacted our revenue and earnings we would do the same thing every time.
The client loyalty that we built by being proactive will pay dividends in the long term as clients continue to entrust us with their investment dollars.
Progress on the Ameritrade conversion was exceptional with about 90% of the client accounts and assets all accurately and successfully converted.
And despite the substantial focus on this effort we continued to make real progress on other client related initiatives that helped set the table for future organic growth.
So let's go ahead on this slide take a deeper look into 2023 from the lens of our investor clients.
The open market Committee of the Federal Reserve continued to recover from the mistaken.
Transitory inflation viewpoint, they raised rates multiple times in 2023 before peaking at close to five 5% is.
As inflation began to ease.
Directionally toward the Fed's long term goal of 2%.
Although equity markets continued to be volatile ultimate returns were actually quite strong with the S&P 500, rising over 20% in the NASDAQ composite increasing over 40%.
Investor sentiment was also volatile throughout 2023, it recovered rather dramatically in the fourth quarter of the year from a strong bear sentiment in the third quarter and ended the year with a solid bullish viewpoint.
But despite this mixed sentiment our clients remained highly engaged with the markets and with Schwab.
Clients were net purchasers of equities last year by a one two to one ratio.
And although trading activity was about 10% lower than in 2022, it was still much higher than pre pandemic levels and.
And net flows into our retail advisory solutions, where a very strong $33 billion.
Last year was a solid year in terms of client flows for our firm, particularly given the volatility of the markets and the negative sentiment that existed throughout much of the year.
Core net new assets were slightly above $300 billion in core net new assets from clients, who originally opened their accounts with schwab, where about $30 billion higher.
The difference of course, reflecting the attrition from certain former Ameritrade clients.
Now in terms of the Ameritrade conversion, we've converted approximately 90% of the accounts and assets that totals about $1 six trillion dollars in assets and 15 million accounts and we will convert the balance in may of this year.
There's no question that this conversion has been a success.
Attrition continues to track below the estimates that we shared in 2019 when the transaction was announced of course, we hate losing any clients, but we're realistic that some attrition is to be expected and also knowing that we would be proactively stepping away from serving certain former ameritrade clients for <unk>.
Variety of logical reasons.
Stepping back a bit to look at the bigger picture.
We are committed to our through client size strategy and it underlines our no tradeoffs execution.
We believe the backbone of organic growth is delivered by focusing on four areas.
<unk> service transparency and trust with our both our clients as well as our prospects.
The ultimate measure of value for clients is the balance between the quality of service and guidance they receive and the revenue we earn that pays for this service and guidance.
And we don't believe any investment services firm delivers a better value than schwab.
The quality of our services well recognized and I'm going to go ahead and speak on that a little bit more momentarily and the revenue we earn averages less than one quarter of 1% in fact, we've almost halved where clients pay us in one form or another over the past 20 years.
And when you compare that to what investors pay certain wire houses or independent broker dealers or regionals schwab clients paid between approximately half or even in some cases close to a quarter of what they pay these other firms.
Now that difference adds up to an enormous drag on client wealth creation over the years. It's one of the key structural advantages that clients of Charles Schwab benefit from.
And we've been recognized for many years as a leader in client service and the financial services World and.
And despite the complexities inherent in the Ameritrade conversion, we retained our world class results in 2023 for client service or.
Our net promoter score in our retail business remained in the mid sixties, while our overall speed to answer phone calls was about 30 seconds with retail averaging just below 20 seconds last year.
These metrics are very important as our reputation for service and creating client loyalty extends across all of our client facing businesses.
Delivering world Class service is a never ending area of emphasis requires training investment in digital and self service capabilities as well as a philosophical deep belief in the nobility of service.
Service has always been at the core of our success at Schwab and will always remain so.
Transparency is also a hallmark of schwab, whether it be defined as our open architecture approach to investing the clarity of any fees or charges assessed to our clients.
The fact that we've been a leader in both guaranteeing the security of our clients' assets as well as their overall satisfaction.
Our satisfaction guarantee is unique across the industry, it's provided our clients with the confidence they deserve as they make investment decisions.
Although the payments we've historically made under this satisfaction guarantee a relatively modest we believe deeply in the philosophy of guaranteed our clients delight with our services and guidance.
We often say at Schwab that were less in the investment business than we are in the trust business and this was never more true than in 2023.
As clients wanted to access their client cash that we held at our banks, we ensured they had ample liquidity to move that cash into money market funds bonds treasuries or other investments.
And while this happened more quickly than we would've expected given the unparalleled pace of fed rate moves our contingency plans worked as designed to ensure that we could always be there to support our clients and as a result during a period of heightened concern about bank's stability across the industry last spring.
Our clients were able to have confidence in schwab.
We're honored that both J D power and Investor's business Daily gave our firm and our bank the highest scores in the areas of Investor satisfaction and trust respectively last year.
And we're committed to maintaining and building trust with our clients in the years to come.
Now before I turn it over to Rick I want to take a moment to remind everyone that our strategies, our philosophies and our execution at Schwab are not random.
Rick: We evaluate everything we do by screening it through a series of lens that apply our experience and knowledge about the investing industry both today as.
