Walt Bettinger on CNBC, October 16, 2023

SARA EISEN:  Look at Charles Schwab. The stock turning higher despite missing revenue expectations. Now for its best day since July, and up more than 5%. Joining us in an exclusive interview is Charles Schwab CEO, Walt Bettinger. Walt, welcome back. Good to see you.

WALT BETTINGER:  Hi, Sara. It’s good to see you. Thanks for inviting me back on the show.

SARA:  Of course. So talk us through the results a little bit. You know, if people were worried about lower deposits, it sounds like on the call you offered some soothing words of things improving as far as the overall environment. What are you telling investors?

WALT:  Well, the economic environment is challenging. We all recognize that with equity markets depressed and interest rates at highs for many, many years, so we don’t want to downplay that. But we can see some light at the end of the tunnel at Schwab. We saw client cash realigning out of our bank sweep offering, which is the largest, most important part of our cash aligning. It actually turned positive in the month of September. So we’re optimistic about where things are headed in the long run even though the short run is still a fairly difficult environment.

SARA:  Right. So that was the concern going in, about the cash sorting, and the fact that we’ve seen this step up in interest rates even farther, were causing some of your clients to move from the bank into money market funds, the sorting issues. So are you saying it was worse during the quarter and it’s gotten better lately?

WALT:  Well, September was an excellent month for cash realigning diminishing. I think, though, that what’s important around this entire discussion is that we want clients to do what is in their best interest, and if that means moving cash out of our bank sweep product, which operates principally like a checking account, into higher-yielding options, that’s something that we encourage. We want them to do that. Again, we’re in a long-term perspective here. We recognize in the short run that it might affect our economics, but that’s okay. The trust that we build with clients by encouraging them to do the right thing pays off for us many times over in the future.

SARA:  Yeah, I mean, there were also questions about capital levels going in and whether the higher interest rates would cause these capital ratios to decline and then lead to some securities portfolio losses. What are you updating investors on that front?

WALT:  Well, our capital levels continue to grow, and they build throughout the third quarter. We remain substantially above all regulatory minimums for capital. I think what you have to bear in mind for context around this interest rate move is that when interest rates go from, say, 1-1/2% to 4-1/2%, that’s a 300% jump. That has a big impact on the value of bonds. When they move from, say, 4-1/2% to 4-3/4%, that’s about a 5% move. So when you put things in context, the type of moves that we’ve seen of late don’t have anywhere near the impact on the value of bonds as what we experienced over the prior 18 months.

CARL QUINTANILLA:  Well, you know, we are looking at daily average trades today. A lot of discussion about sort of suppressed interest in equities, at least, as people find it easier to just park money in money market accounts. Can you talk about how that’s affecting the trader side that you know?

WALT:  Sure. Well, we saw in the third quarter investor sentiment move from positive, or what we call a bullish sentiment, into a bear sentiment. And so when investors begin to head in that direction, you see a slowdown in trading. That’s sort of natural and something that we’ve seen over the history of our firm. So that is the environment right now. It’s tough for investors. Their bond holdings have declined in value and equity holdings are, for the most part, down for almost all investors. But they remain loyal, they remain consistent, trusting of us. I think in September they brought about $27 billion in core net new assets into the firm, which is a pretty remarkable number, given where the investing environment is overall. So it bodes well for the long term.

SARA:  Well, investors are also very focused on this integration that you’ve been doing with TD Ameritrade, Inc. customers and converting them over into Schwab customers. Where are you? It’s been, what, three years since the deal? Where are you in that process? And what’s the risk of further attrition, as you noted that that was happening a little bit?

WALT:  Sure. Sure. Well, we’re about 80% of the way through. Over Labor Day, we converted about $1.3 trillion in assets. That’s one of five groups that we are doing conversions on. Our next one comes up in November. The Labor Day conversion alone would have been the largest integration in the history of our brokerage industry. And just to put into context how well it’s being received by our clients, from the beginning of this integration to today, we’re averaging about 45 client complaints per one million accounts converted. That’s an extraordinarily low number. Again, just to put it into a frame of reference. During the meme stock environment, complaints averaged about 200 per 1 million accounts. So as you can see, our approach of taking the best of both, the best of the platforms from Ameritrade and offering them along with the best of Schwab platforms, is really paying off in terms of client sentiment and their willingness to stay with us.

SARA:  What about on the expense side, a billion dollars of annual savings you announced, incremental. I’m sure investors would like to know more color about where that’s going to come from and how long that’s going to take.

WALT:  Sure. Well, it’s really broken down into two parts. About half of it will be realized throughout principally 2024, which is as we shut down the brokerage platform from Ameritrade and are able to close off a lot of the technology that we’ve continued to maintain while operating two brokerage systems. The other half will be realized principally here in 2023, with the significant chunk coming from real estate decisions that we’re making, given our hybrid work structure, as well as some reductions that we’ll have within our overall workforce.

SARA:  Finally, what do you think is the problem with shares? The stock is down 40% this year, and I know it gets lumped in with regional banks, the unrealized losses, the concern about deposit flight, I mean, we’ve gone through some of those concerns. You’re updating them, you’re saying that it’s getting better. What is the disconnect here?

WALT:  Well, I don’t know that I could be so arrogant as to claim that there’s a disconnect. The street is balancing short-term environment versus long-term. And in the short-term, as I led off by saying, it’s a tough environment. Rates are very high, and the equity market is not exactly encouraging people to put money into it. And so in the short run you can understand where people would be hesitant. But I think from the long-term perspective, where we’re positioned in the fastest growing parts of the market, with leading market share positions, now with a combination of Ameritrade, we really, arguably, have the best platforms in all key areas—the best for self-directed, best for traders by offering the thinkorswim platform to all Schwab clients, the top platform for custody of RIAs, or registered investment advisors. I think our positioning is ideal, and I’m confident that’s going to reveal itself as time goes on.

SARA:  What’s your expectation for what happens with rates next year and how that will impact Schwab?

WALT:  Boy, again, that’s such a tough prediction. I think for us, higher rates actually work out quite well, because as clients begin to further reduce their movement of cash, we’re able to reinvest at much, much higher rates. So higher for longer is good for Schwab,

SARA:  Which goes against the current narrative in the market, Walt. We appreciate you taking the time, talking through some of these issues, answering some of the questions that investors want to hear.

WALT:  Thanks, Sara. It’s always great to be with you. Thanks,

SARA:  You, too. Walt Bettinger, CEO of Schwab.