Charles Schwab: Watch These Top 3 Metrics

Thesis

Charles Schwab (NYSE:SCHW) is down 41.2% YTD after Q1 CY23. It is currently trading at a 1-yr forward PE of 13.1x; close to the COVID lows of 11.5x and at a 40.4% discount to the 10-yr average 1-yr forward multiple of 21.9x:

However, I rarely invest due to valuation alone. I need to see accompanying positive traction in operating momentum. For this, I am watching and waiting for 3 key things to play out:

1. A fall in net new purchased money market fund flows
2. Stabilization of falling average bank deposit balances
3. Growth in core net assets

Until then, I maintain a neutral outlook on the stock.

A fall in net new purchased money market fund flows

Purchased money market fund flows is a way to quantify the extent of the cash sorting effect, wherein depositors move funds from low-yielding bank deposits to higher-yielding money market instruments. Naturally, this is not accretive to a bank's margins.

Recently, as the banking crisis has reduced depositors' confidence in parking money in bank accounts, there has been an increased rate of net new flows into purchased money market securities:

March 2023's figures are expected to be released in early-mid April 2023. I would want to see a reduction back down to low $20bn levels. This would give credence to the notion that cash sorting headwinds are dying down at SCHW.

Stabilization of falling average bank deposit balances

SCHW has been seeing a steady decline in average bank deposit balances over the last 2 quarters now, which was accelerated in February 2023:

This metric is important in the current context as it can be a gauge for renewed confidence in SCHW's bank deposits. I would like to see stabilization of the average bank deposit balances going forward to generate incrementally more confidence for a buy on the stock.

Growth in core net assets

Despite the sectoral headwinds, SCHW's core net assets have been rather stable. In February 2023, it increased 15.5% QoQ from $36bn to $42bn.

I view this as a very positive sign signaling stability of the business. This leads me to have a bullish slant. A bonus kicker would be growth in the asset base. If this happens, it would suggest that people have improved confidence in Charles Schwab, viewing it as a relatively safer haven for their assets.

Takeaway

Charles Schwab stock is trading at a 1-yr forward PE of 13.1x. This is close to the lows during the COVID crash of March 2020 and at a 40% discount to last 10 years' average of 21.9x. Yet, I believe investing in valuation alone is risky; operating traction is important. To that end, I am looking for the following movements on 3 key metrics:

1. Net new purchased money market flows to measure the degree of the cash sorting headwinds
2. Stabilization of falling bank deposit balances to track renewal of confidence in Charles Schwab's bank deposits
3. Growth in core net assets as a bonus kicker on top of the already resilient trends, which would signal customers' confidence in Charles Schwab

The first metric is the most important one in my view. I want to see a drop in this number in the March 2023 figures. The latter 2 metrics may play out over a longer period of time.

Until some of this evidence materializes, I maintain a neutral outlook on the stock, albeit with a bullish slant (just not enough for me to buy just yet).