Charles Schwab

Charles Schwab reported solid third-quarter results, with $7.2 billion in quarterly revenue (up 17% year over year) and $1.69 in adjusted diluted earnings per share (up 29%), as it makes progress on the strategic initiatives laid out in its 2026 investor day. Shares fell modestly after the release.

Why it matters: After digesting the results, our two key takeaways are that Schwab's core business is extremely healthy, exhibiting no signs of intensifying competitive pressure that would support the artificial intelligence disruption narrative, and that a modest top-line miss and a (prudent) move to proactively shore up the balance sheet are responsible for the tepid market reaction. The firm's asset gathering was robust, with $190.4 billion in core net new assets (5.8% annualized), while engagement remains strong across the Schwab ecosystem. The firm saw 59% growth in pledged asset lines and 35% growth in bank loans, a key strategic priority as Schwab works to deepen touchpoints with clients and diversify its earning asset book. While client cash balances declined 10 basis points sequentially to 8.9% of assets, balances remain around where we would expect, considering higher short-term interest rates and strong equity market performance, both of which correlate with leaner cash holdings. It was interesting to see Schwab add roughly $5.5 billion in more expensive short-term borrowing and long-term debt from a quarter ago (average balances), weighing on its net interest margin, which expanded very modestly to 3.04%. We view this as a prudent measure that assuages concerns about the impact of unrealized securities losses as long-term interest rates push higher. However, the net effect is slightly dilutive to net interest margins and returns.

The bottom line: As we digest the results, we plan to lower our $124 fair value estimate for wide-moat Schwab by a low-single-digit percentage.

Adjusted for quality, Charles Schwab is our top pick in the wealth management space, with a compelling growth-at-scale narrative: We project 10-year compound annual growth rates of 9.8% for revenue, 10.9% for operating profit, and 13.4% for diluted EPS.

While share price performance has been underwhelming in 2026 due to concerns about the potential for disruption to the firm's cash sweep business (due to still largely hypothetical AI cash management tools), we believe that the market continues to misprice this risk, resulting in a compelling buying opportunity. The combination of low net benefit to consumers, significant privacy and liability concerns, and a high likelihood that operators like Charles Schwab ban third-party agents from accessing its platform (as we saw with JPMorgan earlier this week) suggests that disruption risk is limited. We also believe that Schwab would be among the best-positioned brokerage firms/wealth managers to weather a change to its monetization model, given its low-cost positioning and the already low fees that it charges its clients. The firm has navigated two significant changes to its monetization model already: first, when it launched its own suite of first-party funds and began monetizing third-party mutual funds sold on its platform, and second with Schwab Bank, the cash-sweep-funded model that accounts for most of the firm's postprovision net revenue today.

After digesting third-quarter earnings, we've modestly lowered our fair value estimate to $123 from $124 for Charles Schwab, largely attributable to modestly lower-than-expected near-term net interest income guidance. This was a feature of the firm's election to raise higher-cost debt financing to support strong loan growth at Schwab Bank (which outpaced deposit growth), as well as modest deleverage. We view the latter as likely reflective of some combination of management conservatism considering rising interest rates and unrealized losses in the firm's securities portfolio and brisk growth in long/short lending products, which inflate the firm's total assets. Our revised valuation corresponds to a 2027 price/earnings of 17.5 times.

Our long-term outlook for the firm remains quite constructive, with our forecasts calling for a 10-year compound annual growth rate of 12% to 13% in earning assets and 14% to 15% in net interest income (driven by modest net interest margin expansion). Despite slower growth in trading commissions and asset management revenue, this results in a 9.6% 10-year compound annual revenue growth forecast.

The key drivers of Schwab's valuation are its net interest margin, balance sheet growth, growth in assets under management, asset management take rate, and pretax operating margin.

Our through-the-cycle net interest margin forecast is 3.15%; it assumes a 10-year US Treasury yield of 4.75% and a federal-funds rate of 3.0%. We take an optimistic view of the firm's ability to grow its balance sheet, projecting Charles Schwab Bank to approach $850 billion in deposits within a decade, or roughly 3.1% of total projected US retail deposits in that year. This outlook could change if the firm takes a more proactive approach to using third-party sweep arrangements, although we view this as unlikely in a higher interest rate environment.

Our consolidated asset management outlook calls for a 10-year revenue CAGR of 1.8% in the business, balancing outstanding recent growth in fee-based managed investing solutions with expected management fee compression in more traditional money market mutual fund and ETF lines. We could see further positive surprises here, with decent growth in alternative asset AUM and monetization of Schwab's distribution, or with decent monetization rates on third-party ETFs, which the firm announced as a priority during its investor day meeting. In 2025, the firm earned a significant 0.25% take rate on its Mutual Fund OneSource solution, for context, although ETFs tend to be much lower-fee vehicles (limiting monetization opportunities, which are capped by management fees).

Regarding trading, we expect just 1% to 2% compound annual growth over the decade to come, despite an outstanding 2026.

The firm has kept a lid on expense growth over time, with noninterest expense growth surpassing revenue growth in just two of the past 10 years. Given the centrality of this approach to Schwab's strategy, we forecast similar outcomes in the decade to come. We expect the firm to generate just shy of 54% pretax operating margin by the end of the decade, significantly higher than its 48% high-water mark in 2025.

