Fitch Affirms Charles Schwab at 'A'/'F1'; Outlook Stable

Published: 2025-04-16 05:19:23 ET SCHW

Fitch Ratings has affirmed The Charles Schwab Corporation's (Schwab) Long- and Short-Term Issuer Default Ratings (IDRs) at 'A' and 'F1' respectively.

Fitch has also affirmed Schwab's Viability Rating (VR) at 'a'. The Rating Outlook is Stable.

Key Rating Drivers

Business Profile, Franchise Support High Ratings: The ratings affirmation reflects Schwab's strong franchise in the mass market retail investor space and the asset & wealth management segments. The ratings also consider Schwab's relatively strong operating performance supported by fee revenues, which make up a meaningful portion of net revenues; solid and improving regulatory capital levels; substantial available liquidity, and continued progress in reducing higher cost supplemental funding including retail-brokered certificates of deposits (CDs) and Federal Home Loan Bank (FHLB) advances.

Market Volatility, Operational Risk: Schwab's ratings are constrained by the company's inherent revenue and earnings sensitivity to market volatility and interest rate movements. Additional near-term constraints include a relatively low tangible common equity ratio and Adjusted Tier 1 Leverage ratio, albeit improving, as well as the potential for opportunistic share repurchases. Fitch believes retail brokers such as Schwab continue to face a higher degree of operational risks relative to traditional banks.

Improving Asset-Liability Management: Client cash reallocation eased since the latter half of 2024 supported by stabilizing interest rates, Schwab's effort to retain client assets within its ecosystem through its proprietary money market funds, and growth of new brokerage accounts. These developments have improved client cash balances.

In addition, Schwab has slowed its reinvestment of maturing securities and shortened the duration of its securities portfolio to better align with liabilities. This strategy has enabled the firm to actively reduce non-deposit borrowings, leading to an expansion of the net interest margin (NIM). Fitch expects Schwab will continue reducing the duration of its securities portfolio, which should help gradually lower interest rate sensitivity and the need to rely on expensive supplemental fundings.

Improved Operating Performance: Schwab's NIM improved by over 40bps yoy to 2.3% in 4Q24, driven by the reinvestment of lower-yielding assets at higher rates and the roll-off of high-cost supplemental borrowings. Earnings also benefited from ongoing asset gathering, with asset management and administrative fees increasing over 20% yoy in 2024, alongside cost synergies from the TD Ameritrade integration. Adjusted pre-tax profit margin (PTPM), which excludes Ameritrade integration costs, was 42.5% in 2024 and remains supportive of its ratings. Fitch believes near-term PTPM improvement will be subject to further NIM expansion and continued expense discipline.

Additionally, following 4.3% growth in core net new assets (NNA) in 2024, management targets 5%-7% core NNA growth in 2025, consistent with its historical range. Fitch considers this achievable over the medium to longer-term as Ameritrade client asset flows turn positive and client engagement strengthens, enhancing cross-selling opportunities.

Capital Strengthening Ahead of Regulatory Changes: Schwab's benchmark capital ratios remain strong, with a Common Equity Tier 1 ratio of 31.7% at 4Q24. The proposed Basel III Endgame rules would result in the inclusion of unrealized gains and losses in regulatory capital for Schwab and all banks with over $100 billion in assets. As a result of improved operating performance, stabilized unrealized losses in the securities portfolio, and a pause in share repurchases, Schwab's AOCI-marked Tier 1 Leverage ratio increased to 6.8% at YE24 from 4.9% one year ago, consistent with management's target range of 6.75%-7.00%, which Fitch considers appropriate for the current rating.

Schwab has earmarked $1.5 billion in share repurchases related to TD's disposition of Schwab's stake in February 2025. Proforma for this, the adjusted Tier 1 Leverage ratio would decline modestly to 6.5%. While management expects to pursue opportunistic share buybacks and the potential redemption of preferred stock, Fitch expects Schwab to maintain prudent capital discipline and manage the adjusted Tier 1 Leverage ratio within the stated target range over the medium term.

Strong Liquidity, Supplemental Borrowings Decline: Fitch views Schwab's funding diversity as solid and its available liquidity as strong. At YE24, Schwab's liquidity coverage ratio was 140%, up from 130% the year prior. The firm, along with its operating subsidiaries, had access to over $90 billion of liquidity from the FHLB and the Federal Reserve Discount Window. During 4Q24, Schwab reduced its high-cost supplemental funding by $15 billion, to $50 billion, which primarily comprised retail-brokered CDs, FHLB advances and repurchase agreements.

