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Schwab Down on Downgrade

Charles Schwab (NYSE:SCHW) shares dipped soon after Thursday’s opening dipped more than 1% after Morgan Stanley downgraded the financial services giant, citing an extended earnings recovery timeline that makes the risk-reward balance for shares appear less compelling.

Morgan Stanley analyst Michael Cyprys downgraded the brokerage company to Equal Weight from Overweight until there's more clarity in cash-sorting trends.

With the Federal Reserve raising interest rates, Schwab customers are moving cash out of sweep accounts into money market funds at $20B per month rate, 2x the amount Cyprys was modeling. "This means SCHW earns less from monetizing cash, which will hurt earnings on top of higher funding costs," the analyst wrote in a note to clients.

With the prospects for a Fed pause or rate cut "highly debatable," the analyst is less confident that cash sorting will improve by Q3.

And with $22B of unrealized losses on the company's books, bears are expecting Schwab ( SCHW ) will have to sell securities at a loss to provide funds for future withdrawals, he said.

"While clients aren't leaving and SCHW has other sources of liquidity, earnings face more pressure than we had expected," Cyprys said.

He is cutting his EPS estimates by 30% this year and next to reflect the trends in customer sorting and uncertainty around the rates outlook. His EPS estimate for 2023 dropped to $3.18 (vs. $4.03 consensus) and for 2024 to $3.76 (vs. $4.97 consensus).

SCHW shares sank $1.85, or 3.4%, to $53.36.