Despite Massive Unrealized Bond Losses, Here Are 2 Reasons I'm Far Less Worried About Charles Schwab
The huge investment brokerage and bank Charles Schwab (NYSE: SCHW), which had more than $7 trillion of client assets at the end of 2022, has come under selling pressure after three banks, including SVB Financial, recently collapsed in less than a week's time.
One big reason for the meltdown has to do with the fact that banks had invested a lot of deposits into government-backed bonds that lost value as interest rates have soared, because bond yields and bond prices have an inverse relationship. At the same time, the Federal Reserve had rapidly raised interest rates and begun the process of quantitative tightening, which put pressure on bank deposits and led to outflows. Bond losses are often only temporary if a holder can hold the bonds until maturity, but if a bank has to sell them to cover significant deposit outflows, those losses can become very real and present big problems.
At the end of 2022, Schwab had average tangible common equity of $17.4 billion. Meanwhile, the bank had $12.3 billion of unrealized losses in its available-for-sale (AFS) bond portfolio, which the bank intends to sell before they mature. However, these losses are marked-to-market and have already been subtracted from equity. The real concern is in Schwab's held-to-maturity (HTM) bond portfolio, where Schwab has unrealized losses of $15.6 billion. These have not been accounted for, and if Schwab ever had to dip into this portfolio to cover deposit outflows, the company would be in deep trouble.
Source Fool.com
