SARA EISEN:  Good to see you.


WALT BETTINGER:  Hi, Sara. It’s good to see you. Thanks for inviting me to be with you today.


SARA:  Of course. So, clearly, a huge move in the stock, up more than 12%. What are you hearing from investors as far as what sort of signal of relief you gave them?


WALT:  Well, I don’t know that there was a big signal of relief. I think that in in more challenging times like last spring, it is important for people to focus on the trees. But at this point I think people are beginning to focus on the forest and the recognition that Schwab’s consistent long-term organic growth is still in play and our integration efforts with Ameritrade are also going very well.


SARA:  But, you know, going in, there was all this consternation about the cash sorting, which, basically, and we’ve talked about this before, Walt, is the money moving, client money moving into lower margin business for you as, as clients want to chase higher rates. Is that trailing off? What’s happening there?


WALT:  Well, it is, and I think it’s important to put this in context. We encourage our clients to move money out of lower-yielding brokerage sweep accounts that are really akin to checking accounts. They have bill pay services, FDIC insurance. And when rates begin to move, we encourage our clients to take the part of those balances that are long-term cash and put them in something that yields more interest for them. That’s good for the client. That’s what a client-driven organization does. We know that there’s a financial impact to us in the short run of taking that action, but because we don’t manage the company on a quarterly basis, we’re always going to do what’s right by our clients. And, eventually, when you do that, that trust is rewarded, that loyalty is rewarded, and those clients stay with us and grow their assets with us. And I think you can see that in the results we’ve presented today, and I’m pretty confident you’ll see that as we go forward.


SARA:  But what more can you tell us about the deceleration that you’ve seen in that cash sorting in June, and whether that’s continuing into July?


WALT: Well, it is. When we look at the last couple of months, the client cash realigning is down over 80% from what it was in the first quarter of this year. And, again, not surprising because we were proactive going to clients, encouraging them to move their sweep cash into higher-yielding balances. And that process began 15 or 16 months ago. They’ve largely done that. And when I look at June, what’s interesting about June is that even as this cash realigning fell to the lowest level it’s been in many, many months, part of that was because clients are now moving back into the equity markets. So that’s a good thing. It’s not simply clients moving money into something in cash to face higher yields, they’re back into markets. And we saw in the aggregate for the second quarter, buys were about 20% higher than sell. So our clients are showing some optimism. They’ve actually moved above the line in terms of their optimism about being a good time to invest, and that’s reflected in their actions.


SARA:  That’s interesting color. But just on the deceleration, so is there a potential, Walt, to restart buybacks here? Because you paused them last quarter because some of the impact and the higher short-term borrowing that that was coming as a result. How are you thinking about that decision?


WALT:  I still believe in an environment like this that we focus on continuing to build capital. And we’re aware that there’s possible changes coming from our regulators around capital requirements, so we’re going to remain conservative and continue to hoard capital at this point in time, rather than going into a buyback period.


CARL QUINTANILLA:  Hey, Walt, it’s Carl. Sara mentioned the stock having its best day since ‘19. I think on an earnings print, it’s the best day for the name since ‘09, as long as it can hang on to 5-1/2%, which looks pretty doable right now. I just wonder, can you talk about your view as to how the stock is reflecting the fundamentals of the business right now?


WALT:  Well, I used an example this morning in our analyst presentation that when my office used to be in San Francisco, I’d look out often early in the morning at Treasure Island, and I couldn’t see it because it was shrouded in fog. And I knew eventually that that fog would lift. I knew eventually Treasure Island was still there. And I think that’s a bit of what may be going on today with the stock price, is the frog has been there for the last few months, given the record rate of increases that the Fed has undertaken. And in many cases, people lost sight of the strength of the Schwab franchise, and the fact that we continue to grow, the fact that we’re doing the largest brokerage integration in the history of our industry and it’s going exceptionally well. And now people are recognizing, as many already did and held onto the stock or even bought more, that that fog will lift, and the strength of the Schwab franchise for the last 50 years is still there and will be there in the future.


CARL:  I’m trying to remember back in March when things were still pretty dramatic across certainly regional banks, you made a pretty high-profile purchase. Are you… I assume you’re above water on that one?


WALT:  I might be. I don’t pay that much attention to the stock price in the short run, but I certainly do believe in the stock price over the long-term.


SARA:  Yes, that was a good interview because it was in the depths of the worries about your stock and some of the other regional banks. So do you think that the crisis is over, Walt?