As well as where its headed in the future.
We categorize these viewpoints into three buckets and they may look familiar to those of you who have dialed into our calls in the past.
Rick: Broad trends client views and the competitive landscape.
Rick: If I were to highlight the viewpoints on these three buckets it would be.
Rick: First we are ideally positioned to benefit from growth in the areas of the industry that have grown the fastest in recent years and.
Rick: And project the most organic growth potential for the future self directed investors and traders.
Rick: Serving as a fiduciary to their clients and low cost tax aware investing.
Rick: Next clients are looking for firms that offer a breadth of solutions that are personalized for them and makes sense within the context of our financial plan.
Rick: Ideally firm should be able to assist clients with both sides of their balance sheet investing and borrowing.
Rick: We believe the future will be won by firms that find the right balance between offering digital.
Rick: And mobile efficiency on par with non financial services experience and of course paired with access to well trained and credentials credentialed professionals.
Rick: Not surprising given our viewpoints, we believe schwab is optimally positioned for long term organic growth.
Speaker Change: Let me turn it over to you.
Speaker Change: Thank you Walt and good morning, everyone.
Speaker Change: Schwab is in a position of strength to deliver on the client expectations that Walt just spoke about.
Speaker Change: I'll spend our time together this morning talking about how we delivered for clients in 2023 within our strategic focus areas that you see on this page.
Speaker Change: I will also share more about the investments, we're making to continue building on our strong foundation. So we can do even more to help our current and future clients meet their financial goals, which in turn will bolster our organic growth and our competitive positioning.
Speaker Change: I'll start with scale and efficiency.
Speaker Change: Our number one priority in 2023 was to execute the largest integration in the history of the industry.
Speaker Change: And it has been a tremendous success as well as the highlighted we brought but 90% of ameritrade clients to Schwab.
Speaker Change: Representing one six trillion and converted assets 7000, RA firms and $15 million total converted accounts.
Speaker Change: While clients are getting used to navigating a new experience in a different way of doing things. They are also seeing the breadth of capabilities on our combined platform.
Speaker Change: We're also focused in 2023 on reducing expenses recaptured approximately $500 million in annual run rate expense savings through streamlining our operating model, which included position eliminations from predominantly non client facing areas as well as reducing our real estate footprint.
Speaker Change: The remaining $400 million in Ameritrade expense synergies will be realized in the second half of 2024 following the completion of the integration.
Speaker Change: When we think about win win monetization.
Speaker Change: Think about meeting more of our clients' total financial needs, including more holistic solutions.
Speaker Change: Lending capabilities and access to high quality fairly priced products.
Speaker Change: This attracts and retains client assets and at the same time improves our economics.
Speaker Change: We generated strong results in our advice business with a 29% year over year increase in net adviser flows including $12 billion in net flows into our proprietary full service wealth management solution Schwab wealth advisory. This is a record for our firm.
Speaker Change: Wasn't Schroeder net flows were $6 7 billion a record for the offer and a 90% increase over the prior year.
Speaker Change: And when it comes to direct indexing, we've enhanced our schwab personalized indexing offer with expanded customization capabilities, a new account level digital dashboard and digital enrollment.
Speaker Change: We launched our fully digital pledged asset line or Pal for RA clients. It gives advisers the ability to submit a power application in minutes and clients can get approved in hours for straightforward applications and in just days for complex situations.
Speaker Change: We also launched Schwab investing themes, which allows self directed investors to buy and sell themes of securities that align with their personal interests and values all available through Schwab dot com as well as our mobile app.
Speaker Change: Finally.
Speaker Change: Our goal in the third focus area is to see through client size to meet the unique needs of each of our client segments.
Speaker Change: Highlights from the last year include introducing our specialized asset based segments for retail high net worth and ultra high net worth clients, which we call Schwab private client services and Schwab private wealth services.
Speaker Change: <unk> tailored offers meet the unique needs of these clients, who represent about 70% of our retail assets.
Speaker Change: While private client services includes access to a financial consultant dedicated service expanded access to specialists as well as products and fee discounts.
Speaker Change: Through our private wealth service delivers all of that plus prioritize service.
Speaker Change: Enhanced support expedited requests priority access to well specialists and exclusive events pricing benefits American Express statement credit bank benefits and more.
Speaker Change: We also in 2023 launched Schwab trading powered by Ameritrade, a re imagined trading experience made possible by the combination of the best of Schwab and Ameritrade.
Speaker Change: All clients can now access the thinkorswim trading platform, giving them access to a unique combination of powerful tools and dedicated service from experienced trading professionals alongside education for all levels of experience.
Speaker Change: We also in 2023 enhanced our offer for all RIAA clients.
Speaker Change: Our clients can now access think pipes are think pipes trading platform, which offers real time chartering pre and post trade allocations and complex options functionality.
Speaker Change: In addition, we launched Ameritrade I rebel and model market Center on Schwab Advisor Center and are taking a measured approach to ensure a seamless onboarding experience for new eire values yours with general access rolling out early this year.
Speaker Change: Finally, we acquired the family wealth alliance to expand our capabilities to serve both single family and multifamily offices.
