Charles Schwab saw its credit ratings downgraded this week by S&P Global, which said the firm faces increasing interest rate risk.
The rating agency lowered its long-term issuer credit and senior unsecured debt ratings on Schwab from A to A-, preferred stock rating from BBB to BBB- and its short-term issuer credit and commercial paper ratings from A-1 to A-2.
In addition, S&P downgraded long-term issuer credit ratings on Charles Schwab Bank SSB and Charles Schwab & Co. from A+ to A and long-term issuer credit and senior debt ratings on TD Ameritrade from A to A-.
But S&P’s outlook remains stable on the firm’s long-term credit ratings, with the agency citing Schwab’s liquidity strength and an expectation that its business will continue to remain strong and profitable, however muted, and attract net new assets.
Shares of Schwab are down more than 9% in the last month, as the firm got swept up in the banking crisis that saw the collapse of Silicon Valley Bank and Signature Bank. In March alone, its stock lost 34% of its value in its worst month since 1987. According to Bloomberg, the firm suffered more than $29 billion in unrealized losses on its balance sheet last year. At the same time, customers are moving their cash out of certain Schwab accounts into money funds due to higher interest rates.
“Rising rates boosted Schwab's net interest margin and income last year, but also resulted in substantial unrealized losses on Schwab's large holdings of mostly Treasury, agency and highly rated fixed-rate securities,” S&P wrote. “At the same time, rising rates have decreased Schwab's brokerage clients' uninvested cash balances, much of which are swept into deposits at its three subsidiary banks. To avoid liquidating securities at reduced values to meet decreased sweep deposits, the company has increased higher cost certificates of deposit (CDs) and Federal Home Loan Bank (FHLB) funding.”
S&P says Schwab has $37 billion in cash liquidity on its balance sheet and substantial FHLB and other borrowing capacity. The firm also has over $290 billion in “unencumbered high-quality collateral available to secure additional collateralized funding.” Schwab has also added about $20 billion in funding since the beginning of the year, having ramped up issuance of term CDs.
“The emergency support measures the Federal Reserve has offered to banks, including the Bank Term Funding Program, further buttress Schwab's liquidity, though we don't expect it to need to draw funding from the Fed.”
A spokesperson for Schwab did not return a request for comment by publication.
In early April, Moody’s Investors Service affirmed all its ratings for Schwab and TD Ameritrade, citing the firm’s scale advantages in the wealth management business and higher granular deposit base. It changed its outlook on Schwab and TD from positive to stable.
“The change in the outlook to stable from positive reflects the rating agency's view that despite the potential for further improvements in Schwab's credit profile over the medium term, the rapid rise in interest rates over the past year has exposed Schwab to additional near-term challenges,” Moody’s said.
Despite the troubles, Schwab’s first quarter 2023 profits were up 12% from a year ago, beating analysts’ estimates, although pretax earnings declined nearly 16% on a sequential basis, which S&P attributes to higher funding costs. The firm reported core net new assets of $132 billion for the quarter, including more than $53 billion in March.
“Our top priority this quarter was to stay connected to our clients—to help them understand what is happening in the marketplace—and empower them with the tools and support to navigate the current environment,” Co-Chairman and CEO Walt Bettinger said, in a statement. “I believe our robust asset gathering speaks to our success on this front.”
“Amidst all that was happening around us, we further advanced our key strategic initiatives of scale and efficiency, win-win monetization, and segmentation," he said. "Completing the Ameritrade integration will unlock sizeable opportunities across all three of those areas and we took a meaningful step towards achieving that goal with the completion of the first client transition group in February.”
Schwab has said it will flip the switch and move all advisors and clients with assets on the legacy TD Ameritrade Institutional platform over to Schwab Advisor Services during Labor Day weekend 2023.