Morgan Stanley downgrades Charles Schwab, cites extended earnings recovery timeline

Published Thu, Mar 30 20236:46 AM EDT

Morgan Stanley is taking a step back on shares of Charles Schwab even after the stock's significant March slump. Analyst Michael Cyprys downgraded the financial services company to equal weight from overweight, citing an uncertain earnings outlook that makes the risk-reward balance for shares appear less compelling. "Stock is down 30% month-to-date, but with limited visibility on multiple variables we are moving to the sidelines," he wrote in a Thursday note. "The SCHW investment thesis has been pushed out and we have less confidence around the timing of an improvement." SCHW YTD mountain Charles Schwab shares in 2023 The collapse of Silicon Valley Bank earlier this month rattled the investing community, sending shockwaves across the broader banking industry and financial markets. The concerns weighed on shares of Schwab, which are down nearly 34% for 2023. Shares fell 1.6% before the bell. Cyprys views the continued migration of cash deposits into money funds as a pressure point likely to weigh on Schwab's near-term earnings outlook. This translates to less earnings from monetizing cash as well as higher funding costs, he explained. He added that "cash sorting (customer deposit outflows) is not improving at the pace we had expected, and the regulatory landscape is set to intensify, which combined weigh on the earnings outlook, reduce capital return, and limit strategic flexibility." Along with the downgrade, the bank trimmed its price target by 32% to $68 a share. That target still reflects 23% upside from Wednesday's close. To be sure, despite Schwab's recent struggles, Cyprys said its "franchise strength is intact." That said, he forecasts it could take until 2025 for the company to bounce back and earnings to reach a full recovery, and the market is unwilling to wait for that. "Limited visibility around timing/magnitude of cash sorting bottoming out, likely weighs on valuation NT," he wrote. "But as the pace of sorting improves, we expect valuation to recover and earnings to rebound." — CNBC's Michael Bloom contributed reporting