By Michael Elkins
Bank of America downgraded Charles Schwab Corp (NYSE:SCHW) to an Underperform rating (from Buy) and cut the stock’s price target to $75.00 (from $92.00) as investor forecasts show potential for continued elevated client cash sorting in 1H23, as well as an end to the Fed’s interest rate hiking cycle by this summer.
BofA lowered 2023-24 EPS estimates to $4.28/$5.00 from $4.60/$5.25 due mainly to a lower balance sheet and BDA forecast. Analysts see the risks to the Underperform rating as an extension of the Fed rate hiking cycle into 2024 and SCHW’s long-term securities portfolio reinvestment opportunity.
The analysts wrote in a note, “SCHW generated strong relative financial results in 2022 (+20%/+12% EPS/rev growth) in a year in which US equities declined 20-30%. Given that ~60% of SCHW’s revenues stem from interest rate sensitive fee streams, SCHW is arguably the biggest beneficiary of higher interest rates across diversified financials. However, we believe SCHW’s revenue/profit growth will decelerate in 2023 led by balance sheet shrinkage (client cash sorting = excess cash reallocation into higher yielding money market funds & ST bond funds/ETFs) combined with a declining tailwind from rising short-term interest rates (expect Fed “pause” this year).”
They expect this deceleration to occur in parallel with an improving fundamental backdrop for BofA’s asset manager coverage – with the alternative asset manager industry currently trading at trough valuations on trough EPS.
Shares of SCHW are down 2.84% in pre-market trading on Thursday.