Schumer’s analyst downgrades Schwab price target after bank account outflows

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Schumer’s analyst downgrades Schwab price target after bank account outflows

The firm s analyst has dropped his buy-equivalent rating on Schwab for the first time since he began covering the brokerage stock seven years ago after Bloomberg's clients are pulling cash out of the firm's low-interest rate bank accounts at twice the rate that Morgan Stanley expected.

According to Michael Cyprys, client money is moving from sweep accounts to money market funds at a rate of $20 billion a month. He reduced his target for the share price to $68 over the next year from $99.

While clients aren't leaving and SCHW has other sources of liquidity, earnings face more pressure than we expected, Cyprys wrote, lowering his forecast for profit this year and next by 30%.

The downgrade is due to the heightened risk that analysts see in financial companies like Schwab, which is struggling with some of the forces that hammered the now-collapsed Silicon Valley Bank. Schwab invested in long-term bonds at a time of record low interest rates and is sitting on losses on those investments after the Federal Reserve jacked up rates.

Depositors are pulling money from bank accounts in search of higher yields, depriving companies like Schwab of cheap funding and raising concerns that they will have to sell bonds at a loss to cover outflows.

Schwab assured clients and investors that it has plenty of liquidity to meet withdrawals of bank deposits last week. The Westlake, Texas-based firm said it was misleading to focus on paper losses.

Cyprys had had an overweight rating on the stock since he started covering it in 2016. His lower price target is still 23% above Wednesday's closing price of $55.21. He has less confidence in the timing of an improvement in the situation, he wrote. He said that the prospects for the Fed to pause in its series of rate increases or to cut rates are highly debatable.

The shares of Schwab fell 29% this month, but fell 2.1% to $54.05 in premarket trading.

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