Speaker Change: As we look ahead in 2024, we will continue to focus on and make investments in our key strategic focus areas to drive our organic growth.
Speaker Change: Fuel, our virtuous cycle and help clients achieve their financial goals.
Speaker Change: One thing I'll point out about this page.
Speaker Change: Is that given our focus on continuing to make schwab, an easy place to do business.
We are adding a fourth pillar to our strategic focus areas called EES.
Speaker Change: Which is about delivering exceptional and easy experiences to our clients.
Speaker Change: With 35 million client accounts, serving our clients exceptionally well will be a big driver of our organic growth.
Speaker Change: When we think about scale and efficiency, we're laser focused on successfully converting the final ameritrade client transition group and then capturing our remaining expense synergies.
Speaker Change: We will continue making investments in artificial intelligence to empower our teams to serve clients, even more effectively and finally, we will invest in automation and systems modernization over the next several years, allowing us to drive greater efficiency.
Speaker Change: Win win monetization remains an important opportunity, where we can both delight clients and boost our revenue.
Speaker Change: Looking ahead, we will continue to make investments to enable clients to keep more of their financial life with us, including a continued focus on lending capabilities that meets the needs of more clients across both I S. N a S.
Speaker Change: We'll enhance our wealth and advice offerings, including making continued investments in Schwab wealth advisory.
Speaker Change: We will continue to build on our momentum with personalized investing solutions and will continue to broaden the breadth and depth of product offerings with new offers like alternative investments.
And we continue to do work to integrate the workplace experience more into schwab, allowing our workplace clients to benefit from all we have to offer at Schwab.
Speaker Change: Within client segmentation will remain focused on meeting the unique needs of our client segments, including our higher net worth clients traders in our eyes.
Speaker Change: Part of this is providing differentiated client experiences just as we've done this year with the new retail high net worth and ultra high net worth offers that I spoke to earlier.
Speaker Change: This also means enhanced service models specialized capabilities are powerful trading platform and our tailored education.
Speaker Change: Our fourth focus area is ease with the size of our asset base, we can drive growth by simply delivering easy and exceptional experiences to our existing clients.
Speaker Change: This is where youll see us continue to invest to make schwab the easiest place in the industry to do business.
And it's important to remember something highlighted earlier, our clients frame of reference.
Speaker Change: <unk> is not just other financial services firms its the experiences they have on Amazon or Uber or door dash and that's the measure of Es, we are striving to accomplish.
Speaker Change: We want every experience a client has with us to be an exceptional one that means we'll continue to make enhancements on all of our channels will.
We will continue to just digitize client workflows and to make sure our clients have access when and where they want it whether that's on schwab dot com or the mobile app.
Speaker Change: Or when they call or chat with our service teams or walk into a branch.
Speaker Change: We believe that the combination of these efforts will help power our long term organic growth.
Speaker Change: Guided by our seeing through clients' eyes strategy, we are well positioned to retain our clients and to win new ones fueling our organic and M&A growth over the long term.
Speaker Change: I've spoken about schwab's unique strengths in this forum in the past we have a top one or two position in the two fastest growing segments of financial services or.
Speaker Change: Our strengths will help us attract assets from our existing clients, including our younger client base valuable dedicated relationships strong <unk> growth and our emphasis on these.
Speaker Change: We will attract new clients through the combination of the strength of our brand our proven retail acquisition model and our continued commitment to serving our eyes.
Speaker Change: And with the four strategic focus areas I, just talked through we will be able to meet evolving client needs, while making it easier for clients to keep more of their financial lives with us helping us attract M&A over the long term.
Speaker Change: <unk> future is bright and before I turn it over to Peter I'd like to spend just a couple more minutes talking about some of the exciting opportunities ahead.
Peter: One of our biggest opportunities is to fully harness the powerful combination of Schwab and ameritrade.
Peter: While it is still relatively early days when we looked at our Ameritrade clients. We know they are already benefiting from the breadth of schwab's capabilities, including both lending and wealth.
Peter: 95% of former Ameritrade FCS have helped our clients find a solution to their needs by enrolling M&A Schwab well solution.
Peter: And former Ameritrade FCS accounted for about 20% of our record Schwab wealth advisory net flows in 2023 today.
Peter: Today, former Ameritrade client advice penetration is at approximately 10%, which is above historical levels.
Peter: Schwab clients are benefiting as well, we launched the new Schwab trading powered by Ameritrade experienced in October and at year end more than 80000, Schwab clients had created new thinkorswim accounts and about 20% of new to firm retail clients opted to access I think or swim.
Account.
Peter: The opportunity ahead for US is tremendous we have about a 12% share of the market and we serve the two fastest growing segment segments.
Peter: Just spoke about our early wins and increasing ameritrade advice penetration.
Peter: As we continue to win here, we believe we have a 500 billion plus share of wallet M&A opportunity ahead of us.
And we believe the win win monetization opportunities I spoken about representing three $5 billion to $4 billion wealth management and bank lending revenue opportunity.
Peter: To wrap up our through client size strategy continues to guide us into the next chapter.
Peter: We're in the final stages of the Ameritrade integration and we made meaningful progress across our key strategic focus areas in the last year.
