Charles Schwab Q2 Profit Falls on Higher Interest Expenses

Charles Schwab's (SCHW) second-quarter profit fell 2% as the brokerage paid out more interest on client deposits and its own borrowings, sending its shares down 7.1% on Tuesday. With the U.S. Federal Reserve maintaining higher interest rates, companies like Charles Schwab have been paying more interest on deposits. The company recorded a rise in fees, however, partially offsetting the hit to profit from the interest expenses.

The Westlake, Texas-based company's total client assets rose 17% to $9.41 trillion in the three months ended June 30, compared with $8.02 trillion a year earlier. Charles Schwab's net interest revenue fell 6% to $2.16 billion. Its asset management and administration fees, earned from managing mutual funds and exchange-traded funds, increased 18% to $1.38 billion. Second-quarter net revenue rose 1% to $4.69 billion.

• Schwab's Q2 profit falls 2% due to higher interest expenses.
• Total client assets rise 17% to $9.41 trillion.
• Net interest revenue declines 6% to $2.16 billion.

• Asset management fees increase 18% to $1.38 billion.
• Net revenue for Q2 rises 1% to $4.69 billion.
• Bank deposits drop 17% to $252.4 billion.

• Impact of Fed's higher interest rates on profitability.
• Client funds shifting into markets amid market strength.
• Monitoring further deposit outflows and asset growth.

On an adjusted basis, the company posted a quarterly profit of $1.47 billion, or 73 cents per share, compared with $1.49 billion, or 75 cents per share, a year earlier. Bank deposits at Schwab dropped to $252.4 billion, down 17% from a year ago. "While deposit outflows have clearly hurt profitability, their steady outflows are not a bank run threatening financial stability," Bespoke Investment Group said in a note. "Given that cash sorting remained low, further weakness in June appears to be mainly related to clients shifting funds into markets given continued market strength," William Blair analyst Jeff Schmitt wrote in a note.