Q1 2024 Charles Schwab Corp Earnings Call
Investor sentiment continued its recovery with the bull bear spread maintaining its recent strong position.
And not surprisingly traders also began to become more active for our Schwab trading index or stacks looking for opportunities to benefit from the improving overall sentiment.
They are encouraged by the improving environment, our clients became even more engaged in the markets with daily average trades up 15% over the prior quarter.
Client borrowing or margin balances of 9% in one quarter alone.
Total client interactions with Schwab were up 17%.
And as they engaged more they also took the opportunity to seek our help more often with net flows into our investment advisory solutions up almost 70% quarter over quarter.
All of these metrics reinforce the confidence our clients have in us and each of them provides support for our optimistic view of the future.
As we progressed through the quarter, we were gratified to see a resumption in the strong organic growth, we've been able to produce for many decades.
Highlighted by core net new assets for the quarter, just shy of $100 billion in.
With the month of March particular, particularly encouraging with about $45 billion of core M&A and that's a 6% annualized growth rate.
New brokerage accounts also grew to over $1 million in the quarter. That's the first time that we've exceeded 1 million since the initial quarter of last year.
Our progress in net new assets during the quarter was due at least in part to a slowing of the level of expected asset attrition from the Ameritrade integration.
Although we continue to expect to see some degree of attrition throughout the balance of this year.
Overall attrition from former Ameritrade clients continues to moderate and remains below the levels that we anticipated when we announced the acquisition in late 2019.
A major factor in the falling attrition is of course that clients become accustomed to the schwab platform as well as they recognize that many of the prior Ameritrade platform features we have built into the schwab platforms.
I'll go ahead and share a little bit more around the details of how former Ameritrade retail clients are responding post conversion in terms of their promoter scores when I move to the next slide.
So speaking of retail client promoter scores, we achieved record levels as measured in the first quarter.
Our overall score was 69.
And interestingly with our Premier fee based advisory solutions Schwab wealth advisory, which some of you may know by its former name of Schwab private client it reached a promoter score of 80.
I think what's particularly interesting here is that we achieved this lofty score in a solution where clients are paying fees for our advice and guidance.
It's clearly a reflection of just how far we've come at Schwab from our roots as purely a discount broker.
And the appreciation of our clients have for the investments we've made in building our modern wealth management capabilities.
Of course, we still offer World class service for self directed investors, an incredible value for fee conscious investors, but the diversification of our model is building.
No as I mentioned earlier, we're also tracking our promoter scores for former Ameritrade retail clients, who converted over to the Schwab platform now.
Now what we see there is an initial dip in those scores probably to be expected given the changes that they face they have to learn a new mobile app, a new website and the like but.
But over a fairly short period of time their scores begin trending toward our historic scores for Schwab clients.
90 days post conversion their scores increase on average about 25 points and after nine months their scores have improved about 45 points I.
These results are another testament to the quality of integration and conversion work that's been done by our dedicated people who have been working on the Ameritrade conversion.
And while mentioning the strength of our offerings for our retail investors. We continue to be recognized by independent third parties for the quality of our platform and service.
I do want to call out a special mention of the success, we're achieving in our 401k in defined contribution business that operates under our workplace financial services arm.
The Premier evaluation of service providers in that industry is done by plan sponsor magazine and they again recognized schwab with the highest number of best in class awards for the seventh consecutive year.
And that's more than two times the number of best in Class awards compared to the second place finisher.
A relatively remarkable run of recognition in a challenging business line, where bigger is often mistaken is better.
And then lastly from a third party recognition standpoint, we were honored with J D power named Ameritrade and Schwab is number one and number two in their satisfaction survey for self directed investors <unk>.
<unk> number one ranking reflects the highest they have ever scored and as he was clearly aided by the multiple schwab enhancements that we've made to the client experience for Ameritrade users a couple of those being the addition of our Schwab secure security guarantee and a substantial reduction in the speed to answer client phone calls.
I think this recognition illustrates the power of the combined platforms and our decision as part of the integration to go with the best of both and design.
I understand that this approach added some time to our integration efforts, but I'm confident it will pay dividends for years to come.
Before I turn it over to Rick I'd like to spend just a moment commenting on the final client transition group that is planned to convert over to Schwab next month as well as maybe summarize the overall ameritrade integration.
Rick: Our next month, we will convert the last 10% of Ameritrade client accounts and assets, but this group is incredibly important and it's also unique it's made up of our most active traders and many are power users of the sink or swim platform.
Rick: For these clients the conversion experience should go relatively smoothly.
Rick: Because unlike the prior four transition groups for this group the client experience is essentially unchanged they'll continue to have access to the trading platform toss that they have historically utilized while also adding all of the features and benefits with Schwab.
Rick: In terms of the clients or the overall integration effort and as largely expected. After initial settling in period clients in our transition groups are engaging with schwab and the expanded array of capabilities we offer.
Rick: These clients are now beginning to bring new assets to us and Theyre trading volumes now exceed the levels of trading they were doing pre conversion when they were exclusively at ameritrade.
Rick: And we're not saying that all integration related asset attrition is over just yet but as we've shared previously when all is said and done we expect to have performed in line or even better than the levels of client asset and revenue attrition that we projected when we announced the acquisition in late 2019.
Rick: In my opinion, the combination of the best of Ameritrade with the best of Schwab.
