On track to achieve NIM recovery
- 4Q23 Adj. EPS dropped 36% y-o-y to US$0.68, edging above consensus’ US$0.64
- We saw bottoming of transactional cash balance and improvement in net new asset since Nov 2023
- Rising rate cut expectations further supports 3% NIM target by 2025; maintain BUY with TP lifted to US$72.5
Transactional cash bottoming. 4Q23 net revenues declined 19% y-o-y to US$4.5b, as the 18% growth in asset management and administration fees was more than offset by 29% drop in net interest income. Net interest spread further contracted to 1.89%, -5bps q-o-q / -35bps y-o-y. The decline in average interest-earning assets was however tapering to 2.7% q-o-q, compared 6.5% q-o-q decline in 3Q23. We also see bottoming sign from the monthly metrics. Year-end transactional cash balance rebounded by 4.9% from the trough level at Oct 2023. Quarterly core net new asset also slightly improved q-o-q. The majority were coming in during Dec 2023, translating to annualised growth rate of 6%. We also see strongest monthly net buys of funds/ETFs during the year in Dec 2023, reflecting an improved client sentiment.
On track to achieve NIM recovery. The counter has joined other large-cap financials in outperforming the broad market since end-Oct 2023, thanks to the rising rate cut expectations which should reverse the challenging condition they face. For Charles Schwab, we think the improved market sentiment would stimulate a faster client assets inflow, while the potential peaking of interest rates would encourage clients to redeploy money market funds back to risky assets. All these should boost its transactional cash balance, i.e. cheap funding, and therefore support NIM expansion. Another driver for NIM expansion remains the continued payback on the expensive Federal Home Loan Bank borrowings (>5%), which was reduced by 13% q-o-q to US$31b in 4Q23 in average balance terms. We think the path to company’s NIM target of 3% by 2025 is achievable. Maintain BUY with TP lifted to $72.5 to reflect improved NIM outlook.