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Charles Schwab expects its second-quarter revenue to drop by 10% to 11% due to a contraction in its net interest margin and softer trading activity, the brokerage firm said on Wednesday.
The company said it has had to rely on more expensive funding sources, like borrowing from the Federal Home Loan Bank, to supplement its cash flow as its seeks to navigate an uncertain environment caused by the Federal Reserve’s fastest rate hike cycle in decades.
Schwab said most of these borrowings could be repaid before the end of 2024.
Analysts have warned of a compression in net interest margins for financial firms, as the Fed’s rate hikes drain excessive liquidity.
Further increases in interest rates could add to pressure on Schwab’s earnings, William Blair analysts Jeff Schmitt and Tyler Mulier wrote in a note.
The Texas-based company, however, reassured investors with its monthly activity report, which showed total client assets at the end of May were $7.65 trillion, up 5% from a year earlier and flat compared to April.
Schwab has seen fewer clients move funds away from their accounts at the company to other high-yield products for four consecutive months.
The company said that trend has continued so far in June and could help reduce Schwab’s reliance on expensive funding sources.
“The continued deceleration of cash sorting … gives us confidence that the issue will abate by the third quarter,” the William Blair analysts added.
Fed policymakers on Wednesday left interest rates steady but signaled they would rise by half a percentage point by the end of the year.
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