Walt Bettinger reaffirms commitment to clients

SARA EISIN:  Joining us now to talk about this and more in a CNBC exclusive, the first since the company reported, Charles Schwab CEO, Walt Bettinger.  Walt, thank you for making the time. Nice to see you.

 

WALT BETTINGER:  Well, good morning, Sara. Thanks for the invitation. It’s wonderful to be with you again.

 

SARA:  So we have a lot to work through, but let’s start on deposits, because I mentioned the quarterly decline, 30% down from where they were last year. I know the market expected numbers like this, but it doesn’t feel like there’s a ton of confidence that issue is over. Is it?

 

WALT:  Well, what we’ve seen is we’ve seen investors make the very natural move that they should make and that we’ve encouraged them to make. And that is, as rates have gone up, they’ve moved from transactional cash, relatively lower-yielding bank deposits, into higher yielding solutions, again, all at Schwab. When we look at the trajectory, in other words, the daily movements, February was lower than January, and then March was lower than February, particularly if you make adjustment for the one day in March right after the SVB issues. And then April is lower than March and measurably lower, again, even taking into consideration that April is tax month. So we’re watching it very closely, but the trajectory would indicate that we’re much closer to the end of this process than the beginning.

 

SARA:  Well, that’s a good update on April because I was wondering if the tax seasonality was going to exaggerate some of those deposit outflows.

 

Walt, can you explain cash sorting, because a lot of the debate around your stock has to do with this idea of cash sorting and whether it’s getting worse. And I know it relates to what you’re talking about with customers moving money around.

 

WALT:  Yeah, well, I guess I wouldn’t put it in a category of getting better or getting worse. Again, it’s a natural movement by clients. When interest rates are at zero, they mix their transactional cash… a way to think about that might be cash you have in a checking account or a brokerage account for trading… with their long-term investment cash, because there’s no reason to keep the two separate from a yield standpoint. And when rates start to move up, then we reach out to our clients and encourage them to move their longer-term investment cash into a money market fund, or a CD, or treasury bills, whatever is in their best interest. And so they go ahead and take that action. We began that process over a year ago, so we’re probably ahead of maybe some of the other organizations that may be just entering into this world that you refer to as sorting. But we see it… again, we see the trajectory moderating. But it’s a good thing, and I don’t want to put it in the context of something negative. It’s what clients should do and what we encourage them to do,

 

SARA:  But also puts pressure on your profitability.

 

WALT:  Well, it does in the short run, but at Schwab we play a much longer-term approach than that. We want to do what’s right by the client. When I think of strategy and when I think of the way clients view us as a safe port in the storm and a trusted partner, we want to always do what’s right for them. And in the long run, we think that pays off much better than any shorter-term strategy that is near-term profit-oriented.

 

SARA:  I remember when we talked, Walt, during the more depths of the crisis in March, and a lot of people were eyeing Schwab, your stock was getting hammered, and you came on to clear up a few misconceptions. And I’m wondering if you feel there have been any since then, since you did the earnings and business update earlier this week. It’s still such a hotly debated name.

 

WALT:  Well, I think early on there was a lot of misinformation about our bank balance sheet and whether we had gone out and purchased long-dated securities, things of that nature. And we’ve tried to clear that up with some of the commentary that we’ve made. But, again, I think what’s really important is we’ve tried to clear it up for our clients. So institutional investors, they understand the difference between comments that we would make that are, of course, from a regulatory standpoint certain to be as accurate as we can, and maybe a blog post or an article that maybe has a catchy headline. But for individual investors or retail investors, discerning between those two can be complicated. And so it’s beholden on us to be out, tell our message, make sure that facts are in the market, and we’re grateful that you and others have given us that opportunity to do so.

 

SARA:  So a lot of it now has to do with the pressure on the stock with the earnings pressure that we’re seeing across the banking system, but particularly, you know, earnings are falling, cost pressures are rising. When does that… how much more pressure do you see there, and when does the cost side peak?

 

WALT:  Well, I think that we’re going to experience some modest pressure on our margins as we move into the next couple of quarters. So we were almost 46% adjusted pretax margin in Q1, I think a margin that most firms in financial services would be awfully happy with. And we could see some modest pressure on that over the coming quarters. But as I indicated in our business update on Monday, we expect the more expensive funding that we’ve accessed, principally CDs, but some borrowings from the FHLB, we expect to have that largely paid off by the end of ‘24. And you should see our, our margins begin to grow as we get possibly later into this year, but certainly as we move into 2024,

 

SARA:  Is there anything you wish you had done differently, Walt, heading into this tightening cycle?

 

WALT:  Well, it’s always easy to go back and… look, if I would have known or we would have known that the Fed was going to embark on a relatively historic increase in rates at a pace 500 basis points, approximately, in 12 months, we might have done some things differently. But, again, I look at it from the perspective of our clients. We’ve served our clients well. We’ve reached out to them and encouraged them to take the right actions. They viewed us as a safe port in the storm. They brought over $130 billion in net new assets to us in Q1, with each month of the quarter getting higher and higher, culminating in March at 53 billion. So our clients understand our position, they understand what kind of firm that they work with, and, to us, that’s most gratifying.

 

SARA:  You know, the problem… a lot of the problems that we’re talking about have to do with the Schwab Bank, not the broker. And there was an interesting note out of JP Morgan this morning, wondering about de-banking Schwab, whether you would consider actually separating the broker and the bank. And the JP Morgan analyst argues that Schwab would trade at a higher, potentially meaningful higher multiple, which could justify a higher value than the stock is trading today. Is that something you would consider?