Rick: Sets the bar for anyone serving retail investors and independent investment advisers alike are combination of platform service dedicated relationships investment advisory for retail clients.
Rick: And expertise serving independent investment advisers is a powerful combination for driving future growth.
Rick: So Rick let me turn it over to you for some more discussion on our efforts and results during the first quarter.
Rick: Thanks, Walt and Hello, everyone.
Rick: We're coming out of the first quarter with strong momentum in our four strategic priority areas as we continue to focus on driving scale and efficiency.
Speaker Change: <unk> monetization.
Rick: Meaning the personalized needs of our client segments and delivering brilliantly on the basics that our clients expect.
Rick: Let me start with scale and efficiency scale and efficiency has been a key enabler of our success and our ability to disrupt the industry.
Looking back to 2013 expense per account has come down 23%.
Rick: In inflation adjusted terms, we've cut the expense to serve in an account.
Rick: Roughly in half.
Rick: At the same time as you can see on the right hand side of the page we have an expense advantage against our competitors. This means more of our clients' wealth is working towards meeting their goals.
Rick: This is a hallmark of our business model and a driver of the virtuous cycle because it means we can reinvest back in our clients over time.
Rick: With our consistent focus on expense discipline and scale combined with the synergies from the Ameritrade conversion and continuously improving our operations, we are able to drive down costs.
Rick: As we look forward, we'll fully realize our planned synergies from the Ameritrade integration and we will invest in AI will invest an end to end process transformation and will invest in technology enhancements to add to our expense advantage, while making sure. We continue to deliver a no tradeoffs experience to clients.
Rick: Enhancing our wealth and lending offerings remains an important win win monetization opportunity.
Rick: We are making progress on both fronts, our clients continue to seek out our advisory solutions in record numbers and we have made a number of important advancements in our lending capabilities, which clients have really appreciated.
In the first quarter, we saw a record $14 billion in net flows into our advisory solutions, a 60% increase over last year.
Rick: We have seen continued interest in our flagship wealth offering Schwab wealth advisory along with increased interest in <unk> and Schwab personalized indexing.
Rick: Swab wealth advisory attracted a record $4 4 billion in net flows for the first quarter with approximately 30% of those enrollments coming from legacy Ameritrade households, which to US demonstrates the power of the opportunity ahead of us as we introduce more ameritrade clients to the breadth of all we have.
Rick: To offer.
Rick: Demand for our water Schroeder fixed income strategies continues to be strong with $2 $3 billion of net flows which is up 55% over last year.
Rick: And as <unk> highlighted earlier the clients and these wealth offers are our happiest clients at Schwab. These solutions consistently achieve our highest client promoter scores.
Rick: As we look forward, we are investing to add capabilities to our wealth and advice platform to support our accelerated growth.
Rick: Turning now to client segmentation.
While we will always meet the needs of the full spectrum of investors. We continue to provide tailored offers for specific client segments.
Rick: Specialized experiences we recently launched for retail high net worth clients, which we call Schwab private client services and Schwab private wealth services are just two examples.
Rick: Our high net worth and ultra high net worth client segments are among the fastest growing at schwab and they represent approximately three quarters of our total retail client assets today.
Rick: In our specialized service models that we launched last year are serving these clients well in the first quarter. The team serving these clients answered calls on average in less than 10 seconds and 80% of the calls were resolved by the Rep, who first answered the phone without meeting the transfer the client to another.
Rick: <unk> or group.
Rick: We are adding to our product and advice capabilities for these clients with the anticipated rollout this year of an alternatives platform for retail investors.
Rick: We've also launched our investor advantage pricing for clients and are working on additional lending capabilities to meet this client segments needs.
Rick: We're also continuing to invest to provide a trader client experience that is unparalleled in our industry with our schwab trading powered by Ameritrade offer.
Rick: The first quarter, we saw robust trading activity across the board, including strong continued engagement from our Ameritrade clients.
Rick: Traders at Schwab have access to the Thinkorswim trading platforms as well as specialized service teams and tailored education for traders of all levels of expertise and sophistication.
Rick: And this is an area that we continue to invest in to maintain and expand our advantage with double the number of Schwab households, this quarter they used stinker swim.
Rick: We believe that our trading offer has never been stronger in terms of our execution our platform our service and the combined research that we offer to our clients through the research and educational capabilities of both Schwab and Ameritrade.
Rick: Turning now to a brilliant basics, we want to delight our clients with exceptional experiences in every interaction they have with us at Schwab and we want to be the easiest place in the industry for our clients to do business.
Rick: This means that we're continuing to make investments to enhance the investor experience for all of our clients. This includes digital interactions like our streamline digital onboarding for <unk>, where they can now open and fund multiple accounts in just minutes or in our enhanced pledged asset line process.
Rick: And where we can now process a pledged asset line and just minutes for most loans.
Rick: Loans.
Rick: For the pledged asset line the client experiences is usually a conversation with their FC or their RIAA to discuss the product to discuss the rate and what assets I'd like to pledge clients, then get a doctor sign email asking them to sign to apply for the loan.
Rick: Time from that email to the email that says the line open and is ready to draw is just about three to five minutes the feedback from our clients on this process has been off the charts.
Rick: We have also worked hard and our digital experiences to be as wealth welcoming as possible to ameritrade clients by incorporating the features and functionality.
Rick: Of greatest importance to them.