Peter: Looking ahead, we are well positioned to continue our healthy organic growth and the opportunities in front of us remain highly attractive both for schwab and for our clients and with that I'll turn it over to Peter.
Well. Thank you very much Rick So Walton Rick talked about how our no tradeoffs positioning continues to resonate with both clients and progress.
Peter: Our prospects the continued progress, we're making with the Ameritrade acquisition with a final transition groups scheduled for may our achievements and priorities around scale and efficiency win win monetization segmentation in our newer priority ease.
Peter: And a large opportunity in front of us over the coming years.
Peter: And my time today I'll briefly review, our 2023 financial performance and provide an update on client cash realignment and share some thoughts on 2024.
Peter: The important point is that in the fourth quarter and really over the last nine months, we continue to see notable improvement across the various tactical metrics on which there has been a lot of focus lately.
Peter: Including the pace of client cash reallocation activity.
Level of supplemental borrowing we're utilizing and our capital levels inclusive of OCI.
Peter: And what that means is that 'twenty 'twenty four is likely to be somewhat of a transitional year from a financial standpoint, but with steadily improving financial results that bridge from what proved to be a challenging 2023 to what we believe is a very promising future ahead.
And so while environmental factors may not allow progress that follow a strictly linear path. We believe we're moving ever closer to the point, where the noise, partially obscuring our long term growth should dissipate and a relatively straightforward financial formula should begin to reassert itself once again.
Peter: Powered by solid organic growth.
Peter: Our diversified business model converting that asset growth into strong revenue growth through the cycle continued expense discipline and producing growing margins.
Peter: And as our tangible capital levels continue to grow the return of meaningful opportunistic capital return.
Peter: Words of resumption of the proven model that you are all familiar with and that has delivered for clients and stockholders for over five decades.
Peter: As Walt mentioned 2023 was an eventful year for many of our clients and certainly a challenging one for our business model and so not surprisingly our financial performance was off 2020 two's record levels with a little under $19 billion of revenue and $3 13 of adjusted EPS.
Peter: But despite those financial headwinds, we still produced an adjusted pre tax margin of over 40%.
Peter: Our fifth consecutive year doing so which demonstrates the strength and resilience of our business model through a wide range of environments.
Peter: Now turning our attention to the balance sheet. The Big story last year of course was the roughly 30% decline in client cash on our balance sheet.
Peter: Of which over 80% moved in the first half of the year.
Peter: This is the outcome of clients moving some of their cash into higher yielding alternatives and as Walt mentioned that was often with our active support and encouragement and importantly that money is staying at schwab as evidenced by the approximately $200 billion increase in purchase money funds and over 200.
Peter: <unk> $25 billion increase in fixed income in Cds, our clients hold.
Peter: And we supported some of the activity by utilizing temporary or supplemental borrowing including both <unk> advances in Schwab Bank Cds and adjust under $80 billion at the end of the quarter those have fallen by more than $17 billion from the peak level reached in May.
Peter: And finally, our capital position continues to get even stronger.
Peter: With our consolidated tier one leverage ratio rising to eight 5%.
Peter: And our adjusted tier one leverage ratio inclusive of OCI and therefore, what our binding constraint would be if we lose the Aoc I opt out at Schwab Bank now nearly five 4%.
Peter: Meeting we are now meeting what will likely be the new quote well capitalized standard at our banks over four years ahead of the anticipated full implementation date.
Peter: During last quarter's update we talked about the slowing pace of client cash realignment over the preceding months.
Peter: And in November our clients actually added to their transactional cash balances and then in December we saw an approximately $15 billion increase in transactional sweep cash now.
Peter: Now historically December flows benefit from seasonal factors, but but even so when you compare December 2023 to December 'twenty. Two it is quite clear that this dynamic is receding as an important driver for us.
Peter: You can also see that trend when you look at purchase money fund flows and specifically that minority of those net flows that are funded from client cash on the balance sheet.
Peter: Now, let me turn our attention to 2020 for our near term financial performance will as always be shaped by external factors that are difficult to predict interest rates equity market performance and client trading activity and then given the much larger sensitivity to client cash allocations, given where interest rates are.
Peter: Today than they were let's say three years ago that will of course be a significant factor.
Peter: So let's talk about this learning and given the importance of this let's talk spend a bit more time here.
Peter: Really three main forces that will influence the trend of our clients' transactional cash during 2024.
Peter: Any remaining client cash realignment from existing clients.
Peter: The contribution of cash we attract from new clients, which ill talk about in a moment is the source of the greatest uncertainty moving forward.
Peter: And seasonal dynamics that are generally similar every year, but can vary based on environmental conditions.
Peter: I'll start with the behavior of our existing clients and.
Peter: And as we've discussed we're clearly in the very late innings of the client cash realignment activity.
Peter: You can see it in the monthly reporting we have shared whether you look at total balances balances per account or our cash as a percent of assets.
Peter: And that high level trend is supported by various dynamics you see when you look under the Hood.
Peter: We're seeing stabilization of activity above among both RIAA and retail clients.
Peter: And we know we've talked about how our cash realignment is an event not a process and were seeing a decrease in both the number of those events and the air average amount of the cash being realigned.
