Morgan Stanley downgrades Charles Schwab for the first time, cutting target

(Bloomberg) — Customers of Charles Schwab Corp. are withdrawing cash from the company’s low-interest-rate bank accounts at twice the rate Morgan Stanley had predicted, prompting the company’s analyst to pull his buy-in 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 per month, analyst Michael Cypress wrote in a report Thursday, lowering the stock to an even weight of overweight. He lowered his share price target over the next year to $68 from $99. Schwab shares, which have fallen 29% this month, fell 2.1% to $54.05 in premarket trading.

“While customers are not leaving and SCHW has other sources of liquidity, earnings are under more pressure than we anticipated,” Cypress wrote, lowering its earnings forecast for this year and next by 30%.

The downgrade reflects the heightened risks analysts see in financial firms like Schwab, which are grappling with some of the same forces that have hit the now-defunct Silicon Valley bank. Schwab invested in long-term bonds during a period of record low interest rates and is now incurring losses on those investments after the Federal Reserve raised interest rates.

Meanwhile, depositors are withdrawing money from bank accounts in search of higher yields, depriving companies like Schwab of cheap financing and increasing concern that they will have to sell bonds at a loss to cover the outflows.

Schwab assured clients and investors last week that it had plenty of liquidity to counter bank deposit withdrawals. The Westlake, Texas-based company said the focus on paper losses is misleading.

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Cyprys has had an overrated rating on the stock since it began covering it in 2016. Its lower price target remains 23% above Wednesday’s closing price of $55.21. He wrote that he had less confidence in the timing of the improvement of the situation. He said the prospects for the Fed stalling in its series of interest rate increases, or cutting interest rates, “seem highly debatable.”

– With the help of James Cone.

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