Goldman adds Charles Schwab as top pick on strong retail trading, higher interest rates

Published Mon, Apr 5 20218:55 AM EDTUpdated Mon, Apr 5 20214:08 PM EDT

Goldman Sachs is getting even more bullish on Charles Schwab ahead of its earning report next week as the financial services firm remains a major beneficiary of higher interest rates. The Wall Street firm added Charles Schwab to its "conviction list" on Monday, sending shares of the retail trading giant up 2.6% to a new 52-week high. Goldman also hiked its 12-month price target on Schwab to $77 per share form $67 per share. "On the back of the considerable momentum for fundamentals, we are adding SCHW to the Conviction List, as the stock has lagged considerable improvements in reinvestment rates, and this combined with robust balance sheet growth is likely to continue to propel forward estimates and the stock in our view," Goldman analyst Will Nance told clients. Shares of Schwab are up nearly 30% this year as investors pour into the stock amid record retail trading and with hopes that higher interest rates will drive price movement. The U.S. 10-year Treasury yield is above 1.7% after starting the year below 1%. Schwab earns a spread off of the customer cash held in every account by purchasing higher-yielding instruments like mortgage-backed securities and making loans funded by those deposits. Schwab's stock remains highly correlated with the yield on the U.S. 10-year. "The rate environment has improved significantly, which we believe will have a significant impact on forward numbers for SCHW, as current reinvestment rates in the ~1.30-1.40% range are likely to put a floor on the net interest margin in the near term," Nance said. Plus, Goldman is forecasting two Fed rate hikes in the next few years, driving further estimate revisions. Goldman's move precedes Schwab's quarterly earnings on April 15. Retail trading has dropped off slightly after elevated levels in January and February. Goldman expects first quarter 2021 earnings per share of 78 cents for Schwab, compared with consensus estimates of 74 cents per share. The analyst said the beat will be driven by higher net interest margin and trading driven by strong retail engagement. "We expect the key driver to the stock to be positive estimate revisions as the Street updates forecasts for higher securities reinvestment yields, which, along with an easing of premium amortization in the coming quarters could help to stabilize" the net interest margin, Nance said. Shares of Schwab are up nearly 100% in the past year. — with reporting from CNBC's Michael Bloom.

Pedestrians pass in front of a Charles Schwab bank branch in downtown Chicago, Illinois.

Christopher Dilts | Bloomberg | Getty Images

Goldman Sachs is getting even more bullish on Charles Schwab ahead of its earning report next week as the financial services firm remains a major beneficiary of higher interest rates.