We believe that Charles Schwab has a wide Morningstar Economic Moat Rating, rooted in a durable cost advantage that we expect to persist for at least the next two decades. Our view is corroborated by an average annual return on tangible equity of 21% over the past decade, comfortably exceeding our estimated 8.8% cost of equity for the firm. The retail broker and wealth management custodian’s status as a premier asset gatherer, its ability to fractionalize investments in platform services across a massive asset base, and synergies across its brokerage and banking businesses have resulted in industry-leading expense ratios and swelling pretax operating margins, even as Schwab passes through a good chunk of those savings to its customers. With the company enjoying a leading position serving the two fastest-growing markets in financial services—retail investors and registered investment advisors—we expect Schwab to generate excess returns for the foreseeable future.

More specifically, we posit that Schwab has carved out a defensible cost advantage in its brokerage and bank businesses, which are now inextricably intertwined. Similar to other industries in financial services like payments and asset management, retail brokerage is a high fixed-cost business at the onset, resulting in gradual consolidation around a small cadre of winners. With $11.9 trillion in client assets at the end of 2025 representing about 15% of the firm's self-assessed addressable market in the US, Schwab looks like one of a handful of long-term winners in a fragmented industry that continues to consolidate amid fee compression and customer expectations for higher service levels at ever-lower costs.

Once the fixed costs are plowed into the development of a trading platform, facilitating incremental trading volume and acting as a custodian for additional customer assets is effectively free, allowing firms to scale very profitably. This is best seen through expense on client assets, or EOCA, analogous to an efficiency ratio for banks. Here, Schwab is extremely competitive, with the firm’s EOCA clocking in at just 0.12% in 2025, significantly more efficient than competitors with smaller asset bases like wide-moat Bank of America (0.41%) and wide-moat Morgan Stanley (0.33%). That metric has declined consistently from 0.17% a decade ago, and it looks to fall even further as Schwab continues to encourage its clients to consolidate their assets on the platform (growing the denominator) while simultaneously remaining disciplined regarding expense growth and service cost per account (limiting growth of the numerator), which has consistently declined in real terms.

A business model that naturally grows more profitable as it gets larger discourages new look-alike competition, so it is no coincidence that Schwab’s current retail brokerage competitors have been forced to specialize, pursue underpenetrated markets, or rely more heavily on marketing and incentives to attract customers. The durability of this advantage hangs on a firm’s ability to continue to attract new assets, but with Schwab’s 5%-6% average annual organic net asset growth over the past decade (adjusted for TD Ameritrade) positioning it as one of the premier asset gatherers in investment management, we do not harbor fears on this front.

Regarding Schwab Bank, our moat framework awards cost advantages for banks that boast some combination of a cost-advantaged deposit base, superior underwriting, and strong operating efficiency. Based on FDIC filings, we believe that Schwab benefits from all three features, although its lack of physical branches and limited need to compete for customer deposits, which are swept from the retail brokerage, make superior operating efficiency the most important.

Schwab has enjoyed an average deposit cost of funding of just 0.38% over the past decade, with an average deposit beta of roughly 0.30. Even in a higher-rate environment, the firm paid just a 0.50% yield on its interest-bearing deposit base, comfortably below an average of more than 2.25% across our US banking coverage in 2025 (estimated). That’s driven by two factors: customers’ desire to maintain readily accessible transactional cash, and the migration of more yield-sensitive cash toward Schwab’s money market fund products. While the latter feature means that deposit costs alone overstate Charles Schwab Bank's funding cost advantage, it's clear that the firm's all-in cost of funding is very competitive, allowing the firm to generate bank-like net interest margins despite a much safer balance sheet that skews toward high-quality securities holdings and low-risk, securitized lending.

Schwab has historically been very conservative in its underwriting, with margin lending rates roughly twice those of its peers and having all its lending secured by customer assets. Over-securitization is a wonderful prophylactic with respect to underwriting. As far back as Charles Schwab Bank's data goes with the FDIC, the firm has an average annual net charge-off ratio of 0.05%, compared with 0.84% for all FDIC-insured institutions over that period.

Most important, in our view, is the operating efficiency shown by Charles Schwab Bank, which stands head and shoulders above peers of similar size as the firm’s unique structure allows it to forgo a costly branch network and spend less to acquire customers, who principally interact with the retail brokerage. Since inception, the bank’s operating efficiency ratio, or noninterest expense as a proportion of revenue, has averaged 20%-30%, compared with US bank averages in the high 50s.

Schwab could drive strong organic asset growth with expansion into alternative investments, expansion of lending products, and similar platform investments over time.

Consumers' growing desire to consolidate financial relationships could benefit scaled players like Schwab, which had nearly $12 trillion in client assets at year-end 2025.

Increases in retail trading activity could prove structural rather than cyclical, allowing the more profitable portion of Schwab's business to outgrow its RIA segment.

A return to zero-interest-rate policy would pose a material headwind for Schwab's net interest margin and net interest income growth prospects.

Regulatory changes could affect Schwab's business model. Any that target the firm's cash sweep model would be particularly painful.

Structurally lower customer cash balances or structurally higher deposit costs, tied to artificial intelligence-enabled cash management tools, could hurt Schwab's net interest income generation capacity.