Peter: Now, while we have a high degree of confidence in our ability to predict the behavior of our existing clients, it's a bit harder to do so with new clients over a very short timeframe like a year.
Peter: Now that contribution depends on the level of new clients, we attract and the size of those accounts.
Peter: And then how much of the new net new asset comes in the form of cash and stays there.
Peter: Which will be influenced by investor sentiment.
Peter: Quantitative tightening by the fed inflation savings rates and so forth.
Peter: I mean, you throw in that this is an election year, which normally brings an elevated degree of volatility makes these predictions even tougher.
Peter: And what this means is that while we have seen throughout our history that over time cash balances grow with the growth in accounts and assets over a shorter period like a quarter or a year, it's harder to gauge exactly how much new accounts will contribute.
Peter: And finally, the evolution of transactional cash over the course of 2024 is likely to be influenced by seasonal patterns.
Peter: Which follow a similar trajectory every year, but can vary in terms of their magnitude.
Peter: That means we are seeing some cash getting invested into the markets in the first quarter and given the large inflows. We saw in December the investment activity could be elevated to start this year and then most likely see a reduction in April as clients pay taxes.
Peter: Before we capped the year with an anticipated buildup in December.
Peter: So what does all this mean for our 2024 financial performance.
Peter: Given the various moving pieces, we decided to bring back a concept you may recall, we last use in 2019.
Peter: Which is to share with you a couple of mathematical illustrations around how our financial performance could unfold based on what happens with certain difficult to predict inputs.
Peter: And those are trading activity and we looked at flat to 2023 levels.
Peter: Plus or minus 5%.
Peter: And we're a transactional cash finished that finishes the year relative to the 12 31 levels again flat plus 5% or minus 10%.
Peter: And those illustration share a couple of comments and pretty conventional assumptions.
Peter: Most importantly normal market appreciation and rates that Paul the dot plots.
Peter: And those illustrations could result in revenue that is plus or minus 5%. There are 2023 levels or said another way or another way revenue that is zero to 10% higher than our annualized Q4, 2023 run rate even with three rate cuts.
Peter: And we're planning as we've shared previously to keep adjusted expenses flat year over year.
Peter: And that would result in an adjusted pre tax margin of a little under 40% to somewhere in the mid Forty's.
Now I know, it's tempting to pick the mid point of the illustrations and interpret that as our outlook that is not how these illustrations are intended to be used. This is just math using some metrics you can track on an ongoing basis to evolve your own perspective.
Peter: On our potential performance over time.
Peter: And as we typically do we have included in the appendix a set of sensitivities and tended to help you make adjustments as you see but.
Peter: Now looking at the range of possibility it doesn't imply much if any growth in terms of full year adjusted EPS.
Peter: But given the consistent paydown in the higher cost supplemental borrowing it suggests strong sequential momentum in revenue and in earnings with a potential exit velocity heading into 2025 that is at least 20% better than where we ended 2010.
Peter: Three and with increasing momentum as we progress through 2025 as well.
Peter: Let's drill a little deeper into the expense story.
Peter: Schwab has been and always will be a growth company a company that continually invest in improving the client experience.
Peter: At the same time, we're a company that recognizes that one of our biggest competitive advantages as Walt mentioned is our industry, leading cost structure, which is measured as <unk>.
Peter: Achieving both of those requires careful balance and discipline.
Peter: And in 2024, even as we're holding spending flat, we're still making significant investments that that Rick talked about that will help sustain our long term organic growth boost our revenue.
Peter: And increase our efficiency during 2024 and beyond.
Peter: Our current revenue and earnings are being pressure forced by our utilization of the higher cost funding in the form of Cds and <unk> advances.
Peter: Those are very much a temporary funding source and as we pay off those we continue to see a path towards a net interest margin in the $2 20 to $2 50 range by the end of this year and approaching 3% by the end of 2025, even if rates fall roughly 200 basis.
Peter: This points from where they are today as the dot plots would indicate.
Peter: With the potential for it to expand further moving forward as we reinvest our securities portfolio at higher market rates and what we currently earn.
Peter: Now, while we paused our buyback in order to build our capital levels capital return remains a very important part of our financial Formula given our very high return on capital and negligible credit exposure.
Peter: Our capital levels have already reached the so-called well capitalized threshold, even if <unk> is included.
And we'd expect our consolidated adjusted tier one leverage ratio to reach the upper 6% range by the end of 2024 at which point, we'll be in a position to at least consider resuming opportunistic buybacks.
Peter: Both Walton I talked about 2020, we're being somewhat of a transitional year from a financial standpoint, but we also talked about the steady improvement we expect to see throughout the year.
Peter: In some ways I hate to use the phrase coiled spring, but I think that's exactly what is being set up as we move into 2025 as we complete the ameritrade integration, creating a true best of breed platform and unlocking both revenue and expense synergies, we continue to advance our strategic agenda, even as we maintain flat.
Peter: Expenses.
Peter: <unk> challenge it transactional cash balances inflect and we begin to see sustained growth in.
