Schwab Shows No Wear from AI Agent Disruption in Robust Third quarter

Financial services giant Charles Schwab is a brokerage, bank, wealth manager and capital markets services provider. Without a traditional institutional investment banking unit, it did not have to deal with investor concerns about a possible slowdown in dealmaking that was the talk of bank earnings week.

Schwab had to face a different, AI-driven anxiety when it reported third-quarter results on Thursday. So far, analysts at Morningstar said, it’s passing the test with flying colors.

Disrupting the Disruption Narrative

Shares in Schwab and other major US brokers have been weighed down this year by the thesis that AI agents and tools will majorly disrupt traditional advisor services by automating financial planning. Customers could appoint agents to automatically shift idle money from brokers to higher-yielding options. That would directly impact Schwab, where net interest revenue rely heavily on the massive pool of low-yielding, so-called sweep cash that it’s able to invest in higher-yielding assets like US Treasuries.

When Meta launched its AI agent Muse last month, it prompted a brief sell-off that also hit rivals like LPL Financial and Raymond James. Wall Street is already taking action. JPMorgan announced earlier this week that it’s blocking AI agents like Muse and Instinct from directly accessing accounts. It’s also piloting its own AI tool called Smart Cash. Schwab, which moved to block agents as well on Thursday, is one step ahead: The company began rolling out an AI-powered assistant called Charley this month. 

Schwab’s latest earnings showed no wear from the disruption. Its $3 billion in net income, up 23% year over year, beat analysts’ expectations. It posted a modest revenue miss, but the $7.2 billion top-line figure, up 17%, was still a record. “Schwab’s core business is extremely healthy, exhibiting no signs of intensifying competitive pressure that would support the artificial intelligence disruption narrative,” wrote Morningstar analysts Thursday. Results proved robust in key areas:

• Schwab continued to benefit from the ongoing surge in American retail investors. Its daily trade count rose 44% and trading revenue climbed 16% to $1.1 billion.
• Attracting customer money, be it cash, stocks, bonds or mutual funds, remained no problem, as Schwab reported $192.4 billion in net new assets, better than expected and 43% more than last year’s third quarter.

Good Debt: Schwab shares fell 2.7% on Thursday. Morningstar said this was a result of investors reacting to Schwab’s “modest” revenue miss and that its quarterly net interest margin came in short of expectations at 3.04%, with executives saying they expect the margin to come in at the low end of expectations by year’s end. However, they noted that the net margin was impacted by a “prudent” decision by Schwab to add $5.5 billion in “more expensive short-term borrowing and long-term debt” due to “concerns about the impact of unrealized securities losses as long-term interest rates push higher.” The average $121.26 price target of 26 analysts polled by Zacks Investment Research implies Schwab’s stock has a 28% upside.