Asset managers, brokerages and banks continue to report first-quarter earnings, but the calls and press releases have been relatively light on money fund and "cash sorting" comments. On the "Charles Schwab Corporation 2024 Spring Business Update Monday, CFO Peter Crawford comments, "The important point is that we sit here today a year removed from the events surrounding the regional banking crisis, we are in a very strong position with nearly all key business and financial indicators improving, in some cases substantially. We have seen meaningful progress back to historical ... organic growth, a continued moderation of client cash realignment activity with the pace slowing even faster than expectations [and] further reduction in the use of supplemental borrowing." Schwab's money fund assets rose to an average of $499.9 billion in Q1'24 from $316.4 billion a year earlier, an increase of $183.5 billion, or 58.0%. Deposits fell from $343.1 billion a year ago to $274.4 billion in Q1, a decline of $68.7 billion, or -20.0%. according to their quarterly earnings release.
He tells us, "Turning our attention to the balance sheet, total assets dropped by 5% driven by the paydown of parent level debt and the continuation of a much lower case of cash realignment [than] we have experience roughly [the past] two years. We saw a notable reduction in activity from January to February and March, and the overall level of realignment was more than 80% less in the same quarter in 2023. Within the bank, an amount that we could support with cash flow from the investment portfolio allowed to reduce usage of borrowing by $9 billion during the quarter, bringing the total down roughly $25 billion from the peak of last May."
Crawford continues, "During last quarter's update, we talked about the slowing pace of the client cash realignment. But we also shared our expectation that we likely see typical seasonal activity to start the year. That indeed has been the case, and clients continue to engage in the market and the number of ... those realignment events continues to trend lower, bringing us ever closer to the point where any residual activity among existing clients will be offset from the contribution of cash from new accounts, and making the client cash realignment a story [that] soon will move to the back pages."
He also says, "Now, if we turn our attention from the solid quarter we just completed to what we expect to be a very bright future, we expect our net interest margin to expand through 2024 and 2025 and approach 3% by the end of 2025, due to mostly the paydown of supplemental borrowing. The actual paying off will be influenced by the level of deposit growth, but also by the growth of margin balances. Why is that? Given the way the liquidity ratio where LCR will work for every dollar of March and balance growth, we need extra $1.50 of client cash of the broker-dealers. That requires us to reroute some client cash balances from bank’s sweep to the broker-dealer solution.... Those are balances that we otherwise used to pay down supplemental borrowing."
During the Q&A, Crawford is asked about paying down debt. He responds, "Certainly, our priority is to pay down the amount of borrowing, CDs, as quickly as we possibly can.... The pace of payment is really driven by ... both the levels of transactional cash that we see as well as the mix of transactional cash between the bank and the broker-dealer. We will do it as quickly as we can to the extent that we see ... greater contributions from new accounts and greater level of deposit growth that will accelerate that."
Asked if new accounts are choosing money funds over bank deposits, he answers, "I would say that we look at the new accounts and they tend to over time look a lot like the existing accounts. They come in with a heavier portion of cash but we are seeing newer accounts realigning ahead of bringing that money ... to Schwab. One is we saw last quarter, for example, or transfer of accounts colors were actually higher portion of our net new assets than last year. That is a good thing. That means we are winning business from competitors, clients are trusting us and choosing to ship more of their business to Schwab versus competitors."
He adds, "But that also means that new assets are coming in the form of securities and mutual funds, etc.... Our expectation, of course, we will see the realignment among the existing clients continue to moderate, not necessarily go to zero, but moderate and get offset by growth from contribution of cash into accounts over time here, ... and see a resumption of positive growth and over time, transactional cash will grow with the growth and accounts and the growth over total assets."
Another analyst states, "You guys have about $350 billion more money market balances today than you did at the beginning of 2022 when the Fed policy shifted. [With lower rates] how sticky are the balances and do you think [they] might flow out ... over time?" Crawford answers, "You are right, balances certainly a lot higher than a few years ago and obviously higher than zero interest rate environment. To the extent that money ... is flowing out of money funds into the equity markets and mutual funds, etc., it depends on what the vehicle is. `If it is flowing out of money funds into our cash balance sheet, clearly that is a positive for us from a revenue standpoint. But [with] our expectations of interest rates ... you would see over time a little bit of a shift in the proportion of cash sitting in those transactional cash solutions like banks reap the broker-dealer deal cash solutions with money fund. It will not happen immediately.... Where you see much more dramatic would be of course if rates fall back to levels we saw in 2020 and 2021. That tends to be the period of time where you see much more significant reductions."
Also, earlier this month on BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "Our cash business can experience seasonal rotations in the first quarter as many institutional clients withdraw these liquid assets for operational purposes, including tax and bonus payments. Cash management flows were impacted by approximately $14 billion of net redemptions during the last week of March ahead of the Good Friday holiday. Outflows were driven by clients redeeming balances to have cash on hand during a time when many businesses are open, but the financial markets are closed. This phenomenon is not uncommon or unique to BlackRock. Balance has largely returned with approximately $20 billion of money market net inflows in the first week of April."
CEO Larry Fink comments, "As Martin said, we generated $76 billion of long-term net flows in the first quarter, which represents nearly 40% of last year's long-term flows in just the first three months of this year. And long-term net inflows across retail and ETFs and institutional active was actually $100 billion, which excludes the episodic institutional equity activity Martin mentioned. Some of these are public, some aren't, but over the last few months, we've been chosen for a breadth of mandate, both wealth and institutional clients across regions that will fund over future quarters and we're in active conversations on a number of unique broad-based opportunities, including several large mandates for Aladdin."
He explains, "There is still a record amount of cash on the sidelines and money market fund balances are now approaching $9 trillion [sic]. I think this stems from fear and uncertainty, but it's hard to achieve retirement or long-dated objectives by holding cash. Clients worldwide are coming to BlackRock for advice on where and how to deploy their capital, and in many ways, how to help them reduce that fear and putting that money to work. Being a growth company requires continued innovation, lots of investments, and intense client focus. BlackRock has invested ahead of these themes, we believe will define the next decade of asset management."
During the Q&A session, JP Morgan's Ken Worthington queries, "Fixed income flows have picked up for U.S. -- the U.S. mutual fund industry so far this year, but the same data services that track the industry don't show a proportionate pickup for BlackRock. Your fixed-income ETF sales were solid at $18 billion, but below levels seen last year. Can you talk about the competitive landscape for fixed-income retail and fixed-income ETFs, both inside and outside the U.S.? And to what extent do you think investor appetite may have changed in 2024?"
President Rob Kapito responds, "The conversations that we're having across all of the distribution systems are about a new allocation into fixed income. It's been very much clouded by all the noise around inflation and the Fed. So the yield curve remains inverted and investors are currently getting paid to wait. And a more balanced term structure of interest rates is going to be the indicator to watch, and that's where we'll start to see demand for intermediate and longer-term fixed income. So the first quarter ... flows of $42 billion, ... we saw the strength in the bond ETFs from immunization activity in institutional and about 25% of the flows were into active strategies. So we're seeing renewed demand for active fixed income and that's led to flows into the high yield, the unconstrained, and the total return strategies."
He adds, "But I do think the noise that's out there focused on inflation and the fact that you can still earn 5%, which is very attractive right now is causing the delay in more allocations to fixed income. The other part of why I'm more encouraged is we are finding a growing interest in high-performing active fixed-income strategies alongside private market strategies. So I think that we stand to bode very well once you see some changes in the yield curve." See BlackRock's Q1 2024 Earnings Call Transcript here.)