Rick: We've also enhanced our move money and self service capabilities and incorporated Doc you sign into our commonly used forms.
Rick: And it also means we're providing access and intuitive experiences when and where our clients want to engage with us whether that's in one of our 380 branches, whether it's on the phone where clients can expect their calls to be answered in less than a minute or whether it's online through our schwab intelligent assistant.
Rick: With through client size as our foundation investors continue to turn to us to serve their wealth management and investing needs through all market cycles.
Rick: We're both ready for the final Ameritrade conversion group and ready to push forward on our four strategic focus areas to serve our clients. We believe we are well positioned to meet the evolving needs of clients and deliver organic growth in line with our historical levels and with that I'll turn it over to Peter.
Peter: Thank you very much Rick sale.
Peter: <unk> Walton and Rick talked about our increasing momentum in the market driven by our no tradeoffs positioning and the satisfaction and loyalty of our existing clients. The significant progress we've made with the Ameritrade integration and the success. We're having is cheyenne to unlock the substantial opportunities the combination enables.
Peter: And our progress and plans around our four strategic priorities, which we're confident will allow us to continue growing with both our existing clients and new to firm.
Peter: And my time today I'll review, our solid first quarter financial performance I'll provide an update on some of the key factors influencing our near term story.
Peter: And I'll share some high level thoughts on the rest of 2024, so recognizing that it's still early in the year. So we won't be sharing updated mathematical illustrations until July.
Peter: The important point is that we sit here today, one year removed from the events surrounding the regional banking crisis. We are in a very strong position with nearly all key business and financial indicators improving in some cases substantially.
Peter: We've seen meaningful progress back towards our historical pace of organic growth.
Peter: A continued moderation of client cash realignment activity with the pace slowing it back even faster than our expectations.
Peter: Further reduction in the usage of supplemental borrowing Rev.
Peter: Revenue and earnings that have bounced up from the prior quarter with much more room to grow throughout this year and beyond.
Peter: Continued expense discipline with head count down modestly from year end and a full 10% lower from the year ago levels.
Speaker Change: And finally.
Speaker Change: A continued increase in our capital levels, both both our regulatory levels on those inclusive of OCI.
Now back in January Walter and I, both said that 'twenty 'twenty four is likely to be somewhat of a transitional year from a financial standpoint.
Speaker Change: But one with steadily improving financial results. The bridge from what proved to be a challenging 2023 to what we believe is a very promising future ahead.
Speaker Change: One quarter away through the year that transition is well on its way as our core earnings power is becoming less obscured by some of the near term headwinds and our long term financial formula that you're all familiar with growth in the client franchise driving scale in our business, leading to improving financials and ultimately capital.
Speaker Change: Return re enters the picture.
Speaker Change: As Walt mentioned the first quarter has been characterized by a supportive macro backdrop increased engagement and solid organic growth we.
We saw that reflected in external benchmarks, such as the S&P 500, as well as key drivers of our business performance, including trading activity up 15% from the fourth first quarter, sorry, fourth quarter of 2023 and margin balances up 9% sequentially as well.
Speaker Change: That constructive foundation paved the way for our financial performance to improve significantly from the fourth quarter.
Speaker Change: With $4 $7 billion of revenue driven by a 5% sequential increase in net interest revenue.
Speaker Change: And a record $1 $3 billion of asset management and admin fees.
Speaker Change: And adjusted pre tax margin of roughly 41% up nearly 500 basis points sequentially.
Speaker Change: And adjusted EPS of <unk> 74.
Speaker Change: Up six from the prior quarter.
Speaker Change: A demonstration of the leverage our model provides us the headwinds we've been facing begin to abate.
Speaker Change: Now turning our attention to the balance sheet total assets dropped by 5% driven by the paydown of parent level debt and a continuation, albeit a much slower pace of the client cash realignment activity, we've experienced roughly two years.
Speaker Change: We saw notable reduction in activity from January to February and March.
Speaker Change: And the overall level of realignment in the quarter was more than 80% less than the same quarter in 2023.
Speaker Change: And within the bank was an amount that we could support with a cash flow from the investment portfolio.
Speaker Change: And that allowed us to reduce our usage of supplemental borrowing by nearly $9 billion during the quarter.
Speaker Change: The total down roughly $25 billion from the peak last may.
Speaker Change: And finally, despite increasing rates during the quarter, our capital position continues to get even stronger with.
Speaker Change: With our consolidated tier one leverage ratio rising to eight 8%.
Speaker Change: And our adjusted tier one leverage ratio inclusive of <unk> and therefore, what our binding constraint would be if we lose the OCI opt out that's raw bank now at five 7%.
Speaker Change: Meaning that we're now above what will likely be the new quote well capitalized standard at our banks over four years ahead of the earliest anticipated implementation date.
Speaker Change: During last quarter's update we talked about the slowing pace of client cash realignment, but we also shared our expectation that we'd likely to see some typical seasonal activity to start the year and that has indeed been the case.
Speaker Change: Our clients continue to engage in the market both the number of newer real liners and the size of those realignment events continues to trend lower.
Bringing us ever closer to the point, where any residual activity among existing clients, we more than offset by the contribution of cash from new accounts and making client cash realignment a story that we're we're optimistic will soon move to the back pages.
Speaker Change: Now, let me turn our attention from the solid quarter, we just completed to what we expect to be a very bright future.
