Fitch Ratings has affirmed
The Rating Outlook is Stable.
Fitch has also affirmed
Key Rating Drivers
Business Profile; Franchise Support High Rating: The ratings affirmation reflects Schwab's strong franchise in the mass market retail investor space and within the asset/wealth management space, its relatively strong operating performance supported by fee revenue which makes up half of net revenues, solid and improving regulatory capital levels and substantial available liquidity even as its funding profile has temporarily shifted to heavier reliance on retail brokered
Ratings Constrained by Rate and Operational Risks: In the near term, Fitch views Schwab's relatively low level of tangible common equity (TCE) and earnings headwinds from higher interest rates as rating constraints. Longer term, Fitch considers Schwab's revenue and earnings sensitivity to volatility in the equity and fixed income markets and movement in interest rates as primary rating constraints. Further, Fitch believes retail brokers such as Schwab face a higher degree of operational risks relative to traditional banks.
The increased usage of wholesale funding also put pressure on Schwab's net interest margin (NIM), which fell to 1.89% at 4Q23 from 2.24% the year prior. Client cash reallocation has slowed more recently and Fitch expects Schwab's NIM to tick up modestly in the latter part 2024 given the firm's asset gathering capabilities and expectations for interest rate declines.
Performance Remains Supportive of Rating: Even with more challenged spread revenue, Schwab's overall operating performance remained supportive of its VR driven by its scale and the stability of fee-based revenues. The firm's operating profit to risk-weighted assets of just under 5.25% and operating profit to average assets of 1.4% YTD through 3Q23 are above similarly rated bank peers. Further, Schwab's adjusted pre-tax profit margin (which excludes merger and acquisition costs as well as amortization of intangibles) exceeded 40% during 2023 and remains strong relative to retail brokerage and wealth management peers.
Offsetting the net interest income decline and softer trading revenue in 2023 compared to 2022 was a 12.8% increase in asset management and administrative fees, which Fitch expects to remain a large part of net revenues given ongoing net new asset growth. Efficiencies gained from Schwab's integration of
Strong Liquidity Offsets Temporary Funding Shift: Fitch views Schwab's funding diversity as solid and its available liquidity as strong. Fitch believes liquidity is sufficient to handle further deposit run-off, which is expected to slow.
At 3Q23, Schwab's liquidity coverage ratio was a robust 118% and it, along with operating subsidiaries, had access to nearly
Short-Term Rating Driven by Funding and Liquidity Score: Schwab's Short-Term IDR of 'F1' reflects strong intrinsic capacity for timely payment of short-term financial commitments. While Schwab's VR of 'a' corresponds with an 'F1+' or 'F1' Short-Term IDR under Fitch's Global Bank Rating Criteria, the 'F1' short-term rating is assigned because Schwab's funding and liquidity score of 'a' is below the 'aa-' minimum required for an 'F1+' rating.
Stable Outlook Reflects Operating Performance, Capital Management: The Stable Rating Outlook reflects the expectation that Schwab's operating performance will stabilize driven by reduced funding costs, continued net new asset growth and synergies from the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
An inability to build the firm's adjusted Tier 1 leverage ratio, inclusive of unrealized losses, to 6.5% as planned would drive negative rating action. The rating would also be sensitive to premature capital actions such as the resumption of share buybacks ahead of reaching planned capital levels.
Sustained operating performance deterioration from elevated funding costs and/or the inability to realize synergies from the
A large operational, technological or cyber security loss specific to the firm that causes significant reputational damage. Fitch believes this risk is heightened in the near term as the firm completes its onboarding of
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch view's Schwab's ratings as at the higher end of its rating potential. Over the longer term, the following factors could lead to a higher rating:
Generation of greater revenue stability through various market cycles, combined with sustained capital and liquidity levels above internal targets. To the extent Schwab is also able to effectively execute its acquisition of
The Short-Term IDR is directly linked to the Long-Term IDR and would be expected to move in tandem. The Short-Term IDR is also sensitive to Schwab's funding and liquidity factor score.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Long-Term and Short-Term Senior Unsecured: In accordance with Fitch's Global Bank Rating Criteria, Fitch has equalized Schwab's long-term senior unsecured debt rating with its Long-Term IDR, which is also equalized with its VR. This is the case when Fitch observes or expects the sum of holding company senior debt and group junior debt (QJD) to clearly and sustainably exceed 10% of risk-weighted assets (RWA) for the group. At 3Q23, Fitch estimates Schwab's holding company senior debt and group QJD to be over 20% of RWAs. Schwab's 'F1' CP rating is equalized with the Short-Term IDR.
Preferred Stock: Preferred stock issued by Schwab is notched down from the holding company rating in accordance with Fitch's assessment of the instrument's non-performance and relative loss severity risk profiles. Schwab's preferred stock issuances are notched four notches from the VR, which includes two notches for non-performance and two notches for loss absorbing capacity.
Long-Term and Short-Term Deposits: CSB's long-term deposits are rated one notch higher than its IDR because
Government Support Rating (GSR): Schwab has a GSR of 'ns'. In Fitch's view, the probability of government support is unlikely and IDRs and VRs do not incorporate any support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Long-Term and Short-Term Senior Unsecured: The senior unsecured debt rating is directly linked to Schwab's VR and Long-Term IDR and would be expected to move in tandem. Additionally, if Fitch were to observe or expect the sum of holding company senior debt and group junior debt (QJD) to clearly and sustainably trend below 10% of RWA for the group, the firm's Long-Term IDR and long-term senior unsecured rating could be downgraded. Schwab's CP rating is sensitive to changes in its Short-Term IDR.
Preferred Stock: The preferred stock ratings are directly linked to Schwab's VR and would be expected to move in tandem with any changes in Schwab's credit profile.
Long-Term and Short-Term Deposits: Given today's withdrawal, sensitivities related to CSB's ratings are no longer relevant.
GSR: Schwab's GSR would be sensitive to any change in Fitch's view of
VR ADJUSTMENTS
The Asset Quality score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reason: Concentrations (negative), Non-loan exposures (negative) and historical and future metric (negative).
The Earnings Profitability score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reason: Revenue diversity (negative).
The Capitalization and Leverage score of 'a-' has been assigned below the 'aa' category implied score due to the following adjustment reason: Leverage and risk-weight calculation (negative).
The Funding and Liquidity score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reason: Non-deposit funding (negative) and deposit structure (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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