Charles Schwab Corp. shares suffered their biggest intraday drop since the depths of last year's regional-bank crisis after the investing giant warned it will have to shrink itself in order to protect profits.
Going forward, Schwab is planning to rely more on off-balance sheet arrangements to house customers' deposits, Chief Executive Officer Walt Bettinger said on a conference call with analysts.
By relying on partners like Toronto-Dominion Bank, such deals would allow Schwab to more efficiently use capital, he said.
"These various actions should lead — again over time — to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients' banking needs, lower our capital intensity and, importantly, protect the economics we're able to generate from owning a bank," Bettinger said.
The warning hearkens back to a year ago, when investors started to sour on Schwab after the Federal Reserve's moves to rapidly increase interest rates saddled the company with paper losses as the value of its bond investments took major hits.
At the same time, consumers were yanking their deposits held with the bank as they searched for higher-yielding alternatives, causing the company to seek out more expensive funding sources.
The company is now looking to pay down some of that high-cost debt it took on, though it might have to use some of the excess capital it would have used for buybacks to do so, executives warned on Tuesday.
It will also begin to restructure its balance sheet in order to shorten the duration of some of its investment portfolio.
Bettinger cautioned that such a move could lead to more earnings volatility in the near term, but it would reduce the company's need to rely on supplemental forms of borrowing.
"This definition of a transition year is being realized," Bettinger said. "All of these issues position us for a strong period of growth in client metrics and financial results in the coming years."
Shares of the company plummeted 8.9% at 11:56 a.m. in New York, the biggest intraday drop since March 2023 and one that made it the worst performer in the S&P 500 Index. The stock had risen 9.1% this year through the close of trading on Monday.
Crowded Space
The latest moves come after the investing giant reported that fewer clients in the second quarter opened new brokerage accounts than analysts were expecting.