Peter: All of that plus continued business momentum creates an opportunity for a return to sequential revenue growth and accelerating momentum towards the end of the year and into 2025.
Peter: And that paves the way for a return to our long term financial formula.
Peter: One that is powered by our position as the premier asset gatherer, producing consistent 5% to 7% organic growth through the cycle.
Peter: With industry, leading client loyalty and a leadership position in the two fastest growing segments within wealth management.
Peter: One that has a proven ability to expand margins through the cycle with a potential for even more dramatic margin expansion in the years ahead back above 50% as revenue benefits from paying off higher cost borrowings and expenses benefit from harvesting the remaining expense synergies.
Peter: One that can combine that strong organic growth and revenue growth with more meaningful capital return as our capital levels inclusive of OCI March higher.
Peter: And so when you take a step back and look at our potential financial performance.
Peter: Respective depends on your time frame you know in the immediate term we have been dealing with some pressures that have constrained our financial results.
Peter: But those are pressures are temporary not permanent so long term opportunity the long term potential remains significant.
Peter: And as an organization that has a long time horizon that is what fuels, our optimism our confidence and our excitement for what lies ahead.
Peter: And with that I'll turn it over to Jeff to facilitate our Q&A.
Peter: Yes.
Jeff: Hi, operator can you please remind everyone how they can ask a question and alternatively.
Speaker Change: Thank you for those on the phone if you would like to ask a question. Please UN mute your phone hit Star one and record your name clearly linked prompted again Thats star one to ask a question and start to to withdraw your question.
Speaker Change: Our first question in queue is from Ken Worthington from Jpmorgan. Please go ahead.
Ken Worthington: Hi, good morning, and thank you for taking the question.
Ken Worthington: Net new assets, so even when excluding the ameritrade attrition core net new assets seem decently lower.
Ken Worthington: Than it had been over the last two years, despite Fortunately, what we're better market conditions in 2023.
Ken Worthington: We sort of look at it 'twenty, one 'twenty two core monthly ne.
Ken Worthington: Okay.
Ken Worthington: $1 billion per month and in the <unk>.
Ken Worthington: Last six months it's been.
Ken Worthington: 10 to 30, and there's noise there attrition Cds, but it still ultimately seems like software engagement over the last six months. So the questions. So first was it 2021 and 2022 that were unusual in the aftermath of Covid or is it really the last six months that might've been unusual.
Ken Worthington: Do you see a cohort or customer segment, where engagement might have weekend.
Ken Worthington: You know in the second half of 2023, and ultimately can you give us a little bit more color.
Ken Worthington: On how you see the outlook for 2024.
Speaker Change: Well, thanks, Ken I think when you look at M&A in very short periods of time, you have to really evaluate sentiment.
Speaker Change: More so than what the market did when I spoke at the end of.
Speaker Change: The third quarter last.
Speaker Change: October sentiment was very negative and although it slipped by the end of the year that's a.
Speaker Change: That's a late change within the year and so when you have negative sentiment that historically when we look at longer time horizons, youre going to get lower levels of M&A.
And so I think it's it's it's not what the market does it's what the sentiment of the Investor is.
Speaker Change: We don't see any reason.
Speaker Change: To believe that net new assets are likely to be constrained over a longer period of time relative to historic levels. Our promoter scores when we look at that.
Speaker Change: Is there.
Speaker Change: Reported on the on the retail side remained very very strong.
Speaker Change: On the advisor side, we have retained virtually all of the advisers that are that we wanted to retain post.
Speaker Change: Post integration, so I don't see anything on the horizon that would tell me that long term youre going to see some form of extended softening in M&A, but short run you have to look at sentiment and and.
Speaker Change: And you also have to look at investment options as rates are higher.
Speaker Change: People may bring a bit less money to their investment account as opposed to may be leaving it at a bank, where they might just be buying Cds or something of that nature, but nothing structurally gives us cause for concern.
Speaker Change: Thank you next we'll go to Steven <unk> from Wolfe Research. Please go ahead.
Steven: Hi, good morning.
Steven: Hello question clarifying question just on the NIM glide path Peter that you would offer.
Steven: So you had previously talked about that 3% NIM exiting 'twenty five.
Steven: Reaffirm the target here despite the additional customer forward curve I was hoping you could speak to some of the inputs still supporting that 3% NIM target.
Steven: The re basing and rate expectations.
Steven: The NIM tailwind of 80% to 90 guidance what is the jumping off point that we should be applying that again.
Speaker Change: Sure. So the biggest driver of the growth in NIM from where we are today to 3% as is continuing to pay off the supplemental borrowings.
Speaker Change: We don't we don't necessarily need deposits to grow although we obviously would expect that will happen between now and 2025, we don't need deposits actually grow tailored to that room, we've got probably 11 or $12 billion of per quarter in cash flow coming from the investment portfolio. That's cash that's earning less roughly two.
Speaker Change: Percent today, and we can use that to pay off up on our borrowing this is costing us, let's say on average 5% and so that's a significant NIM advantage and <unk> advantage and revenue advantage that we're able to generate every month that we don't that we have even flat deposit so that's really the bigger.
Speaker Change: Driver.
Between for the NIM growth between now and the end of 2025, and frankly between now and the end of 2024 as well.
