The Bull And Bear Case On Charles Schwab: Are Shares Trading At Attractive Price Point Or Could This Be The Next Silicon Valley Bank?

Regional bank stocks suffered steep losses on Monday following the recent collapse of SVB Financial Group (Silicon Valley Bank) SIVB, which led to the government stepping in to support depositors.

The California Department of Financial Protection and Innovation closed the bank on Friday and named the Federal Deposit Insurance Corporation (FDIC) as the bank's receiver.

Can the contagion spread to other banks such as Charles Schwab Corporation SCHW?

BofA Global Securities thinks it could.

The BofA Analyst: Craig Siegenthaler reiterated an Underperform rating and reduced the price target from $74 to $60.

Siegenthaler compared Charles Schwab's situation to that of Silicon Valley Bank and Silvergate, which also collapsed last week.

The analyst noted the significant rise in short-term interest rates over the past year is causing problems for capital-intensive financial institutions with long-term assets. This situation is putting financial institutions in difficult situations due to the rising cost and shrinking duration of liabilities.

Siegenthaler expected a similar dynamic will drive a downside to market expectations for Schwab's net interest revenues through 2025.

Read Also: Cathie Wood Issues Fed A Warning Over SVB Failure

The analyst did not expect the same type of “run on the bank” issues to emerge with Schwab as they did with Silicon Valley Bank and Silvergate. Despite the 34% drop in Schwab's stock over the past month, BofA expects Schwab to continue to underperform in the first half of the year relative to its broker peers.

But not all analysts are throwing in the towel on Schwab — in fact, Piper Sandler said the recent sell-off presented a Buy opportunity.

The Piper Sandler Analyst: Richard Repetto said last week's sell-off in Schwab was overdone, and shares are trading at a particularly attractive price point.

Repetto noted Schwab’s deposit base is largely made up of retail brokerage investors, meaning the company is not prone to the same level of rapid deposit outflows as banks with commercial depositors, as evidenced by the pace of cash sorting.

Piper Sandler said Schwab has access to between $150 and $200 billion of available liquidity, which can be used to meet client deposit withdrawal requests without having to sell securities. The analyst noted Schwab’s Category III bank classification means it can exclude accumulated other comprehensive income from regulatory capital, giving it a 7.1% tier 1 leverage ratio that is well above the required minimum of 4.0%.

Piper Sandler said that while investors should keep an eye on the situation as it develops, Schwab’s ample liquidity and steady cash sorting provide some level of comfort in an uncertain market.

SCHW Price action: Shares of Charles Schwab are trading 11.06% lower to $52.25, according to data from Benzinga Pro. The stock is down more than 34% over the last five trading sessions.

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Photo: OleksandrShnuryk via Shutterstock