Introduction
New Accounts vs. New Assets
In January, Schwab witnessed the largest monthly increase in new brokerage accounts in almost a year, with 366,000 new accounts. This marks a significant milestone, surpassing the numbers achieved in March 2023. However, while new accounts surged, net new assets for January were only half of what they were a year ago. Schwab reported net new assets of $17.2 billion for January compared to $36.1 billion in January 2023 and fell short of the $43.1 billion achieved in December.
Attrition of TD Ameritrade Clients
Schwab attributes this decline in net new assets partly to the attrition of some TD Ameritrade clients. This factor has contributed to their slower start in asset gathering for 2024. Analysts at Jefferies estimate that Schwab had a 2.5% annualized organic growth last month compared to an average monthly organic growth rate of 4.4% in 2023. They emphasize that this metric will receive increased scrutiny as industry trends remain relatively healthy for most of the peer group.
Looking Ahead
Despite the challenges faced by Schwab, it is important to note that last year, they generated $306 billion in net new assets, a significant figure that surpasses many of its competitors. Jefferies, a prominent research firm, rates Schwab's stock as a Buy and assigns a price target of $85. Schwab's resilience will be tested as they navigate the impact of high interest rates, customer attrition, and their reliance on short-term borrowings to manage deposit outflows.
Conclusion
While Schwab has witnessed an influx of new accounts, the decline in new assets compared to the previous year indicates a slow start to 2024. However, the company's track record and Jefferies' positive outlook provide some reassurance. As challenges persist, Schwab must address the impact of high interest rates and customer attrition while finding ways to optimize their earnings.
Attrition and Cash Sorting Trends at Schwab
Attrition among former Ameritrade customers is expected to taper off as they have transitioned to Schwab's platform. Financial advisors from Ameritrade are unlikely to switch custodial platforms again soon due to the complexity of moving their books of business.
The ratio of client cash to client assets remained flat at 10.5% compared to the previous month. The amount of transactional sweep cash decreased by $11.3 billion in January, reaching $406.1 billion. This decline can be attributed partly to customers investing their cash in the market. Furthermore, the decrease aligns with the seasonal deployment trends observed in the past, as stated by Jefferies analysts.
The data on certificates of deposit also suggests a decline in cash sorting, with CDs decreasing by $3 billion from the previous month to reach $45.3 billion.
Schwab, one of the largest brokerage, wealth management, and custodial companies in the nation, serves millions of investors and thousands of financial advisors. As of the end of January, the company's total client assets reached $8.56 trillion, reflecting a 14% year-over-year increase primarily driven by market gains.
Jeff Schmitt, an analyst from William Blair, has revised his earnings estimates for Schwab based on a slower recovery in sweep cash growth than initially anticipated. Schmitt, who rates Schwab Outperform, now expects adjusted EPS of $3.30 in 2024 and $4.25 in 2025. In a research note, he expresses optimism about the stock and predicts substantial potential for growth as results recover in the coming years. He suggests that Schwab's stock price could reach $77 to $81 over the next 12 months based on a multiple of 18 to 19 times their 2025 EPS estimate.
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