Speaker Change: We expect our net interest margin to expand through 2024 and in the protein and 2025 and approached 3% by the end of 2025, driven mostly by the pay down of supplemental borrowing.
Speaker Change: Now the actual pace of paying off that borrowing will be influenced of course by the level of deposit growth, but also by the growth in margin balances and why is that.
Speaker Change: Given the way that the liquidity ratio, where LCR rule works for every dollar of margin balanced growth, we need an extra roughly $1 50 of client cash of the broker dealers.
Speaker Change: And that requires us to reroute some client cash balances from bank sweep to the broker dealer cash solution.
Speaker Change: And those are balances that we would otherwise have used to pay down the supplemental borrowing.
Speaker Change: But I wont make very clear that increased margin loans expand both our net interest margin and our net interest revenue. We are happy to carry some of these supplemental borrowings at roughly five ish percent to support lending activity that currently generates closer to 8%.
Now on the expense side, our expense side, we continue to maintain spending discipline with expense with the objective of flattish expenses year over year.
Speaker Change: Even as we have grown accounts and assets during the quarter average head count dropped roughly 3% from the fourth quarter and is down nearly 10% year over year.
Speaker Change: But of course, the ultimate path of expenses will depend to a certain extent on some volume related factors, such as trading and equity market valuations, which of course correspond to revenue.
Speaker Change: And finally, we continue to expect strong growth in revenue and earnings through the year with an exit velocity in the fourth quarter substantially higher than where we are today and the potential for continued sequential growth in 2025 and beyond.
Speaker Change: One final, but important point I would make the long.
Speaker Change: Term NIM expectation I communicated is based off adopt a dot plot forecast from a few weeks ago.
Speaker Change: In anticipation that we would see interest rates come down in the coming years.
Speaker Change: And to the extent those rates stay higher for longer that is a good thing for our business. We are asset sensitive a continuation of higher rates means higher yields on the little bit more than one third of our assets that are floating margin loans lend.
Speaker Change: Ah pledged asset lines cash et cetera, and potentially more time for us to capitalize on higher rates. Once we resume our investment activity following the pay down of our supplemental borrowing. So again, if we don't see 150 basis points of easing by the end of 2025.
Speaker Change: As the fed suggested a few weeks ago, our net interest margin could actually exceed that 3% figure above all else being equal.
Speaker Change: Despite and finally, despite long term rates that moved higher during the quarter. Our capital ratios have continued to grow with our banks now all measurably above the well capitalized level, even if <unk> is included.
Speaker Change: And we continue to expect our consolidated adjusted tier one leverage ratio to reach the upper 6% range by the end of 2024.
Speaker Change: Which point, we'll be in a position to at least consider potential options for resuming further capital return.
Speaker Change: And that paves the way for a return to our long term financial formula.
Speaker Change: One that combines our position as the premier asset gatherer in our industry with a track record of consistent 5% to 7% organic growth through the cycle industry, leading client loyalty our leadership position in the two fastest growing segments within wealth management and significant opportunity in front of us.
Speaker Change: Our diversified revenue model, allowing us to convert asset growth into revenue growth with contributions from net interest revenue asset management fees and trading and over the next several years a major tailwind in the form of NIM expansion.
Speaker Change: Our focus on disciplined expense management highlight highlighted by a recognition that our low cost structure is a big competitive advantage as Rick talked about.
Speaker Change: And our scalable business model that enables both margin expansion over time and investments to continue to grow the business and.
Speaker Change: In a business model that can combine that strong organic growth and revenue growth with more meaningful capital return as our capital levels inclusive of a OCI March higher.
Speaker Change: This is a formula that has worked in the past and it's every bit as relevant today as ever.
With that I'll turn it over to Jeff to facilitate our Q&A.
Operator can you please check the queue and see if we have any questions.
Jeff: Yes, Thank you and at this time, if you would like to ask a question. Please ensure that your phone is unneeded press star one and record your name clearly when prompted if he would need to withdraw your request you May press star two again to ask a question that is star one.
Jeff: And our first question comes from Ken Worthington with Jpmorgan you May go ahead.
Hi, good morning, and thanks for taking the question.
You paid down <unk> 4 billion of federal home loan bank borrowing $9 1 billion of Cds This quarter or so $11 5 billion. In total is this the case of borrowing pay down that you would expect for the next couple of quarters and to what extent are the higher markets and greater asset levels and the solid volume helping to boot.
Jeff: The pace of payback versus your initial expectations.
Jeff: Yeah, Ken So we're certainly our priority is to pay down the supplemental borrowings both the <unk> as quickly as we possibly can and and the pace of paying that down is really.
Jeff: Driven by the as I mentioned in my comments both the.
Levels of transactional cash that we see as well as the mix of that transactional cash between the bank and the broker dealer. So we'll do it as quickly as we can.
Jeff: To the extent that we see a.
Jeff: Greater contributions from from new accounts, and a greater level of deposit growth that will accelerate that in terms of the.
Jeff: The market engagement and a strong markets you know, there's really sort of two.
Jeff: <unk> is going on there and when when markets are higher.
Jeff: I am moving higher we do see clients more likely too.
Jeff: To change their asset allocation and move into the equity markets and that ends up being a negative for some of that cash on the other hand when markets are higher clients are more engaged and so they're more likely to add.
Jeff: To their accounts with money from outside of Schwab and and that's so that's certainly a positive for us as well.