Speaker Change: Thank you and next we'll go to Kyle Voigt from <unk>. Please go ahead.
Kyle Voigt: Hi, good morning.
Kyle Voigt: Other one for Peter as we think about a potential fed cutting environment. I was wondering if you could comment on how you think about deposit betas on the bank sweep on the way down in other words should we expect betas to mirror, what we saw on the way the way up because I don't think you increase bank sweep rates over the last 100 basis points of hikes are so we're good.
Kyle Voigt: And that the current cash balances that remain remain on your balance sheet or likely the lease rate sensitive deposits could there be some leeway to begin to modestly move the bank sweep rates lower even with the first fed cut.
Speaker Change: Yeah. Thanks. Thanks for the question. So I think it's reasonable to think that the betas could be a bit higher on the way down than they were on the way up.
Speaker Change: 45 basis points and bank sweep, we're paying a rate today that is significantly better than what.
Speaker Change: Traditional banks are offering on checking accounts that are still paying I think in many cases, a basis point or two basis points for accounts that have <unk>.
Speaker Change: Similar liquidity features or in some cases even.
Speaker Change: Inferior liquidity features.
Speaker Change: And so I wouldn't necessarily assume that the deposit betas on the way down will be symmetrical to where they were.
Speaker Change: On the way up necessarily.
Speaker Change: Thank you and next we'll go to Brennan Hawken from UBS. Please go ahead.
Brennan Hawken: Good morning, Thanks for taking my questions.
Brennan Hawken: Couple questions Peter.
Brennan Hawken: For the past and thinking about NIM and the scenarios.
Brennan Hawken: Number one.
Brennan Hawken: <unk>.
Brennan Hawken: I think you referenced that.
Brennan Hawken: These scenarios are based on the Dot plot you also referenced a forward curve. So maybe could you clarify which rate assumptions underpin.
Brennan Hawken: The scenarios that you laid out and and also how should we think about.
Brennan Hawken: Forecasting the interest, earning assets you referenced $11 billion to $12 billion of principal.
Brennan Hawken: Is that the pace that we should be thinking about through much of 2024 until about wholesale borrowings is paid down.
Yeah.
Speaker Change: Yes. Thanks for the question. So the map hop illustrations are based on the dot plots, which again so three cuts over the course of 'twenty four and I think it's 200 basis points by the end of 2025 of easing.
Speaker Change: Terms of the pace of interest earning assets.
Speaker Change: Our priority.
Speaker Change: Is that is to pay off the supplemental borrowing and so as we continue to prioritize that.
Is it reasonable to expect that our ensuring assets would decline.
Speaker Change: Again doing so you can be.
Speaker Change: In a situation where engineering assets are declining but revenue is increasing because again, we're paying off those supplemental borrowings.
Speaker Change: Of that $11 billion to $12 billion of quarterly cash flow from the investment portfolio.
Speaker Change: A portion of that is principal and then of course a portion of that is interest. So I wouldn't assume that the interesting assets are going down by that necessarily by that level, but I think do we think it is reasonable to expect that there'll be some decline as long as we have the supplemental borrowings outstanding were endeavoring to pay those off.
Speaker Change: As quickly as possible.
Speaker Change: Thank you and next we'll go to Dan Fannon from Jefferies. Please go ahead.
Daniel Thomas Fannon: Thanks, Good morning, another follow up here Peter just in the context of some of the seasonality charts, you gave and what we saw in the fourth quarter declined slower in the fourth quarter versus third quarter, yet deposit trends got better. So as we think about the start of this year and clearly places important how do we think about.
Daniel Thomas Fannon: The seasonal benefits or cash trends versus those priorities are paying down their disorder. Some funding.
Speaker Change: Yes. So we saw you know I think if you look at the we ended the year with our we target sort of in the banks kind of a 5% to 6% overnight liquidity at the banks.
Speaker Change: That position roughly doubled at the end of the year.
Speaker Change: We always like to build up extra liquidity.
Speaker Change: If you look at our price.
Speaker Change: Prior years, when we did the same thing.
Speaker Change: To make sure we have a lot of excess liquidity heading into what is again typically the seasonal investment season.
Speaker Change: So we would expect to draw down those liquidity levels.
Speaker Change: And that will help to support the.
Speaker Change: The seasonal activity that we're seeing.
Speaker Change: If you look at prior years.
Speaker Change: Over the course of the last several years, you can kind of gauge a sense for that seasonal activity.
Speaker Change: And I would say this this month is progressing and kind of consistent with that.
Speaker Change: So without getting to sort of specific numbers in terms of what we're seeing month to date.
Speaker Change: I would say, it's consistent with what we've seen in previous years and consistent with our expectations, but again, it's not only really clear that this seasonal activity that we see in January through March and tax season. In April this isn't client cash realignment. This is just activity that we see every single year as clients build out their cash balances at the end.
Speaker Change: Of the year, and then and then deploy those into the markets in the first part of the Air then deploy those to to the IRS I guess in April.
Speaker Change: Thank you next we'll go to Alex <unk> from Goldman Sachs. Please go ahead.