WALT:  Well, I don’t know that I’m qualified to talk about the broad picture from a crisis standpoint. I do think when it comes to Schwab that what we’re seeing unfold is what we talked about would likely unfold. And by that, I don’t want to give any impression that we’re taking a victory lap because we’re not. But we encourage clients to realign their cash, to earn more interest. They have done so, that process is largely played out. We expect to be net positive from a cash growth standpoint at some point before the end of 2023. We’ll pay down the short-term supplemental funding that we utilized. And the future looks very, very bright for the firm.


SARA:  But the thing is, Walt, you know, the Fed is still raising rates, and we’re expecting one next week, maybe another one if you judge their forecast. How does that trajectory fit in with your outlook on net interest margin, and how do you have confidence that investors won’t seek that same sort of yield-seeking behavior that could pressure results again?


WALT:  Well, they’ve largely completed that process. We’re looking at record lows today for balance sheet cash. It is possible that you could see a little bit more of that realigning going on, but that’s largely played out. And we actually will reach a tipping point where because cash will begin growing with our clients, these higher rates actually become a tailwind for the company from a financial standpoint. And so another quarter-point, another half-point, I don’t think has a big impact in client cash realigning, but it can begin to have an impact in our earnings longer term.


SARA:  What about the TD Ameritrade customers and what you’re seeing? I know you’ve been trying to do that over the last few quarters. How is it going? And are you seeing any pitfalls or any customer losses as a result of some of the changes?


WALT:  Well, thanks to the extraordinary work by thousands of folks at Schwab, that integration is going exceptionally well. In May, we converted about 5 million clients, just in May. And we have several more groups of clients to convert. The May conversion alone would have been the largest brokerage consolidation in the history of our industry. And we have another one coming up in September, and then two more smaller ones to go. The attrition levels are below those that we estimated at the time of the acquisition, so we’re very pleased by that. Now, in fairness, we’ve spent a lot of money over the last few years leading up to this, because we felt there was nothing more important that we could do than create a seamless transition for these clients over to Schwab. And the other thing that we’ve done is we didn’t take the traditional approach in an integration, which is just to move everyone over to the acquiring firm’s platform and let it go at that. We really went with the best of both. So if you’re a retail investor, you’re going to have access to thinkorswim, which is recognized as the best trading platform for retail investors. If you’re an RIA that uses Schwab for your custody services, you’re going to have access to iRebal and thinkpipes. So we’ve got best of both. That’s been more costly, but, again, as a client-driven organization, it’s the right thing to do. That’s the approach we’ve taken, and I think it’s paying off right now.


SARA:  So no major attrition, I guess, is the question ahead of those conversions?


WALT:  No, in fact, again, we’ve seen attrition levels measurably lower than what we estimated when we announced the acquisition. I think, again, it’s a result of the approach we’ve taken. We didn’t just port everyone over. We’re going with the best of both platforms, because each of these were very successful, independent companies on their own, with great services for clients and great technologies. So it only made sense to take the best of both and use that as what we’ll have as our platforms going forward. Costly, but the right thing to do for clients.


SARA:  Got it. Walt, you know, finally, as a technology leader, we’re all trying to figure out what the impact of AI is going to be, certainly on financials, on investing. How are you thinking about it when it comes to your business, and also how people trade and what kind of advice they get, is it going to be artificial intelligence based? Or have you been dealing with some of these other problems and sort of put that on the back burner?


WALT:  Well, certainly, AI has not been on the back burner. We have, I think, almost 40 use cases right now in various stage in the company. We think that AI creates tremendous opportunity for our people to better serve clients, to provide them with incredibly accurate responses to questions, with a lot of detail. Whether it’s going to get into the point of advising clients based on AI, I think that remains to be seen. But, again, a client experience in our view is only going to benefit from the work that we’re doing in AI today, and it’s a very significant part of our future.


SARA:  You said, 40 use cases so far?


WALT:  We have almost 40 use cases right now, 38, specifically, in process using AI in various places of the firm. And many of those will have a positive impact for client experience in time.


SARA:  All right. We’ll look forward to hearing more about that when you’re ready. Walt, thank you very much for the time today. Appreciate it,


WALT:  Sara, again, thanks for the invitation. It’s always great to be with you.


SARA:  You too. Walt Bettinger is the CEO of Charles Schwab, which is of double-digits today.



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