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Charles Schwab swing trade
Yesterday Charles Schwab was down 12% along with other banks with massive bond holdings of longer maturities. The sudden awareness and fear around bond holdings of longer maturities was sparked by Silicon Valley Bank closing on Friday, whose bond portfolio was pummeled by quickly rising interest rates over the last year.
The main fears around $SCHW can be summarized as:
- Management has clearly been caught flat-footed by rising interest rates, as evidenced by a 1.5% return on their securities held to maturity, the majority of which have a more than 10-year duration.
- Deposits are decelerating as clients search for yield outside of savings accounts.
- Liquidity concerns if a bank run occurs (which seems unlikely now that the FDIC stepped in to protect depositors of Silicon Valley Bank
So is $SCHW in trouble? Probably not:
- Charles Schwab is well-capitalized with a low loan-to-deposit ratio.
- More than 80% of its total bank deposits fall within the insurance limits of the Federal Deposit Insurance Corp. which is further reason that depositors wouldn't be scared about losing funds. (This was a major factor which spiraled Silicon Valley Bank out of control, as the vast majority of depositors were startups with much, much more than $250k held at $SIVB. The game theory just isn't the same at Schwab)
- Charles Schwab had 12% YoY revenue growth last year, driven in part by 4 million new accounts and $428 billion in annual core net new assets.
My bet was that the fears regarding the similarities between Silicon Valley Bank and Charles Schwab would be short lived, as investors looked closer, they'd realize that the dip in Charles Schwab was unwarranted.
Therefore, I bought $SCHW at $53.77 yesterday.
Today, $SCHW was up 6%.
Since my thesis was short in nature, and appeared to be confirmed, I decided to take the 6% win and call it a day.
For those of you who bought $SCHW and are looking to hold longer term, what is your thesis?
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