BofA downgrades Schwab by two notches as stock extends slide for second day

BofA Securities on Thursday announced a rare double downgrade of Charles Schwab Corp. as the online broker’s stock fell sharply for the second straight day after its quarterly results.

BofA cut its rating on Schwab
SCHW,
-6.06%
to underperform from buy — skipping the neutral rating — and slashed its price target to $75 from $92 a share after the broker’s fourth-quarter result disappointed Wall Street.

Schwab’s stock fell 6.3% on Thursday after a drop in the previous session.

Because about 60% of Schwab’s revenue stems from interest rate-sensitive fee streams, analyst Craig Siegenthaler said, it’s “arguably the biggest beneficiary of higher interest rates across diversified financials.”

But the company faces balance-sheet shrinkage as clients take part in “cash sorting” by pulling deposits out of Schwab and putting money into higher-yielding money-market funds and bond funds.

Slower interest-rate hikes by the U.S. Federal Reserve will also translate to “a declining tailwind” for Schwab, Siegenthaler said.

Schwab said it increased its liquidity during the fourth quarter by limiting new portfolio investments to help build available cash and used a “limited amount of short-term funding sources,” including Federal Home Loan Bank advances and retail certificates of deposit.

BofA remains more cautious on rate-sensitive brokers such as Schwab and LPL Financial Holdings Inc.
LPLA,
-2.97%,
while it’s more bullish on alternative asset managers such as buy-rated Blue Owl Capital Inc.
OWL,
-3.19%,
KKR & Co. Inc.
KKR,
-4.69%
and Ares Management Corp.
ARES,
-2.40%.

BofA also has buy ratings on less interest rate-sensitive brokers including Interactive Brokers Group Inc.
IBKR,
-1.19%,
Focus Financial Partners Inc.
FOCS,
-1.21%
and Ameriprise Financial Inc.
AMP,
-1.50%.

Analysts typically change ratings by one notch at a time, but in more extreme cases of a company’s fortunes changing, they will adjust their ratings by two or more levels.

Also read: JPMorgan CEO Jamie Dimon sees ‘a lot of underlying inflation,’ rates at 6% in a recession

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