With abating cash sorting and stabilizing client sweep cash, Fitch expects Schwab to continue reducing its use of external funding sources. However, these sources will remain part of the firm's funding profile over the Outlook horizon.

Stable Outlook: The Stable Outlook reflects Fitch's expectation of stable operating performance, supported by core net new asset growth toward management's long-term target, reduced funding costs, and continued cost discipline. The Outlook also assumes Schwab will maintain strong asset quality of its bank loan book, reduce reliance on supplemental funding, and maintain stable liquidity levels. Further, the Outlook considers Fitch's expectation that Schwab will maintain its conservative financial policy and build sufficient capital well-ahead of any finalization of regulatory capital rule proposals.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

An inability to maintain the adjusted Tier 1 Leverage ratio (inclusive of unrealized losses) within management's target of 6.75%-7.00% on a sustained basis, particularly if it is driven by aggressive capital initiatives such as significant share buybacks that undermine the firm's financial flexibility;

Sustained deterioration in operating performance due to elevated funding costs and/or the failure to maintain cost discipline, such that adjusted PTPM fall below 40%;

A significant operational failure or security breach including system outage, cybersecurity, and fraud, that is specific to the firm and causes significant reputational damage. While the integration of TD Ameritrade has been completed, Fitch believes the firm's inherent operational risk remains heightened owing to increased scale and trading activity which requires effective risk governance and oversight.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch view's Schwab's ratings as at the higher end of its rating potential. Over the longer term, the following factors could lead to a higher rating:

Generation of greater revenue stability through various market cycles, combined with capital and liquidity levels sustained above internal targets;

Sustained improvement in operating performance as a result of strong organic growth and PTPM exceeding stated targets and continued expense discipline;

A successful implementation of business strategies that improves balance sheet and capital ratio stability through the cycle, particularly if the firm can effectively shorten the duration of its securities portfolio to lower interest rate sensitivity, while reducing the need for higher-cost supplemental funding.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

In accordance with its 'Bank Rating Criteria,' Fitch has equalized Schwab's long-term senior unsecured debt rating with its Long-Term IDR, which is also equalized with its VR. Fitch takes this approach when it observes or expects the sum of holding company senior debt and group junior debt (QJD) to clearly and sustainably exceed 10% of the group's risk-weighted assets (RWA). As of 4Q24, Fitch estimates Schwab's holding company senior debt and group QJD to be over 20% of RWA. Schwab's 'F1' Commercial Paper (CP) rating is equalized with the Short-term IDR.

Preferred stock issued by Schwab is notched down from the holding company rating in accordance with Fitch's assessment of the instrument's nonperformance and relative loss severity risk profiles. Schwab's preferred stock issuances are four notches below the VR, encompassing two notches for nonperformance and two notches for loss-absorbing capacity.

Schwab's Short-Term IDR of 'F1' reflects strong intrinsic capacity for timely payment of short-term financial commitments. While Schwab's VR of 'a' corresponds with an 'F1+' or 'F1' Short-Term IDR under Fitch's global bank rating criteria, the 'F1' short-term rating is assigned because Schwab's funding and liquidity score of 'a' is below the 'aa-' minimum required for an 'F1+' rating.

Schwab has a Government Support Rating (GSR) of 'ns' (No Support). In Fitch's view, the probability of government support is unlikely, and the IDRs and VRs do not incorporate any support.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The senior unsecured debt rating is directly linked to Schwab's VR and Long-Term IDR and would be expected to move in tandem with it. Additionally, if Fitch were to observe or expect the sum of holding company senior debt and group junior debt (QJD) to clearly and sustainably trend below 10% of RWA for the group, the firm's Long-Term IDR and long-term senior unsecured rating could be downgraded. Schwab's CP rating is sensitive to changes in its Short-Term IDR.

The preferred stock ratings are directly linked to Schwab's VR and would be expected to move in tandem with any changes in Schwab's credit profile.

Schwab's GSR would be sensitive to any change in Fitch's view of U.S. sovereign support, which Fitch views as unlikely.

VR ADJUSTMENTS

The Asset Quality score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reasons: non-loan exposures (negative), historical and future metrics (negative), and Concentrations (negative).

The Earnings and Profitability score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reason: Revenue diversification (negative) and risk-weight calculation (negative).

The Capitalization and Leverage score of 'a-' has been assigned below the 'aa' category implied score due to the following adjustment reason: Leverage and risk-weight calculation (negative).

The Funding and Liquidity score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reasons: Nondeposit funding (negative) and deposit structure (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visithttps://www.fitchratings.com/topics/esg/products#esg-relevance-scores.