Charles Schwab’s Q4 Profit Drops 47% Amidst Rising Interest Payments

The impact of the U.S. Federal Reserve's aggressive rate hikes weighed heavily on Schwab and other financial firms.

Charles Schwab (SCHW.N) has reported a 47% decline in its fourth-quarter profit due to increased interest payments on client deposits and debt, which offset gains from higher asset management fees.

The impact of the U.S. Federal Reserve’s aggressive rate hikes weighed heavily on Schwab and other financial firms.

Schwab, primarily reliant on client deposits and uninvested cash balances to purchase bonds and issue loans, struggled to maintain profitability amidst rising interest rates.

In an effort to retain depositors and prevent them from seeking better returns elsewhere, Schwab offered higher interest rates, paying an average rate of 1.37% on deposits, a significant increase from the 0.46% rate from a year earlier.

Additionally, in the first half of 2023, Schwab resorted to borrowing from the Federal Home Loan Bank, incurring an interest expense of $423 million, a fourfold increase compared to the previous year.

These strategies eroded Schwab’s net interest revenue, which plummeted by 30% to $2.13 billion in the fourth quarter ending on December 31.

Despite the initial challenges, the pace of client reallocation has slowed down, reducing the pressure on Schwab to raise deposit rates further.

This moderation comes amid growing expectations that the Federal Reserve may cut interest rates in the future.

On a brighter note, asset management and administration fees surged by 18% to $1.24 billion, driven by Schwab’s management of mutual funds and exchange-traded funds. Client assets reached a historic high, contributing to this increase.

The Westlake, Texas-based company reported a profit of $1.05 billion, equivalent to 51 cents per share, compared to $1.97 billion, or 97 cents per share, in the previous year.

Prior to the announcement, Schwab’s shares rose by 1.2% in pre-market trading.

However, the company experienced a 17% decline in its shares’ value throughout 2023, in contrast to the S&P 500 index’s gain of just over 24%.

Currently, Schwab is trading at approximately 17 times the expected earnings for the next 12 months. Some analysts anticipate that the company may return to its historical 18-20 times expected earnings multiple, driven in part by cost-cutting measures implemented over the past year.

Despite the challenges posed by interest rate hikes, Schwab remains committed to navigating the evolving financial landscape.