Asset managers, brokerages and banks continue to report second-quarter earnings, and several of the calls have discussed money fund and "cash sorting". On the "Charles Schwab Corporation 2024 Summer Business Update Tuesday, CFO Peter Crawford comments, "I'll provide some high-level perspective on what we're seeing with regard to our clients' transactional cash.... The important point is that we are proceeding through what we've described ... as a transitional year, but ... at a slightly faster pace than we had anticipated just six months ago, with ... a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, [and] sequential growth in our net interest margin." Schwab's money fund assets rose to an average of $523.7 billion in Q2'24 from $375.9 billion a year earlier, an increase of $147.8 billion, or 39.3%. Deposits fell from $312.5 billion a year ago to $258.1 billion in Q2, a decline of $54.4 billion, or -17.4%. according to their quarterly earnings release. (See Seeking Alpha's Schwab update transcript here.)
He tells us, "Our clients' transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024. But even so, we continue to see a moderation of the rate-driven client cash realignment activity.... Turning our attention to the balance sheet, total assets dropped by 4%, driven primarily by tax-related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. The overall level of realignment within Bank Sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023."
Crawford continues, "We have seen strong growth in margin utilization to start the year, and to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter.... Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year."
He also says, "All indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from Bank Sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing. Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked ... we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time. We believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again."
Crawford adds, "Over the last two-plus years, that [long-term growth] formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances. But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we're nearing the point where that simple and straightforward formula ... should become clear."
During the Q&A, Crawford is asked about deposits rates when the Fed cuts. He responds, "The scenario that I outlined is based off the Fed cutting rates a single time the rest of this year in September. In terms of deposit betas, I wouldn't necessarily assume that deposit betas are symmetrical. If you look historically, deposit betas tend to be a bit higher in the easing cycle than they are in a tightening cycle. And so, while we certainly haven't made any decisions exactly about what we'll do with deposit rates, I think that's a reasonable expectation. We also would expect that as rates come down, the cost of any replacement supplemental funding that we have to access comes down as well. And we'd also expect that, on the margin, rate cuts would, over time, bring about higher levels of clients' transactional cash as the incentive for them to utilize alternative solutions like purchase money funds and CDs become somewhat less."
Asked if about scrutiny of advisory sweeps, he answers, "With respect to the Wells Fargo issue, we have provided money market fund sweep cash and -- or money market yields on bank cash for all of our fiduciary-driven investment advisory solutions already. So, I don't really see the Wells Fargo report having any kind of meaningful implications for us. We've been doing this for an extended period of time already."
Crawford adds, "I know there's a lot of focus on kind of month-to-month, even at times week-to-week changes in deposit flows. I think it's important to maybe set a little bit of context. So, first is deposit flows over a short period of time are influenced by net new assets, of course, the cash is brought in from new accounts, and then what clients do with that cash. And that can be rate-driven allocations that they make to purchase money funds, CDs and so forth. It can also be into engagement in the markets, equities, mutual funds.... And so that can create some variability. We have seen strong engagement in the markets. When we look at the rate-driven activity among our clients, that continues to go down."
He says, "The second point of context I would make ... is that you do see variability in those flows from, frankly, from day to day or month to month. And we can see $2 billion or $3 billion of net inflows or outflows on a particular day. And so, when you just look at a month's numbers, depending on what day of the week the month ends on, it can influence the level of transactional cash that we report on that monthly basis. I'd say June ... was comparable to May. July has started off stronger. It's still early, it's about halfway through the month, so we'll see how the month ends. But it ... started off definitely stronger than in terms of deposit flows than May."
Crawford explains, "In terms of the long term, ... we would expect in a stable environment that client transactional cash grows with the growth in accounts and the growth in total assets. We actually recently did a study to look at clients who opened their accounts roughly 20 years ago. And what we see over time is, as those clients increase the net worth in their accounts, increase assets in their accounts, their cash balances go up and they actually stay at a relatively constant percent of the assets in the account."
Finally, he tells us, "So, I think as you are modeling our transactional cash over a long period of time, over years, I think it's reasonable to expect that that transactional cash grows with the growth in assets and the growth in accounts. When rates are rising, ... growth will be a little bit lower, and rates are falling, that growth will be a little bit faster. But I think over time in a stable environment, that's a reasonable expectation over, again, over multiple years."
Also, earlier this month on BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "In the second quarter, we saw equity markets power to another record high and more clients starting to re-risk. `Investors waiting in cash have missed out on significant equity market returns over the last year and more investors are stepping back into risk assets. BlackRock is a ... winner when there's assets in motion.... Over the past few months, the slate of client mandates we've been chosen for is the most broad and diversified has been in years across active equity and fixed income, customized liquidity accounts, private markets and multi-product Aladdin assignments."
He states, "Cash management net inflows of $30 billion were driven by government and international prime funds. Flows benefited in part from clients reinvesting in cash strategies in early April after redeeming balances during the last week of March. Net inflows included multiple large new client mandates, as connectivity between our cash and capital markets teams allows us to deliver clients holistic advice and market insight. Our scale and active approach for clients around their liquidity management are driving sustained growth in our cash platform."
Asked about the shift from deposits to MMFs during the Q&A, Small comments, "I'd say a couple of dynamics we've definitely seen in the platform. Post Silicon Valley Bank, we saw through Cachematrix, in our institutional business, I think clients just being more mindful, tactical and kind of operationally flexible in how they manage cash. We think that largely for an institutional manager like BlackRock that's been a good trend of being able to put together technology and customized liquidity accounts in a way that we can grow."
He adds, "Then, ultimately, we have seen this business grow. But I'd also flag that bond ETFs have been a real surrogate, I think for kind of how clients are managing cash. And as Larry mentioned, over the last year we've seen $100 billion basically of organic growth in bond ETFs, which I think have been used as cash or cash proxies along the way as clients manage their liquidity dynamically across money funds, separate accounts and traded instruments like ETFs."
