CNBC Interview with Schwab CEO, Walt Bettinger
At Trinity, our communication to clients is designed to be intentional and thoughtful as we try not to overload you with emails. That said, we felt it prudent to send a follow-up message to Monday’s note (banking failures and what’s next) as developments continue to unfold. In times of crisis like the one we are witnessing, there can be a lot of misleading information regarding companies and their financial situation.
Walt Bettinger, CEO of Charles Schwab & Co. was interviewed yesterday by Sara Eisen of CNBC on the Silicon Valley Bank (SVB) fallout. We believe portions of his interview are helpful as Walt addresses three things:
Differences between banks and brokerages such as Schwab (as you know, Trinity utilizes Schwab)
Financial resources and earnings strength of Schwab
Strong cash inflows into Schwab, $42B of deposits in the last month, $4B occurring last Friday alone
A link to the full interview can be found here and at the bottom of this excerpted interview if you wish to listen or read. Please note that bold underlined text is added by us for emphasis and to bring attention to key points.
We understand that any financial development of this magnitude can be stressful. Intentionally or not, the media often intensifies and adds to that stress. By sharing insights such as these, our hope is to bring a sense of knowledge to the situation as well as peace of mind to you. As always, if you have any questions regarding recent event or your plan, please reach out to us.
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Charles Schwab CEO on SVB fallout, contagion risk and deposits
SARA EISEN: Walt, thank you for joining me. I know you don’t speak out very often, but we’re going through some pretty extraordinary times in your world right now.
And we have to address what’s happened with your stock first and foremost. It’s not necessarily the first place you would think about for contagion after a collapse of a bank in Silicon Valley that did a lot of lending to venture capital firms, but that’s what’s happened. Your stock is down almost 30% over the past week, including today’s bounce. Why?
WALT: Well, I think there’s been a degree of confusion on two sides of our firm. The first one is the difference between a brokerage operation and a banking operation. I see people speaking about FDIC and they have a fairly good understanding of that, that when you deposit at a bank, the bank takes those deposits and invests them, they’re part of the bank balance sheet, and then the FDIC provides insurance up to $250,000. At least that’s the way it’s been since, I believe, 2008.
Brokerage assets are completely different. So, we have about $7.4 trillion that clients have entrusted us with at Schwab, and over $7 trillion of that sits on the brokerage side. Brokerage assets are held separate. They are segregated from Schwab, segregated from Schwab assets. This is done under what’s called the SEC Consumer Protection Rule. And so those assets are not commingled with us. I even have heard some pundits talk about SIPC and tried to compare it relative to FDIC, and, of course, there’s no comparison. These are segregated assets and SIPC kicks in largely only in a situation of fraud. Of course, the SEC requires us to report on the segregation, and we do so regularly, and they audit it.
So I think that’s the first bit of confusion that went on. People began to conflate SIPC and FDIC, and didn’t really understand the segregation of client securities from the rest of Schwab.
SARA: But you do have deposits, right? I mean, you do have a pretty robust bank business inside of the company.
WALT: We do.
SARA: And that, I think, is where the concerns are.
WALT: We do, and that’s the second one that I wanted to try to address. Our bank is very conservatively managed. If you look at the holdings of the bank, we have about 10% of client deposits outstanding in loans that are over collateralized, almost exclusively to our clients, very, very low risk. And then we have about 80% in US government-backed paper. Within that… effectively you’re operating with virtually no credit risk. From a liquidity standpoint, we have access to very substantial liquidity. Arguably, we have a level of liquidity over a 12-month period equal to our entire bank sweep deposits, around $280 billion.
So I understand that there were banks that got into trouble. We have a reasonable understanding as to how they did so, but those applications we don’t believe apply at Schwab at all. We do understand, though, that when our stock price went down at a rate that was, in some manner, consistent with some of the regionals, that people easily put us up on slides and talked about us in a manner consistent with some of the regional banks. Completely different model, completely different. I mentioned… or you mentioned earlier that 80%-plus of our deposits in FDIC insured balances…
SARA: …are insured.
