(Bloomberg) — The clients of Charles Schwab Corp. is pulling money out of the company’s low-interest-rate bank accounts at twice the rate Morgan Stanley expected, prompting the company’s analyst to snatch his buy-equivalent rating on Schwab for the first time since he began covering the stock brokerage seven years ago.
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Client money is moving from so-called sweep accounts to money market funds at a rate of $20 billion a month, analyst Michael Cyprys wrote in a report Thursday that cut the stock to equal weight from overweight. He reduced his target for next year’s share price to $68 from $99. Schwab’s shares, which have fallen 29% this month, were down 2.1% at $54.05 in premarket trading.
“While clients are not leaving and SCHW has other sources of liquidity, earnings are facing more pressure than we expected,” Cyprys wrote, lowering his forecast for this year’s earnings. and the next by 30%.
The downgrade reflects the heightened risk analysts see at financial firms like Schwab, which are struggling with some of the same forces that have plagued the now-collapsed Silicon Valley Bank. Schwab invested in long-term bonds during a period of low interest rates and is now sitting on losses on those investments after the Federal Reserve raised rates.
Depositors, meanwhile, are pulling money out of bank accounts in search of higher yields, depriving firms like Schwab of cheap financing and raising concerns that it will need to sell bonds at a loss to cover the flows.
Schwab last week assured clients and investors that it had plenty of liquidity to meet withdrawals of bank deposits. It’s misleading to focus on paper losses, the Westlake, Texas-based firm said.
Cyprys has had an overweight rating on the stock since he began covering it in 2016. His lower price target is still 23% above Wednesday’s closing price of $55.21. He has less confidence in the time of improvement in the situation, he wrote. The prospects for the Fed to pause in its series of rate hikes, or to cut rates, “look very debatable,” he said.
–With help from James Cone.
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