Will Schwab use TD Ameritrade deposits to fuel banking expansion?

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The brokerage giant Charles Schwab is just a minor player in consumer banking, but that could change now that it is acquiring rival TD Ameritrade.

As part of the $26 billion deal, Schwab will gradually acquire at least $53 billion of deposits that are held by TD Bank on behalf of TD Ameritrade customers, boosting overall deposits by more than 20%.

That significant inflow of deposits — coming at a time when Schwab and other brokerages are eager to find new sources of revenue — could prompt Schwab to take a closer look at consumer banking, analysts said. With less money coming from trading now that it has cut commissions to $0, Schwab could potentially use the influx of deposits to expand its very modest loan portfolio, said Bob Meara, a senior banking analyst at Celent.

“It seems like a no-brainer,” Meara said.

Mayura Hooper, a Schwab spokesperson, declined to comment, but in a conference call with analysts last month to discuss the TD Ameritrade deal, Chief Financial Officer Peter Crawford didn’t rule out the possibility of Schwab bulking up in banking.

“With the TD relationship, do you see any more, maybe like banking offerings that you could try to offer to the broader Schwab client that maybe you didn’t in the past?” asked Michael Carrier, an analyst at Bank of America Merrill Lynch.

“Our goal is to be able to meet the needs of the various client segments that we serve, and we like the relationship to begin with an investing relationship,” Crawford said. “To the extent it’s in the best interest of the client and we have solutions that make sense for them, we’re thrilled when they choose to take advantage of them.”

Schwab’s core wealth management business is facing significant revenue pressures since the firm cut stock-trade commissions to $0 from $4.95 per trade, following rivals who took the same step. (In the 1970s, Schwab charged about $70 per stock trade, according to Bloomberg.)

In an October interview on CNBC, Chairman Charles Schwab acknowledged that the move will require the company to find revenue growth elsewhere.

“We make our money on other relationships — you might want advice, you might want fixed income or things like that,” he said.

The lines between banking and brokerage are becoming increasingly blurred. Fintechs that were founded to disrupt the wealth-management sector are now offering banklike products while banks of all sizes have expanded offerings to include robo advice, largely to compete with the upstarts.

That upheaval is putting pressure on firms like Schwab to try to make more money off of existing customers, said Michael Taiano, an analyst at Fitch Ratings. Schwab is already one of the country’s largest brokerage houses and the acquisition of TD Ameritrade will give it even more customers to whom it can sell new products and services.

“Offering other products will clearly be part of Schwab’s plan,” Taiano predicted.

Even though Schwab is chartered as a savings and loan holding company, only 9% of its total deposits are held in transaction-based accounts like demand deposits, which allow customers to conduct routine transactions like paying bills.

That’s primarily because Schwab must keep a large portion of its deposits as cash in sweep-deposit accounts to fund trades. Sweep deposits are short-term and carry little duration risk.

Still, the TD Ameritrade deal would allow Schwab to offer more checking and savings accounts, if it chooses, through the additional deposits, Taiano said. Schwab could still keep a sizable portion of its new deposits in sweep-deposit accounts, but earmark some for consumer lending.

Schwab also has plenty of room to expand lending. Its loan-to-deposit ratio stood at 8%, as of Sept. 30. Most of its deposits are used to fund its $194 billion investment-securities portfolio.

Schwab already has a limited loan business. It held $11.9 billion of single-family residential mortgages, as of Sept. 30, through a partnership with Quicken Loans. Schwab also has a $1.2 billion commercial-and-industrial loan book, according to Federal Deposit Insurance Corp. data.

Still, if Schwab is to expand in consumer banking, it will likely do so slowly. For one, as a result of the TD Ameritrade deal, Canada’s TD Bank will become Schwab’s largest shareholder with a 13.4% stake. Schwab might be reluctant to compete directly with its biggest stockholder, said Greg O’Gara, a senior analyst at Aite Group.

Schwab would also need to go on a hiring spree to add the credit and risk analysts necessary for underwriting a larger volume of loans, Taiano said.

“If you don’t already have the core expertise in underwriting, it’s not exactly an easy transition,” Taiano said.

A more likely path is that Schwab partners with TD Bank to add Schwab investment advisers inside TD’s branches, O’Gara said.

“Schwab has experimented with a few different models in order to get their brand out into the marketplace,” he said. “Bank of America had success with putting Merrill Lynch advisers in branches and Schwab’s strategy might look a lot like that.”

But the opportunity for Schwab to become bigger in consumer banking is probably too good to pass up, Meara said. Schwab’s digital banking platform is robust enough that it wouldn’t need to rely heavily on physical branches to build a consumer banking business, he said.

O’Gara agreed. "Schwab has a very robust business model and this gives them an opportunity to further build their balance sheet with cash deposits," he said.

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M&A Consumer banking Deposits Charles Schwab TD Ameritrade TD Bank