WALT: Banks that have run into trouble are at fractions of that number.
SARA: But, as you say, you’ve been swept in. Have you seen any deposit outflows? What are you seeing from customers?
WALT: No, actually, what we’re seeing is asset inflows to the firm in significant numbers. So in February, our clients brought in almost $42 billion in net new assets to us. March, to-date, they’ve averaged about $2 billion a day. Interestingly enough, last Friday when we were maybe at the heart of… the peak maybe of some of these challenges before the actions taken by the Federal Reserve around liquidity, our clients actually brought about $4 billion into the firm that day alone. Another interesting factoid, the number one stock that our clients bought on Friday was Schwab stock.
SARA: Schwab. Yeah, saw a bargain out there, I guess. So as I understand it, Walt, there are concerns about this so-called cash sorting. I don’t want to get too esoteric here, but this idea that clients have been moving money from deposits into money markets, for instance, and that really pressures margins. We’ve been seeing that. Has that accelerated? Is that something to be concerned about?
WALT: Well, we haven’t seen an acceleration, and let me just quickly walk through what that is. That’s simply clients moving assets from transactional oriented accounts, like a checking account or a brokerage sweep account, into a higher-yielding investment. It might be a CD, a money market fund, a treasury security. That’s a good thing. That’s what we want clients to do with their investment cash. In fact, we reach out to clients by the thousands, by the tens of thousands every day, encouraging them to do so with their investment cash. It’s the right thing to do for clients. It’s the way we operate our firm, and we think it’s a very prudent action on their part.
SARA: You also have a pretty big investment advisory business, Walt. I wonder if any of that has been affected in the last few days, just around the perceptions of risk around the firm?
WALT: Sure. Well, I spent most of yesterday engaging with our clients, serving them, talking with them, listening to them, because that’s what’s really important. When you have a diversified client base like we do, 35 million clients across all types of individuals, investors, traders, investment advisors, as you referenced, that’s great diversity and it provides tremendous stability for our firm.
What I’ve heard from the advisors that I spoke with yesterday is great confidence in our firm. Most of them have utilized us for decades in serving their clients. They know how conservative we are. They know we don’t take risks. They know that our viewpoint is it’s OPM, it’s other people’s money. That’s why we buy conservative securities, that’s why we don’t go out a long way in terms of duration, and that’s why we maintain access to liquidity in the way that we do. So the RIAs are comfortable with what we’re doing.
It is important, though, that we continue to educate those who may not understand this segregation of client securities from all other assets at Schwab. That is an important message, and I don’t know that that message has been delivered as well across the press or, in fairness, by us at Schwab as it could have been.
SARA: I mean, one of the reasons that a lot of these banks including yours have sold off in the last few days, according to investors and analysts, is just the business model is going to change, the higher regulations, higher cost of capital, as you mentioned, higher fees now as a result of funding all of this for uninsured depositors. What are you telling investors about what that looks like, how that impacts your revenues and profitability going forward if it’s going to be a re-rating?
WALT: Well, I think this may be… you opened up with a question about our stock price, and I might suggest that this could be one of the factors that has weighed on it, and that is just simply an uncertainty about what the future will bring in terms of earnings, really for any organization in the financial services world. And I think in time as we better understand what changes might occur, we’ll be transparent as always, and we’ll be able to share scenarios as to what our earnings might be.
It is possible that you could see some contraction within margins. But, again, looking at us at Schwab, the last several quarters we’ve delivered a 50% pre-tax adjusted margin. And adjusted is only adjusting for the cost related to the integration of TD Ameritrade. So we’re a very profitable firm, and if there is some modest impact to margins in a couple of points, I don’t see that having any meaningful long-term implication for the performance of our stock, but time will tell.
SARA: All right, there you go. Thank you so much for taking the time and all the questions. Obviously, a lot of swirl and a lot of noise. It’s good to hear from you directly.
The full interview can be found here:
https://www.aboutschwab.com/walt-bettinger-on-financial-stability