SCHWAB CHARLES CORP Q3 FY2024 earnings call

Opening Remarks

• Walt Bettinger began, noting it was his final business update as Executive Co-Chair, thanking the investment community for their engagement over the years.

Strategic Focus Areas (Rick Wurster)

• Scale & Efficiency: Captured 95% of Ameritrade run rate expense synergies, with adjusted expense on client assets (EOCA) falling to 12 basis points in 2024-to-date.
• Win-Win Monetization: Year-to-date managed investing net flows up 65%; PAL balances reached a record $15.7 billion, with 44% of growth from former Ameritrade clients; new and existing clients added $11.5 billion to wealth offers in Q3.
• Client Segmentation: Focus on distinct retail and advisor clients; strong RIA business with continued investment in custody and services.
• Brilliant Basics: High client satisfaction scores; average phone answer time in retail business less than 40 seconds in Q3; Advisor Services client easy score 89% in Q3; workplace business ranked #1 by J.D. Power for retirement plan digital experiences.

Financial Performance (Peter Crawford)

• Q3 financial performance exceeded expectations, with revenue up 5% to $4.8 billion, adjusted pre-tax income up, and progress in paying down supplemental borrowing.

Balance Sheet and Cash Trends (Mike Verdeschi)

• Transactional sweep cash grew $9 billion in Q3, including a $17 billion net inflow in September; reduced supplemental funding at banks by $9 billion; capital levels building towards adjusted Tier 1 Leverage objective.

In the third quarter, revenue reached $4.8 billion, up 5% year-over-year. Adjusted pre-tax income also saw a similar increase, with an adjusted pre-tax margin of over 41% and adjusted EPS of $0.77. Managed investing net flows year-to-date were up 65% compared to the prior year. Third quarter managed investing or retail advisory flows totaled a record $15 billion. Margin balances grew over $1 billion to end at $73 billion. Net new assets more than doubled from the third quarter of the previous year. Transactional sweep cash balances grew $9 billion in Q3, including a $17 billion net inflow in September. Revenue contribution from various segments was driven by strong client engagement across trading, banking services, advisory solutions, custody for RIAs, and asset management.

2024 Guidance

• Full-year 2024 revenue expected to increase 2%-3% vs 2023, slightly above July's range due to higher transactional cash balances and reduced supplemental funding.
• Adjusted expense growth for 2024 still expected ~2%.
• Q4 earnings expected in the upper 80s range, above July's communication.

2025 Outlook

• Planning ongoing; NIM expected to expand in 2025, influenced by rate path; mid-single-digit expense growth anticipated, balancing investment in growth with financial objectives.

• Uncertain macroeconomic environment, including interest rate fluctuations, market performance, and investor sentiment, which can impact net new assets and cash flows.
• Risks associated with ongoing transition and integration processes, though progress is being made.

Q: Ken Worthington from JP Morgan asked about September's transactional sweep cash improvement.

A: Michael Verdeschi said it was a combination of organic growth and realignment activity normalizing.

Q: Alex Blostein from Goldman Sachs asked about securities portfolio restructuring.

A: Michael Verdeschi said not currently pursuing restructuring, focused on paying down supplemental borrowing.

Q: Brennan Hawken from UBS asked about 2025 expense growth.

A: Michael Verdeschi said mid-single-digit expense growth includes efficiencies from 2024.

Q: Dan Fannon from Jefferies asked about Ameritrade client normalization.

A: Rick Wurster said Ameritrade clients are contributing positively to net new assets and expected to continue growing their net new asset contribution.

Q: Kyle Voigt from KBW asked about share repurchases and supplemental borrowing.

A: Michael Verdeschi said paying down supplemental borrowing is a priority, with capital supporting growth first before share repurchases.

Q: Brian Bedell from Deutsche Bank asked about deposit reversion and NIM.

A: Walter Bettinger and Michael Verdeschi discussed cash trends and NIM expected to expand in 2025 but influenced by rate path.

Q: Michael Cyprys from Morgan Stanley asked about REA custody monetization.

A: Walter Bettinger discussed opportunities in Advisor Services, including lending and wealth management, with potential monetization in future.