Mr Cooper Group Inc (COOP)

[t1215s]

Good morning people,FYI, Charles Schwab: Situation Appears To Stabilize
Jun. 17, 2023 8:59 AM Charles Schwab fell victim to a panicky move when the regional banking sector turmoil arose in March.
The company is hit hard by deposit migration, seeing severe pressure on net interest margins, and thus earnings.
It appears that near-term earnings pressure might be the biggest impact, which combined with a recovery in stock markets and a lagging share price starts to look compelling.
Looking for more investing ideas like this one? Get them exclusively at Value In Corporate Events. In April, I provided an update on shares of Charles Schwab (NYSE:SCHW) as the first quarter earnings report looked solid at a first glance. Finding comfort in this report was a bit preliminary, as the banking crisis of course arrived late in the first quarter and with disclosure somewhat limited, I found it too early to draw a conclusion.

That said, the anticipated second quarter revenue decline looked manageable, perhaps a bit too upbeat, as the latest comments from management suggest as well. Nonetheless, stabilization appears to be arriving here, creating a potential interesting set-up.

A Recap

In the first days of March, Schwab was still a $75 stock, and amidst the implosion of the SVB Financial Group, shares fell to the $60 mark in the time span of just two days, shedding $25 billion in market value in the process. In fact, shares fell further to the $50 mark in the weeks thereafter, with investors pricing in a lot of uncertainty.

Being a broker and bank combined, investors asked questions and voted with their feet. This sharp contraction in the balance sheet of Schwab stood in sharp contrast as total assets of the balance sheet rose from $140 billion to more than half a trillion in just a decade.

For the year 2022, sales grew 12% to $20.8 billion, with GAAP earnings reported at $7.2 billion, equal to $3.50 per share, with adjusted earnings coming in even forty cents higher. Of course, most of the assets managed by the firm do not appear on the balance sheet, with the company holding over $7 trillion in client assets (in separated or segregated accounts), seeing more than $400 billion inflows for the year. Despite these inflows, the actual asset base was down, mostly due to lower valuations, of assets carried on the books.

The problem was that the asset base of $552 billion fell a bit during 2022, in part as the bank paid a mere 0.46% on deposits on a $367 billion deposit base in the fourth quarter of the year, opening the door for deposit migration. While full year pre-tax profits of $9.4 billion left a lot of room to hike deposit rates, it was not sufficient to hike these rates to levels equal to risk-free rates. The issue if these assets leave is that Schwab has to resort to selling assets and with liquidity rapidly depleted, investors feared that it had to dip (sell) available-for-sale security and assets which are held-to-maturity.

These combined stood at more than $300 billion by year-end 2022, and with some duration risks taken on, the company was looking towards substantial unrealized losses on these.

While the company pointed toward net asset inflows by clients in February and in fact since the start of the (regional) banking issue in March, these asset inflows relate to client accounts, with these same customers moving money away from deposits held at Schwab. After all, why would they want to take credit risk on Schwab, while receiving a subpar interest/deposit rates as well?

When looking at the first quarter results, they looked solid with sales up 10% to $5.1 billion, with GAAP earrings up as much as 14% to $1.6 billion, equal to $0.83 per share (and adjusted earnings coming in ten cents higher). Given the sing of the times, I was puzzled behind the rationale to hike the dividend by 14% to $0.25 per share. Amidst stable markets at large, the company actually reported a $132 billion asset inflow to $7.5 trillion.

While hiking the dividend, the company paused the buyback program as the company hiked the payouts on deposits and in the form of other borrowings. This pressured net interest income, which fell from $3.0 billion in the fourth quarter of 2022 to nearly $2.8 billion in the first quarter of this year.

This came in part as the balance sheet shrank by about $16 billion to $535 billion, although deposits fell by $41 billion to $326 billion, with the shortfall made up for by borrowings at the Federal Loan Bank, among others. It was hard to read into the numbers in its entirety as the company reported on average assets for the quarter, not ending assets, certainly as the banking crisis only was seen late in the quarter.

CFO Peter Crawford indicated that revenues for the second quarter were seen down in their high single digits. Amidst flattish operating costs, earnings would be down a third, which actually looked quite alright given the set-up.

What Now?

Since April shares have traded around the $50 mark, now actually trading at $55 which is still largely similar to the levels seen at the time of the release of the first quarter results. This came as the market at large actually has been rallying, and despite a short-lived revival of the banking concerns in April/May, it has been rather quiet on the banking crisis front here.

The business itself has seen some mixed news. Halfway May, the company reported a $13.6 billion asset inflow for the month of April, with clients balances moving up to $7.6 billion. In June, the company reported $20.7 billion in new asset inflows for May, although that client balances were largely flat, with really most of the gains in the broader market only seen in June.

On the corporate front, the company secured some financing, offering a combined $2.5 billion in notes due in 2029/2024, carrying rates between 5.6% and 5.8%, raising the cost of borrowing and putting pressure on net interest margins. Another interesting piece of news was comments made by CFO Peter Crawford, which now sees revenues down by 10-11%, worse than the high single digit decline guided for alongside the release of the first quarter results, which does not surprise me at all. Crawford attributes this to pressure on net interest margins, which could be anticipated, as well as lower trading activity.

The reality is that I fully anticipate a further decline in the near-term earnings, which is essential what Schwab is guiding for. I must say that I am pleased to see the market at large calming down and moving higher, which should be positive for the shares, which actually have been lagging quite a bit.

Quite frankly, the risk-reward seems to improve quite a bit here, although I am generally a bit cautious to invest in financial stocks. That said, Schwab seems to improve quite a bit here, and is a quality name in its field, making me turning a bit more upbeat here than was the case in April. That being said, I am waiting for the second quarter results before reconsidering a position.

https://seekingalpha.com/article/4612137-charles-schwab-situation-appears-to-stabilize
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PS.
Dimples , When the BOD gets gimme more bonus shs program to sell on a regular basis along with their healthy salaries and the toots play musical chairs (shares) month in and month out makes me wonder why I didn’t sell in the mid 49’s this time around as I’m writing this post and no divs , plus with CD’s playing a nice price and no gamble , I always try to stick to my target price sell number/s ,oh well shoulda ,coulda, would’ve , I do believe something isss still missing just what s the puzzle , but just how much longer and will it be worth allll the time I’ve been here churning for my freebies

GoGooooooCOOP
GLTA, Time to hit the gym -Ts