Schwab Charles Corp Q4 FY2025 Earnings Call

Good morning, everyone, and welcome to Schwab's 2026 Winter Business Update. This is Jeff Edwards, Head of Investor Relations. I'm joined in Westlake today by our President and CEO, Rick Wurster; as well as our CFO, Mike Verdeschi. During our time together this morning, the team will review 2025, a year where the business delivered growth across all fronts and discuss the growing set of opportunities we see to help clients even more in 2026 and beyond. A quick rundown on the housekeeping front. The slides for today's business update will be posted to their usual spot on the IR website at the end of the prepared remarks. Q&A remains one question, no follow-ups, then please try to limit the nested but boosted all questions. If you have multiple questions, we encourage you to simply hop back into the queue and ask another one if time allows. And as always, the IR team is here to assist with any questions following today's update. And last but not least, the ever-present forward-looking statements page reminds us that outcomes may differ from expectations. So please keep in touch with our disclosures. And with that out of the way, I'll turn it over to Rick.

Thank you, Jeff, and good morning, everyone. Thanks for joining our winter business update. 2025 was a record year for Schwab. Guided by our Through Clients' Eyes strategy and with a supportive market, engaged clients, and strong execution, we delivered growth on all fronts with clients across our solutions and in our financial results. We attracted $519 billion in core net new assets, a 42% increase over last year. In 2025, clients opened 4.7 million new brokerage accounts, which is a 13% increase over 2024. Solutions growth, one measure of deepening relationships with clients by helping them conduct more of their financial lives at Schwab, reached new records. Managed investing net flows grew 36% over 2024, achieving a new record. Bank lending balances reached an all-time high of $58 billion. This diversified combination of client and solutions growth, supported by our disciplined financial management approach, resulted in record financial growth. Total net revenues reached $23.9 billion, and we delivered record adjusted earnings of $4.87, up 50% over last year. With strong execution across our strategic focus areas, growth, scale, and efficiency, brilliant basics, and our people, we continue to innovate to help our clients grow, manage, enjoy, protect, and pass on their wealth. This is how we've always approached innovation at Schwab, focusing on helping our clients achieve better financial outcomes. I'll share just a few examples from 2025. We opened 10 new branches and hired hundreds of financial consultants and wealth advisers. Clients with a financial consultant bring in more than twice the NNA, are more engaged with our wealth solutions, and have higher client Promoter Scores. We strengthened our lending, wealth, and trading offers. We leveraged artificial intelligence to serve clients more efficiently. In our Advisor Services business, we launched Advisor ProDirect, a subscription service supporting RIAs wherever they are in their journey to separately managed accounts programs, and nearly doubled the size of our institutional no-transaction-fee mutual fund platform. We entered a definitive agreement to acquire Forge, which will help us provide clients with multiple ways to access alternatives while democratizing private investing. We also made a strategic investment in Qapita, a complete equity management solution designed to support private companies in the late stages prior to IPO. With Forge and Qapita, we are creating an ecosystem where we can administer private stock plans while providing access to liquidity for private company employees and investors while creating a pre-IPO pipeline of future stock plan services clients for Schwab. We took an ownership stake in Wealth.com and began rolling out their estate analysis capability to our specialists, giving us more tools to help clients integrate their estate planning into their investment lives. We delivered all of this in a year where our clients achieved record levels of wealth through market ups and downs. As the year came to a close and from where we stand today, market valuations are high, but the economy remains strong. All of this fueled record levels of client engagement. We supported 1.9 billion trades, more than 30 million calls to our service centers, and about 2.2 billion digital log-ins, up approximately 18% from 2024. Clients reaching out to our service centers had their calls answered in less than 30 seconds on average as our professionals fielded client questions ranging from whether stocks were overvalued to how to navigate market volatility to inquiries about cryptocurrencies to how to protect their wealth. Millions of investors consumed our educational content. While clients embraced our easy and intuitive digital experiences, they showed us they want more than an app when their financial future is at stake. In short, we were there for our clients when, where, and how they needed us. You can see this in our third-party recognition and, more importantly, in strong and improving client Promoter Scores across retail, adviser services, and our workplace business. We ended the year with more than 46 million client accounts and nearly $12 trillion in total client assets, reinforcing our position as an industry leader and ranking number one among peers by total client assets, RIA custodial assets, and daily average trades, which reached a record $7.7 million a day for the year. We are entering 2026 in a leading competitive position, and our momentum is strong. I want to spend a few minutes laying out what positions us to continue delivering earnings growth through the cycle. Most importantly, we are taking a holistic view of growth. We have two important levers: serving more clients and deepening relationships by serving more of their financial needs. Attracting more clients will always be important. But with nearly $12 trillion in assets and more than 46 