Morgan Stanley Downgrades Charles Schwab for First Time, Cuts Target

(Bloomberg) — Charles Schwab Corp.’s clients are pulling cash out of the firm’s low-interest bank accounts at twice the rate Morgan Stanley expected, prompting the firm’s analyst to withdraw his buy-equivalent rating on Schwab for the first time since he began covering the brokerage’s stock for 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 a month, analyst Michael Cyprys wrote in a report Thursday, cutting the stock to equal weight from overweight. He cut his share price target for the next year to $68 from $99. Schwab’s shares, which have fallen 29% this month, fell 2.1[ads1]% to $54.05 in premarket trading.

“Even if customers are not leaving and SCHW has other sources of liquidity, earnings are facing more pressure than we had expected,” Cyprys wrote, lowering the forecast for profits this year and next year by 30%.

The downgrade reflects the increased risk that analysts see in financial companies like Schwab, which are struggling with some of the same forces that hammered the now-collapsed Silicon Valley Bank. Schwab invested in long-term bonds during a period of record low interest rates and is now sitting on losses on those investments after the Federal Reserve raised interest rates.

Depositors, meanwhile, are pulling money out of bank accounts in search of higher yields, depriving companies like Schwab of cheap funding and raising concerns that they will have to sell bonds at a loss to cover outflows.

Last week, Schwab assured customers and investors that they have plenty of liquidity to meet withdrawals from bank deposits. Focusing on paper loss is misleading, the Westlake, Texas-based firm said.

Cyprys had an overweight rating on the stock since he began covering it in 2016. His lower price target remains 23% above Wednesday’s close of $55.21. He has less confidence in the timing of an improvement in the situation, he wrote. The prospect of the Fed pausing its series of rate hikes, or cutting rates, “looks very debatable,” he said.

–With help from James Cone.

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