Keefe Bruyette & Woods analysts Kyle Voigt and Matthew Moon downgraded Charles Schwab Corp. and TD Ameritrade Holding Corp. to "market perform" from "outperform." KBW had aligned the firms' ratings to "outperform," when Charles Schwab's acquisition of TD Ameritrade was announced.
Since then the Fed has reentered a zero interest rate policy, with interest on excess reserves currently sitting at 10 basis points and the 10-year Treasury yield at 70 basis points. The KBW analysts noted that the companies would need to have a more favorable economic outlook than KBW's current baseline to keep their "outperform" rating, and lowered their 2024 pro forma earnings per share GAAP estimate to $2.55 from $4.60.
The analysts lowered Charles Schwab's 2020 and 2021 EPS estimates to $2.17 and $1.84 from $2.58 and $2.88, respectively. According to Voigt and Moon, this reflects the lower interest rate environment and lower asset management revenues given lower market valuations. KBW also introduced a 2022 EPS estimate of $1.77, which reflects a year-on-year decline of 3.7% versus its 2021 EPS estimate.
The KBW analysts also lowered TD Ameritrade's 2020 and 2021 EPS estimates to $2.89 and $2.09 from $3 and $3.13, respectively. They introduced a 2022 EPS estimate of $2.09.
Additionally, the analysts lowered TD Ameritrade's 12-month price target to $39 from $61 and Charles Schwab's 12-month price target to $36.50 from $57.
Voigt and Moon added that the stock rating downgrades are partially offset by the companies' lower expenses; higher trading revenues given the strong, recent trading activity; and higher cash balance estimates.