Thank you. Our next question is from Steven <unk> with Wolfe Research you May go ahead.
Steven: Hey, good morning.
Steven: So wanted to ask a question on the sweep cash growth algorithm just given sorting is in the very late innings. The second derivative on sweep cash is steadily improving I was hoping you could speak to the proportion of new cash dollars are getting deployed into money market versus bank sweep and how that informs your expectations.
Steven: For when sweep deposits to not only stabilize but actually begin to inflect positively.
Speaker Change: Yeah, So Steven I would say that the when you look at the the new accounts they tend to over time look a lot like the existing accounts they come in with a with a heavier portion of cash and then but we are seeing some of the new accounts.
Kind of.
Speaker Change: Realigning ahead of of of bringing that money those that business to Schwab one of things. We saw in this last quarter. For example, we saw that our transfer of accounts.
Speaker Change: We're actually a higher portion of our net new assets than they've been for last year that is a good thing that mean that means we are winning business from from competitors clients are entrusting us and choosing to ship more of their business to schwab versus our competitors, but that also means that some of that net new asset hasn't come in is coming in the form of securities.
Speaker Change: Mutual funds it et cetera. So.
Speaker Change: It really it really depends.
Speaker Change: Our expectation of course is what we will see.
Speaker Change: That does the re alignment among the existing clients continue to moderate not.
Speaker Change: Not necessarily go to zero, but continue to moderate and then get offset by as we see growth from a contribution of cash from new accounts over time, and we'll see a resumption of deposit growth and overtime, our transactional cash will grow with the growth in accounts on the grow without growth of our total assets.
Speaker Change: Thank you. Our next question comes from Alex Blaustein with Goldman Sachs. You May go ahead.
Alexander Blostein: Hey, good morning, Thank you for the question as well.
Alexander Blostein: Could you guys expand a little bit more on the capital return priorities as you make your way back to higher capital ratios as you pointed out and over the last couple of quarters.
Alexander Blostein: Would the preference be to a larger buyback going behind how we saw in the past or something else. Thanks.
Speaker Change: Yeah. Thanks, Alex So so certainly capital return it remains a very important part of our our financial Formula. We've obviously paused our buyback at the moment to enable us to more quickly grow into what we expect will be our new capital requirements, but.
Speaker Change: Our baseline.
Speaker Change: Our cast.
Speaker Change: <unk> anticipates that our capital levels growing.
Speaker Change: Inclusive of the OCI growing to levels that we had excluding OCI.
Speaker Change: Previously and at that point, we expect to be in a position to at least consider as I mentioned.
Speaker Change: Returning more capital to our stockholders again, it's not we've always set our buyback is opportunistic not not programmatic not all automatic and in terms of our capital return priorities. We always consider a few different things. We look of course at our dividend, which tends to grow with the growth in earnings.
Speaker Change: We look at doing a common buybacks known of course, we also look at the preferred redemptions as well and we'd want to look at the full.
Speaker Change: The landscape I guess, if you will and also take into consideration as we do so.
Speaker Change: The interest rate environment, what we're seeing from clients the level of supplemental borrowing we have outstanding and and.
Speaker Change: And so forth, but those are all the different aspects of the different vehicles that we consider as we think about capital return, but again, China is a very very important part of our financial Formula and something we think as you look over time, we will continue to be very very important for the company.
Speaker Change: Hi, operator, we are we have a few questions that would kind of trickle down over the course of the day.
Speaker Change: Console here, so maybe let's let's insert one.
Speaker Change: Maybe this one's for Walt recognizing this is a bit of a topic does your across most industries could you spend a minute talking about the role of AI or artificial intelligence than schwab's go forward strategy.
Walt: Thanks, Jeff you're right. There's a there's an incredible amount of hype that are that you have to sort through here, but we do believe that AI has a lot of long term potential.
Walt: For us in making a difference in serving our our various client segments I think it.
Walt: For us it can it can really impact the efficiency of service as well as enhance digital experiences for our clients at the same time.
Walt: We tend to believe that it will be the the marriage of of AI with.
Walt: With humans that will they will deliver best for our clients of course, we we have been.
Walt: Very active in the use of AI for for things like security and fraud detection for for a number of years and.
Walt: And of course the challenges there is it's also being leveraged by by bad actors. So there's a there's a constant effort to stay a couple of steps ahead there.
Walt: From a security and fraud detection.
Walt: From a productivity and efficiency.
Walt: Standpoint, a big opportunities or are there in a very simple example is <unk>.
Walt: Take the difference between someone answering a client call who as a year of experience versus some of it has 20 years of experience.
Walt: That gap today, even even with access to our knowledge center capability likely exist just given the difference in tenure and experience I would expect that gap to close dramatically given some of the projects and initiatives that we have going on with AI today.
Walt: Will provide real time knowledge support for for.
Walt: All of our.
For all of our reps when you switch over to something like generative AI.
Walt: I think it's going to be a while to watch that technology mature I know that may not match some of the hype that we hear some some speaking of.
Walt: But I think that technology will need to mature there'll be a lot of work that will go on with regulators along the way to ensure that we can deliver for clients without some of the inherent biases that you sometimes see.
Walt: But AI is a big big opportunity for us to further delight, our clients to deliver on the brilliant basics that Rick spoke of and and continue to ensure fairness and transparency and accountability.
