Earlier this week, Charles Schwab released its "First Quarter Earnings," which quotes CFO Peter Crawford, "Our first quarter revenue picture reflected the company's sustained business momentum and the benefits of rising interest rates, partially offset by clients' asset allocation decisions. Total revenue was up 10% year-over-year and exceeded $5 billion for the fourth consecutive quarter. While bank deposits shrank by 11% versus the prior year-end as clients realigned their allocations across our expansive selection of transaction and investment cash solutions, we observed a decline in the average daily pace of bank sweep movements from January to March -- even when allowing for a temporary spike in activity at the onset of the banking system turmoil." (Note: Register soon for our big Money Fund Symposium, June 21-23, 2023 in Atlanta, Ga. We hope to see you there!)
He adds, "Concurrently, we benefited from higher asset yields resulting from the Federal Reserve's pronounced tightening program. This helped expand net interest margin by 81 basis points from the first quarter of 2022 -- growing net interest revenue by 27% to $2.8 billion. Additionally, asset management and administration fees increased slightly, while trading revenue declined, and bank deposit account revenue was down due in part to a $97 million one-time breakage fee relating to ending our arrangements with certain third-party banks ahead of the initial Ameritrade client transition group."
Schwab's table on "Net Interest Revenue information," shows bank deposits for the three months ended March 31, 2023, at $343.1 billion vs. 2022's $452.7 billion, a decline of $109.6 billion. A table on "`Asset Management and Administration Fees Information," shows Schwab money market funds for three months ended March 31, 2023 at $316.4 billion for 2023 vs. 2022's $144.7 billion, a gain of $171.7 billion. Another table, "Growth in Client Assets and Accounts," shows money market funds at the end of Q1'23 at $357.8 billion, a 150% change from a year earlier, when money market funds were at $159.2 billion.
The New York Times, in "Charles Schwab's Deposits Shrink, but Profits Grow Faster Than Expected," writes, "Customer deposits dropped significantly in the first quarter, falling by $41 billion, or 11 percent, from the previous quarter. But client holdings in Schwab's money market funds rose by nearly $80 billion, or 28 percent. The company opened one million new brokerage accounts in the first quarter, which brought in $132 billion of net new assets."
The Bank of New York Mellon also released earnings earlier this week and made mention of money market funds. The "Q4 2022 Earnings Call Transcript quotes CFO Emily Portney, "Fee revenue was flat as the benefit of lower money market fee waivers and healthy organic growth across our Security Services and Market and Wealth Services segment was offset by the impact of lower market values from both equity and fixed income markets and the unfavorable impact of a stronger US dollar.... In Asset Servicing, investment services fees were down 1% as the impact of lower market values at a stronger US dollar were mostly offset by the abatement of money market fee waivers, higher client activity and net new business. In Issuer services, investment services fees were up 7%, driven by the reduction of money market fee waivers and higher depositary receipt issuance and cancellation fees."
She continues, "Market and Wealth Services reported total revenue of $1.4 billion, up 19%. Fee revenue was up 14% and net interest revenue increased by 33%. In Pershing, investment services fees were up 22%. This increase reflects lower money market fee waivers, higher fees on suite balances and higher client activity, partially offset by the impact of lost business in the prior year and lower market levels.... In Treasury Services, investment services fees were flat. The benefit of lower money market fee waivers and net new business was offset by the negative impact to fees from higher earnings credit on the back of higher interest rates."
Portney says, "Investment and Wealth Management reported total revenue of $825 million, down 19%. Fee revenue was down 18% and net interest revenue was up 2%. Assets under management of $1.8 trillion declined by 25% year-over-year. This decrease largely reflects lower market values and the unfavorable impact of the stronger US dollar partially offset by cumulative net inflows. As it relates to flows in the quarter, we saw $6 billion of net outflows from long term products and $27 billion of net inflows into cash. Among our long term active strategy, liability driven investments continued to be a bright spot with $19 billion of net inflows in the quarter, a real testament to our market leading capabilities and resilient performance during the recent market dislocation, a very healthy net inflows into our cash strategies come on the back of strong investment performance, most notably in our Dreyfus money market funds."
In other news, J.P. Morgan Securities writes in a "March MMF holdings update," "As we well know, March was an eventful month for money funds, with an influx of cash pouring into government MMFs following the onset of the recent banking crisis. As of March-end, government MMF AUMs saw over $400bn in growth month over month, with inflows devoted in large part to Agencies (+$125bn in FRNs and +$42bn in discos) and repo (+$56bn in ON RRP and +$123bn ex-Fed). Meanwhile, prime MMFs saw a slight decline in total AUMs month over month, and allocated less towards credit and more towards repo and ON RRP."
They tell us, "Notably, in March, government MMFs devoted the largest allocation to FRNs of this hiking cycle yet ($810bn, or 18.4% of their portfolios) as the market outlook on Fed policy wavered, and their overall WAMs pushed up to 14 days from 10 days a month earlier.... Furthermore, unusual of quarter-end, government funds appeared to direct a significant portion of their inflows towards non-Fed repo, with TGCR no longer trading through RRP as of March-end.... Of course, balances at the RRP facility saw increases in March as well, with prime funds contributing an additional $65bn and government funds an additional $56bn month over month. Total RRP balances climbed to $2375bn as of 3/31, with government MMFs making up about 76% of total uptake and prime MMFs a whopping 17%."
Finally, JPM writes, "Meanwhile, government MMFs have shown a noticeable shift in their T-bill maturity profiles this year. Continuing last month's trend, government MMF bill holdings showed a dramatic drop in 91-180d bills, both in absolute terms and as a percentage of total bill holdings, which fell to a measly 2% as of March-end.... At the same time, government funds dramatically increased holdings of 31-60d T-bills in March by about $100bn, with the 31-60d tenor now making up an entire 44% of funds' bill portfolios in total.... This historic shift could be attributed to stark changes in monetary policy outlook certainty in combination with precaution surrounding the drop-dead date, which likely falls within the 91-180d period. As we discussed last week, flows into MMFs were primarily driven by institutional investors' flight to safety in the wake of the recent banking crisis, though we also saw retail investors move cash into government MMFs during the same period to a lesser extent.... In the near term, we could continue to see MMF AUMs trend higher, though likely not by the same degree."
