Morgan Stanley Downgrades Charles Schwab Stock, Cites Concerns Over Cash Sorting, Earnings Under Pressure

Analysts at Morgan Stanley downgraded Charles Schwab Corp SCHW on Tuesday, citing concerns over cash sorting and regulatory changes.

Schwab CEO Walt Bettinger recently said that the company's banking unit had enough liquidity to cover if 100% of its bank deposits ran off without having to sell a single security.

Schwab’s recent performance has not been up to Morgan Stanley's expectations, with customers moving cash out of sweep accounts into money market funds at a rate twice that which the bank had been modeling.

The SCHW Analyst: Michael Cyprys downgraded Charles Schwab from Overwight to Equal Weight, and lowered its price target from $99 to $68.

Check out more Schwab ratings here. 

Cyprys told investors Schwab’s earnings are under more pressure than initially anticipated, and the company is facing $22 billion in unrealized losses due to rising rates.

Despite Bettinger’s comments last week, Morgan Stanley says that "bears think it [the bank] will have to sell securities at a loss to fund future withdrawals."

Further, Morgan Stanley cut EPS estimates by 30% for 2023 and 2024, reflecting the latest trends in customer cash sorting and uncertainty around the rates outlook.

Cyprys expects Schwab to successfully navigate through its near-term challenges given its access to funding and balance sheet liquidity, but a meaningful deceleration in cash sorting, followed by a reset of earnings expectations, are necessary preconditions for the market to buy into a recovery story.

Lack of visibility into the abatement of cash sorting and the amount of wholesale funding required in the interim creates significant uncertainty around Schwab’s earnings trajectory, Cyprus said, making the investment risk/reward less compelling.

SCHW Price Action: Shares of Charles Schwab are trading 5.25% lower to $52.32, according to data from Benzinga Pro.

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