Walt: With AI usage is as we navigate the opportunities.
Walt: That will be present there.
Walt: Thank you and our next question comes from Brennan Hawken with UBS you May go ahead.
Brennan Hawken: Good morning, Thanks for taking my question.
Brennan Hawken: Given that today is April 15th and we have our taxes to hoping that you could give us an update around what trends you've seen around tax payments month to date and maybe an early read on how this tax season compares with other tax seasons UC.
Sure Brian So.
UC: We're still not all the way through obviously through the tax season, but I would say on the whole. This this tax season is proceeding.
UC: Staying consistent with our expectations it looks a lot more like tax seasons from years prior to 'twenty, two and 'twenty three.
UC: With more of our clients' cash being in money funds a lot more of the tax payments are being paid.
UC: Bye.
UC: Through through redemptions of those money funds.
UC: Again, not not surprisingly so overall.
UC: Consistent with what we've seen and again in previous years before 'twenty, two and 'twenty three.
UC: Thank you. Our next question comes from Devin Ryan with citizens JMP you May go ahead.
Devin Patrick Ryan: Thanks, So much good morning. So you guys have about $350 billion more in money market balances today than you guys did at the beginning of 2022 when the fed policy shifted so it is the path of interest rates is lower from here, how sticky are those balances and.
Devin Patrick Ryan: Do you think your money flowing out of money market funds over time is that a net opportunity for schwab or as a drag I guess it would just seem to matter where some of that money would flow. So just great to get an update there given how our largest balances are today. Thanks.
Speaker Change: Yes, I guess I would what I would want to split that into two pieces.
Youre right. Its obviously balances in money funds are certainly a lot higher today than they were a few years ago, and obviously higher than when we were in the zero interest rate environment.
Speaker Change: You know to the extent that that money. So it depends on where that money is flowing out of money funds or its falling out of money funds into the equity markets in the mutual funds et cetera.
Speaker Change: And it depends on what the vehicle is if it's flowing out of money funds into cash on our balance sheet. Then you know clearly thats a positive for us from a revenue standpoint, what I'd say is if if interest our expectation is that of interest rates.
Speaker Change: Fall modestly.
Speaker Change: Under a 100 basis points or something like that you'd see a.
Speaker Change: Over time, you would see a little bit of a shift in the proportion of cash that's sitting in those transactional cash solutions like bank sweep in the broker dealer cash solution.
Speaker Change: First is money funds, it's not going to happen immediately it's not like people, who sell their money funds when rates fall by 75 basis points, but what happens is it.
Speaker Change: If a liquidity if they need cash they may sell a money fund and if they want to have a cash accumulates that maybe you know on the margin somewhat less likely to put that into a into a money fund and so over time, you see that shift.
Speaker Change: Changed slightly where you see a much more dramatic impact.
That would be of course, if rates fall back to levels that we saw in 2020 in 2021 that tends to be the period of time, where you'd see a much more significant reduction or shift from money funds onto transactional cash and the nice thing about that is that that is something where an environment like that where where spreads are.
Speaker Change: And some of our floating rate assets compress having more of that cash on our balance sheet allows us to offset some or all of that impact. So it is sort of a some dry powder. If you will that helps mitigate.
Speaker Change: The revenue potential revenue impact from a.
Very low interest rate environment.
We're going to push out one more of those console questions here I think this one for Rick.
Rick: It was great to see the interest from the Ameritrade side in terms of enrollment.
Rick: Trouble with advisory.
Rick: Maybe a little more color about what other.
<unk> solutions are gravitating towards.
Rick: Jeff maybe before I dive into the to the wealth solutions, they're gravitating towards I'd, just make a comment about the overall integration we've gone through now for transition weekends, we will have our fifth coming up shortly from an operational standpoint, those have gone exceptionally well and as well as shared earlier the more time ameritrade.
Client spend at Schwab the happier they become as you see the robust expansion in their client promoter scores. We're now getting to what I think is the most exciting part of the combination which is the ability to introduce the combined capabilities of our two firms to both sets of clients and we've seen the number of schwab clients.
Rick: That are using Thinkorswim, we saw those double in the first quarter. So our schwab clients are taking advantage of one of the great capabilities of Ameritrade, which was its trading and educational platform and we're seeing the same thing happened for ameritrade clients or wealth platform. We think this is incredibly strong and we've been able to.
Rick: Introduce it to the ameritrade clients through that.
Rick: Our relationship building and through a different approach to engaging with clients thats, its holistic and wealth and financial planning oriented and that has led to much greater engagement and wealth solutions among.
Rick: Ameritrade clients than than in the past and in fact, we've seen 97% of legacy Ameritrade FCS have opened up some form of wealth.
Our advice.
Rick: Solutions in the first quarter in terms of your specific question, what they're gravitating towards <unk>.
Rick: The majority of the assets are going towards full service wealth.
Rick: Solutions, either our Schwab wealth advisory capability or Schwab advisor network, which makes <unk>.
Rick: Available to us to our clients. They are also gravitated towards schwab personalized indexing into wasn't Schroeder. So those are those will be the four but the majority of flows are going to full service wealth and that's exactly the power of the combination that we thought we'd see and we're seeing it in.
Rick: What's most gratifying about that for US is that on the other end of that is a client Hughes.
Rick: Life, we're making a big difference and so we're excited about these trends.
