Moody’s stabilizes Charles Schwab view

Moody’s Investors Service said it revised its outlook for Charles Schwab Corp. to stable from positive and affirmed all the ratings for the issuer and its subsidiary, TD Ameritrade Holding Corp., including Schwab’s A2 senior unsecured rating.

The stable outlook reflects the agency's view that despite the potential for further improvements in Schwab's credit profile over the medium term, the rapid rise in interest rates over the past year has exposed it to added near-term challenges, Moody’s said.

“While Schwab's management has been anticipating since at least 2021 that a significant portion of client cash balances would flow into higher-yielding money fund alternatives as rates rose, causing deposit outflows in a process Schwab calls "cash sorting," the rapid and substantial rise in rates has also led to a sizeable increase in the level of unrealized losses in its investment securities portfolio.

“If Schwab were forced to sell a significant amount of these securities, the resulting losses could lead to a significant decline in Schwab's bank regulatory capital ratios. Schwab has been able to cover a substantial portion of its anticipated deposit outflows with incoming cash flows including principal repayments from its securities portfolio, new client assets and earnings. However, the firm has also utilized FHLB advances and the sale of CDs to fund a portion of these outflows. Moody's expects this trend to continue during 2023,” the agency said in a statement.

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