 

WALT:  Well, we have respect for Ken Worthington who wrote that piece. As you could imagine, we’ve considered de-banking. But in the end, as we look at it and weigh all the different factors, it’s not something that we’re going to look at in the short run. I guess three things that I would suggest you consider when you look at the idea of de-banking.

 

First, our clients benefit tremendously from our banking offering, and we’ve researched with them and they value it. You have a combination of your investing, your banking, your lending, trust services, all delivered in an integrated model that’s very low cost. So our clients want us to offer those services.

 

The second thing is from a stockholder standpoint, I understand the perspective of moving all of the sweep cash, sweep balances from the bank to a money market fund, but we have to remember that we’ve been in a ZIRP, or zero interest rate period for many years since 2008. And if we moved all those balances into a money market fund and we went back into ZIRP, we would have zero revenue on those cash sweeps because we would waive our management fee to ensure clients didn’t have a negative yield.

 

And then I think the third thing you have to look at is from a big picture standpoint, I don’t think it would make sense to do long-term strategic moves based off what really has been an extraordinary period of sort of unprecedented circumstances. You had a global pandemic, then you had a massive amount of fiscal and monetary stimulus, and now the fastest Fed tightening in in history. I’m just not sure that’s a formula that should have a company like ours making very big, long-term strategic changes.

 

SARA:  Fair enough. It's good that you saw the note and responded. What about the buybacks? You paused it, citing regulatory uncertainty. Can you just elaborate on what your expectations are there and when the buyback might return?

 

WALT:  Well, one of the fortunate things about my role is I have the benefit of working on a daily basis with Chuck Schwab, and there’s probably few people in financial services who have more experience or knowledge about different cycles than Chuck. And I remember Chuck telling me 15, 20 years ago that when you are in a very unusual economic environment, that capital is king. And so that’s really the approach that we have followed. This is a time where there’s uncertainty. There’s uncertainty in the economy, there’s uncertainty about the future trajectory of rates, uncertainty from a regulatory standpoint. So this is a time for us to conserve capital. That helps, again, ensure that we are that safe port in the storm that our 35 million or so clients count on.

 

SARA:  Well, one possibility is you could be moved to, I guess, Category 2 regulation as a financial institution instead of Category 3. Have you gamed that out? Do you have the financial capacity to deal with those higher capital levels and increased stress tests?

 

WALT:  Well, we’re well aware of, of that possibility, and as you can imagine, in all of our planning, we look at various contingencies. But at this point, I don’t think it would be healthy for me to speculate on the direction our regulators will go. We have more than adequate capital by the regulatory standards and we’ll continue to monitor that capital. And if we feel that it makes sense for to make adjustments in it, we’ll do so, as we have in the past.

 

SARA:  There’s also a report from The Journal that the Fed is considering now treating those unrealized losses in terms of capital levels, to have to report them, and that they would dent them, whereas you didn’t have to. That was the problem with SVB. Is that something you think is realistic, and how would it affect you?

 

WALT:  Well, I think what’s being looked at is the possibility of unrealized losses in available for sale being included from a regulatory capital standpoint. And, again, that’s the kind of thing that we are studying, we’re looking at. And if, in fact, that were to come to pass, we look at our internal and organic capital generation as one of the means that we would be able to cover that. And if that wasn’t sufficient or wasn’t at the pace that we wanted to move, then there are other actions that we could consider, debt at the parent that we would downstream to the bank. There’s many actions available to us, but the key in all of this is the health of the client franchise. When the client franchise is healthy, a lot of these other things that unfold in, again, unprecedented circumstances, they will tend to work themselves out. And that’s why our, again, focus is on the clients, and are grateful to our clients for the ongoing trust that they place in us.

 

SARA:  Finally, you know, a lot of this is being caused by, and you said it, the fastest interest rate increase that we’ve seen in history. Do you have a view on what the Fed should do next? We’re going into another meeting after next week, and there are questions about whether they should pause, whether they should do one-and-done, whether they should cut. From your vantage point, given you’ve lived through this storm right now and you’re still living through it, what do you think?

 

WALT:  Well, we have a lot of respect for the Open Market Committee at the Fed that has to make these decisions, and they have a lot of data that probably goes beyond what we have. I do believe that we should be getting near the end of this rate-rising cycle. And it’s probably also correct that lending could be pulling in quite a bit, as banks have to look at capital ratios and other possible changes. But we trust their judgment and believe that they will make wise decisions for the economy as a whole.

 

SARA:  Are you still buying stock? You told me last time you had been buying.

 

WALT:  I’m still a big, big believer in our company. I think the window is closed around earnings time, but I’m a huge believer in the long term. I’m so confident in our future. When you look at our client position, our through clients’ eyes strategy, we have this integration with Ameritrade bringing 10 million more clients into… exposed to Schwab capabilities. It’s a time that I feel very, very optimistic for the future of our business. I mean, we’re strong, we’re secure, and our clients value that, and the company’s future, I think, is bright.

 

SARA:  Walt, thank you very much for the time today and for going over some of those concerns out there.

 

WALT:  Thank you, Sara.

 

SARA:  Walt Bettinger, the CEO of Charles Schwab…Carl?

 

 

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