Rick: Thank you and our next question is from Brian Bedell with Deutsche Bank You May go ahead.
Brian Bertram Bedell: Great. Thanks, Good morning folks thanks for taking my question maybe.
Brian Bertram Bedell: Maybe just back on the balance sheet, Peter in relation to the the tax season.
Yeah, assuming obviously that we'd get a contraction in the balance sheet in the month of April just given given tax season.
Brian Bertram Bedell: Can you talk a little bit more about.
Brian Bertram Bedell: Investing.
Brian Bertram Bedell: Risk on behavior investing in assets, and then that coming more from the money market funds versus the transactional costs and maybe just your confidence that the.
Brian Bertram Bedell: Your earning assets could rebuild.
Brian Bertram Bedell: Throughout the year back to <unk> levels at the end of March or even potentially exceed that.
Speaker Change: Yes, I'm not sure entirely.
Speaker Change: I guess I'd say as mentioned.
Speaker Change: Answer your question I got a little bit higher level, so without making sort of a specific prediction around where we're going to end the year right.
Speaker Change: Back in January we shared those mathematic illustrations steering clear of giving you a specific prediction and the reason we did that is because the actual pace of deposit growth.
Depends on a number of factors that are frankly hard to anticipate or it depends on what's going to happen with interest rates.
Speaker Change: Investor sentiment.
Speaker Change: The pace of new account formation and the level of the contribution of cash from those new accounts.
Speaker Change: And those same dynamics are our true today as I'm as I mentioned.
Speaker Change: Clients with.
Speaker Change: And a strong equity market.
Speaker Change: Clients tend to be net buyers of equities, although the impact is probably not as great as you might think.
Oftentimes when I look at the daily flows of into and out of equities and oftentimes, you'll see our clients buying equities on those down days, because they end up seeing it as an opportunity to step into the market and buy the dip if it as it were I think the more.
Speaker Change: Significant impact is that a is that a.
Speaker Change: Time, when the markets are when clients are feeling more enthusiastic when investor sentiment is higher they do tend to put more money into their accounts.
Speaker Change: Both cash as well as.
Speaker Change: There are more engaged and they are in there.
Counts and what we've seen over time is that when clients are more engaged in the investing process that is a period of time when we tend to win.
Speaker Change: That when clients sort of.
Speaker Change: Sort of pick up their head and sort of look around and say Oh, you know I want to invest they tend to shop around a little bit more and in those situations, we tend to be a winner.
In terms of business and so that I think is part of the reason that we've seen.
Speaker Change: Very strong transfer of accounts.
Speaker Change: This quarter end and.
Speaker Change: We're gratified by that and I hope that that continues.
Speaker Change: Thank you. Our next question is from Bill Katz with TD Cowen You May go ahead. Okay. Thank you very much maybe just mix of the topics a little bit Peter just coming back to the expense guide for a moment.
Q1 tends to be rather seasonally strong just given FICA and payroll increases et cetera.
William Katz: The 2.8 sort of annualize out to just over $11 billion, but just given the head count reduction.
William Katz: Year to date and seasonal dynamics, how should we be thinking about the sort of full year bogie right now in the incremental margin on revenues. Thank you.
William Katz: <unk>.
Speaker Change: Yes, so so bill will provide our updated.
Speaker Change: Expense outlook in our in our July update as I mentioned in my prepared remarks, we're targeting flattish expense growth.
Speaker Change: We have definitely.
Speaker Change: <unk> taken steps to to limit.
Speaker Change: Our expenses have been very disciplined in terms of the hiring and so forth and that's why you've seen our overall labor equivalents come down from the end of year levels over the course of this year, we will commit to continue to capture some of the remaining expense synergies related to.
Speaker Change: The ameritrade integration with the expectation that we'll have fully capture those on a run rate basis by the end of this year I'm not going to get into exactly you know timing around sort of when in the year, we're going to capture those expense synergies, but that's certainly our our expectation. So are you know we're targeting flash expense growth as you know they often start you know from <unk>.
The company for a while.
Speaker Change: There are some expenses that grow and fall with with levels of a client engagements.
Speaker Change: Things like trading are there you know there's trading pass through expenses that that are aligned with revenue. There is third party expenses to go up and down based on equity market valuations as of course, our bonus funding, which goes up and down based off of our financial performance. So those are a little bit harder to gauge, but again that those are going up that's certainly a good.
Speaker Change: From a revenue standpoint, but our objective right now is and continues to be to be very disciplined on expenses.
Speaker Change: And with the objective of maintaining that and at flattish level for the full year.
Chris O'brien: Another question from the console here. This one is from Chris O'brien of Barclays.
Chris O'brien: Maybe you could start with this one it's a question on retail.
Competitive landscape, there's competitors that have been in the market with with fairly attractive deposit matches, which appear to be driving cash inflows with those firms is this something that the firm.
Is worthy of some sort of competitive response or is it something that schwab has it really worried about.
Speaker Change: Yes, So let me let me first say that the least innovative thing any company can do in our industry is to buy business by giving someone cash.
Speaker Change: It is it is certainly a strategy that some firms employ it is not a sustainable strategy over any period of time.
Speaker Change: It is not a sustainable strategy when you're talking about meaningful dollars.
Speaker Change: There have been some rare circumstances, where we have chosen.
On certain clients to respond to those offers.
Speaker Change: When we have responded we have been able to retain the clients that we wanted to retain.
