Unemployment Prospects, Rate Environment Sends Bank of America Neutral On Charles Schwab

Pandemics aren’t exactly the steady environments investors look for, so it’s not surprising that Charles Schwab's SCHW stock has hardly recovered its early-coronavirus losses. One analyst team sees continued pain in the company’s future.

The Rating

Bank of America's Michael Carrier downgraded Charles Schwab to a Neutral rating and cut the price target from $40 to $35.

The Thesis

The analysts expect high unemployment to weaken Charles Schwab’s growth.

“Despite SCHW being a high quality company with attractive organic growth and AMTD deal synergies ahead, we expect rate headwinds, moderating net new assets (NNA) growth, and deal/integration/competitive risks to be an offset and limit earnings growth and the multiple over the coming year,” Carrier wrote in a note.

They anticipate the Fed maintaining interest rates at zero and the 10-year Treasury rates lingering below 1% for the foreseeable future. Even in the absence of other rate-pressuring policies, the current environment presents 5% downside risk to Bank of America’s 2021 forecasts.

“Schwab generates roughly 65% of its revenues from interest income and money market fees, both of which are rate sensitive,” the analysts wrote. “While we previously lowered our estimates for the impact from the Fed moving to zero, lower rates along the curve could have an ongoing impact and lower the growth outlook further.”

Still, they remain generally positive on Charles Schwab long-term given the firm’s second-quarter activity strength and first-quarter records in accounts, trading and new net assets metrics.

“We expect Schwab to continue to put up industry leading growth and should gain further scale with the pending AMTD deal, though we expect some moderation ahead,” Carrier and Murukutla wrote.

SCHW Price Action

At the time of publication, shares traded down marginally around $33.22.

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