Alex: Hey, good morning, everybody. Thanks for the question just another quick follow up on the funding dynamics. So I appreciate it might be difficult to predict client behavior with respect to transactional sweep cash on new assets, but maybe give us some color on the trends you've seen.
Alex: Transactional cash as a percentage of net new client assets call. It over the last maybe six months or so just to help us kind of what the starting point because obviously, that's a really important dynamic when it comes to rebuild into cash balance in deposits.
Speaker Change: Yes, so that I mean, thats why we called that out as is I would say are an area of uncertainty going forward is because.
Speaker Change: We are seeing not surprisingly, we're seeing clients who are coming in are realigning their cash as as existing clients are.
Speaker Change: So that's happening.
Speaker Change: There is a certain amount of Av.
Speaker Change: Float if you will that we took.
Speaker Change: We typically rely on that that has contributed.
Speaker Change: Contributed a little bit less over the previous.
Speaker Change: Six months as clients are realigning their cash.
Speaker Change: More quickly maybe than traditionally they would have done in and is right what the C as rates.
Speaker Change: Come down.
Speaker Change: One would expect that that activity would be a little bit less.
Speaker Change: The immediate or or timely.
Speaker Change: Or to the same extent and so I think that is one of the uncertainties what has what happens with the level of new cash that comes in.
Speaker Change: As the fed cuts rates three times four times to six times whatever it might be that's why we called that out as a as an area of uncertainty, but we certainly still expect as we've seen throughout history that over time as we are kind of as that as we add accounts as we add assets again over a long.
Speaker Change: Sort of longer arc of history.
Speaker Change: Those transactional cash balances grow with the growth in accounts and the growth in assets. It's just over a short period of time like a quarter over a year, it's a little bit harder to gauge exactly what the near term contribution will be but again over time over three years five years et cetera, we expect that our total transactional cash balances will grow.
Speaker Change: As we grow our client base.
Speaker Change: Yeah.
Speaker Change: Thank you and I don't think we have time for one last question.
Speaker Change: Absolutely I last question comes from Devin Ryan from JMP Securities. Please go ahead.
Thanks, So much good morning, I guess different topics and some of other questions, but probably for Rick you mentioned in your remarks. So obviously the firm has a strong technology background, So love to.
Just talk a little more detail about the opportunity you guys see from artificial intelligence investment as we look beyond 2024, so maybe looking out the next three to five years what are some of the areas. We're most focused on how much efficiency do you think that can be derived from the current use cases, you see how much productivity uplift and just more generally how material AI will be for swaps it would seem like.
Speaker Change: This fits right into kind of the ethos of the company long term, but I know, sometimes they take a while to kind of implement so just love to hear a little bit more about the strategy there. Thanks.
Speaker Change: Devin Thanks for the question on AI I think it will have a meaningful impact in three areas on our employees.
Speaker Change: On our efficiency and on our clients. So let me start with employees I think AI can be used.
Speaker Change: To make our employees, even more effective with our clients to provide them with the ability to have an answer that is.
Speaker Change: Really strong in particular for our newer employees that are coming up to speed the ability for AI to make them as efficient or as effective as a more experienced employee I think will be powerful both for the employee and for our clients that are that are receiving the.
Speaker Change: The thought from that from that person. So I think theres, a lot of benefits and helping make our employees more effective with clients.
Speaker Change: There's clearly an efficiency opportunity in AI and.
Speaker Change: And here with.
Speaker Change: Thousands of phone reps that we hire each year.
Speaker Change: At some point, we likely will have the opportunity to hire less in a particular year because we've made our reps both on on the phone on chat in our branches, even more effective and efficient because we're powering them with information and putting it out there at their fingertips.
Speaker Change: And then I think theres a lot of client benefits that will come from AI, we have what I believe is the worlds.
Speaker Change: Best trading platform and thinker swim and a lot of clients invest years and years into building out their platform and into building out their alerts and what types of signals that we're looking at to drive.
What they may want to buy and I think the opportunity for our clients to leverage an AI driven research platform.
Speaker Change: We'll provide them with even greater insights into how they trade into what positions they might want to put on into what risks. They may need to be aware of and so I think AI will will directly impact clients in the future. So when I think about both make our employees as effective as possible, becoming as efficient as possible and driving great.
Speaker Change: Client outcomes I think AI will play an important role in all three.
Speaker Change: Okay well. Thank you. Thank you Rick and then let me just let me just close.
Speaker Change: Walton and I, both said 'twenty 'twenty four it could be a bit of a transitional year I'll be with steady progression in our financial results throughout the year.
Speaker Change: I think it's really important to put that concept in an appropriate context.
Speaker Change: First is that we're talking about the topline growth versus where we finished 2023 and second and more importantly.
Speaker Change: As we emerge from this challenging period, we're not transitioning or we're changing our strategy our focus on clients the discipline with which we run the business.
Speaker Change: Nor should you expect to see us lowering our organic growth aspirations are resolved or we're changing the fundamentals of our financial formula those have all worked quite well and we're confident we'll continue to serve our clients and our stockholders while in the years ahead.
Speaker Change: Well. Thank you very much and we'll look forward to speaking with you again in April.