Speaker Change: For about <unk>.
Speaker Change: 15%.
Of what may be an alternative firm might be offering in terms of cash, which I think is an interesting reflection of the way the client values the difference in their experience.
Speaker Change: There have been some clients that we have let go.
Speaker Change: Without offering any incentive to stay generally speaking those are clients.
Speaker Change: Who have chosen to move.
Assets that they have no intention of trading with or doing anything different with so as an example, a client might have a significant holding in a given stock Microsoft Nvidia or something like that and they will take advantage of one of these offers and move those in.
Speaker Change: Dividual positions, while leaving the rest of their assets at Schwab, knowing that theyre, not going to liquidate or trade or do anything with those assets and proactively telling us that as soon as the required holding period expires they'll move those assets back to Schwab.
So again, it's something that goes on in our industry and.
Speaker Change: And we watch it very very closely but it is not not innovative and it is not sustainable as a means to grow the only way to grow is to delight clients offer them no trade offs.
Speaker Change: Operate your business through client size, that's the only way to have any form of sustainable organic growth and we like our track record of that and are incredibly optimistic about our future with those approaches.
Speaker Change: Thank you and our next question is from Kyle Voigt with K BW you May go ahead.
Kyle Kenneth Voigt: Hi, good morning.
Kyle Kenneth Voigt: Just given the steady progress now on supplemental funding paid down and as we look out over the next 12 months or so it seems that we can be in the zone whereby the securities book is no longer in run off so we'll begin to reinvest and grow the bulk I'm wondering if we could get an update on how youre thinking about the ideal structure of the securities portfolio in terms of.
Kyle Kenneth Voigt: Fixed float mix and duration over the medium term and should we expect any changes to your historical views on balance sheet structure as we get towards growing total interest earning assets once again.
Speaker Change: Sure. So we're still going through the.
Speaker Change: The process of thinking through that.
Speaker Change: You are right, we will be in a position of course to two <unk>, our reinvestment I would I would characterize the sort.
Sort of balance sheet changes being more evolutionary versus revolutionary and we've always assumed when we lose the OCI opt out.
Speaker Change: That we would need to be very mindful about the size and duration of of our available for sale portfolio.
Speaker Change: Given the potential variability capital variability that that that would create.
Speaker Change: So I think.
Speaker Change: You'll see us take some steps to you know to.
Speaker Change: To manage that that duration appropriately.
Speaker Change: What that does in terms of you think about our overall consolidated asset duration of sort of two to two and a half years sort of top of the house you know that's.
Speaker Change: That's still really a TBD.
Speaker Change: But I think I think on the on the <unk> portfolio again, you'll see us take steps to manage that.
Speaker Change: As I say I think the overall changes, though are going to be.
Speaker Change: Evolutionary versus again not revolutionary.
Speaker Change: It looks like we have maybe time for one last question. So just given.
Speaker Change: The continued interest here, maybe we'll we'll do this last one from the council and maybe what you could start off.
Speaker Change: Just around the general approach that clients are taking on their cash and their continued evolution of those realignment trends more recently.
Speaker Change: Yes and of course, Peter touched a little bit on it on the earlier question around equity trades.
Speaker Change: I think if if you look at the supplemental.
Speaker Change: Metrics that we provide with our earnings it really tells an important story that the notion of client cash realigning is.
Speaker Change: As a story of 2022 and in the early parts of 2023.
Speaker Change: When I look at overall of <unk>.
Speaker Change: Balance sheet cash over the last six months, it's down $8 billion and at the same time, if I look over the last six months for example, adjusted large capitalization stock purchases, which is the largest category by far of equity trades. The clients do with US those are up $25 billion.
Speaker Change: And so.
The concept of realigning is just <unk>.
Speaker Change: Sort of one that has played itself out we were very early in the process. We were very proactive in reaching out to our clients encouraging them to to move their non transactional or what we call investment cash into higher yielding alternatives not surprising when you're proactive and explain the benefit of that to our client.
Speaker Change: They take advantage of it and they did and they did early in the process and and today, that's just not a meaningful part.
Speaker Change: A part of our story one last comment on it I know there were past periods, where people try to equate.
Speaker Change: The growth in purchase money funds.
Speaker Change: Two to impact around client cash realigning and I know, Peter was particularly clear and emphasizing the danger in doing so that they really werent correlated.
Again go back over those last six months, where balance sheet cash went down about $8 billion in total purchase money fund is up $80 billion. So you're there's really no correlation there at this point in time.
Speaker Change: The story of client cash you're aligning has played out.
Speaker Change: Great. Thanks, a lot I'll turn it over here to Peter to close this out.
Peter: Alright, well, thank you, Jeff and Rick and Walton and thank you all very much for joining us and hearing our thoughts on the state of our business and the opportunities in front of us.
Peter: We're certainly gratified by the by the momentum we're building and the progress we're making on the on the integration of Ameritrade and really unleashing the as Rick talked about the potential of the combined firm that the redemption resumption of our historical organic growth rate and really unlocking that that core earnings power.
Peter: We're certainly mindful the way of a lot of work ahead of us, but we're really excited about the future and we're looking forward to sharing more about what fuels that excitement at our Investor day in May next month and hope to see many of their thanks, everyone.
Speaker Change: Thank you that does conclude today's conference. Thank you all for participating you may disconnect at this time.