million client accounts, doing more for our clients is as important a source of growth as acquiring new clients. We are equally focused on growing NNA and our wealth, lending, and product areas. This growth is key to our revenue growth and diversification. There are two more critical pieces to the puzzle. First, our sheer scale, combined with efficiency efforts that make it easier for clients to do business with us, keeps our cost to serve clients low. This also allows us to invest in client capabilities that will fuel our growth and Experiences that drive more efficiencies. Second, our disciplined financial management approach and capital return underpin it all. Taken together, when we deliver on each of these effectively, we are cyclical. I'll spend the next few minutes unpacking growth, scale, and efficiency, while Mike will dive into our financials. Serving a growing number of clients and attracting net new assets is our first growth lever. In 2025, the organic growth rate of core NNA reached 5.1%. In Advisor Services, we are attracting net new assets from new and existing advisers of all sizes as we help them serve their clients, grow their businesses, and succeed in an increasingly competitive industry. No matter the size of an RIA, we serve them all in a way no competitor can. One million new retail households turned to Schwab in 2025. These new households represent a broad and diverse client base. Our average retail client is now in their 40s, and our average new-to-firm retail client is in their 30s. Gen Z investors comprise nearly one-third of new retail client accounts opened in 2025, and nearly 60% are under the age of 40. About one-third of new clients are affluent, and the volume of new trader clients continues to increase. To sum it up, we are winning with investors of all ages, wealth tiers, and time horizons. Clients expect all aspects of their lives to be more convenient, and they want to conduct more of their financial lives in one place. At our scale, we have an incredible opportunity to do more for existing clients in a way that cannot be easily replicated. When existing clients entrust more of their assets to Schwab, it is a win for them because it simplifies their financial lives, and we’re delivering the value they want. It is also a win for the firm because it helps us diversify our revenue streams. Guided by our Through Clients' Eyes strategy, we have a diverse set of monetization opportunities providing value to clients across both adviser services and retail. I want to specifically call out the growth we see in adviser services. First is wealth. We're expanding our wealth services offer, which is designed to simplify processes and help advisers compete and serve their clients' comprehensive needs. This includes our growing model market center platform and alternative investments. Second, we're focusing on expanding our lending and trust services to our advisers through Charles Schwab Bank. Finally, we're delivering industry-leading trading capabilities. At a later date, I'll share more on the high-touch trading service for block trades we're launching in Q1. I'll share more detail on the opportunities we have across wealth, banking, trading, and alternative investments. We've made significant investments in our wealth offer over the last several years, including rounding out our product offerings with solutions like Wasmer Schroeder Fixed Income Strategies and Schwab Personalized Indexing. Within our flagship offer, Schwab Wealth Advisory, we've reduced the practice size of our wealth advisers and hired to serve more clients. We've created a business development officer role focused solely on growing the business so wealth advisers can focus on their clients. We've improved our tax, trust, and estate capabilities, and we've built specialty teams catering to the unique needs of our higher net worth clients. These investments are paying off. Managed investing net flows have nearly quadrupled since 2022, and we still have a meaningful opportunity ahead of us. Approximately 5% of retail households at Schwab engaged with our managed investing solutions, but about 31% say they are willing to pay for advice. The reason we have confidence we'll continue to close this gap is the client Promoter Scores for our managed investing solutions are among the highest at the firm. At the same time, return on client assets for managed investing solutions is twice that of retail, which diversifies our revenue streams as we delight clients. We expect wealth to be a critical future driver of AMAF growth. We've also made significant investments in our banking offer. Just a few years ago, it took about a month for a client to access investments. We've made our pledged asset line client experience best-in-class with average digital cycle times of about a day and nearly three-quarters of originations completed in less than a day. With these investments in client experience, PAL balances have nearly doubled since 2023. Given the opportunity we have ahead of us, we're not taking our foot off the gas. Client penetration of PAL remains relatively low. Within retail, only 9% of ultra-high net worth clients have originated a PAL. In Advisor Services, 23% have a PAL. We are continuing to invest in the experience with expanded PAL collateral capabilities, including borrowing against Schwab managed investing solutions and more enhancements to follow in the year ahead. With an average spread to securities north of 100 basis points, this is a win for clients and for our economics. Schwab is the place for traders of all experience levels. We're the number one firm by daily average trades, handling about 10% of the total U.S. notional trading volume in 2025. Traders come to Schwab because we provide the platforms, capabilities, education, coaching, and service they need to grow their wealth, engage in markets, take advantage of opportunities, and hedge their portfolios. In 2025, about half of new-to-firm retail clients initiated access to our industry-leading thinkorswim platform. Schwab clients hold about a 20% share of spot crypto exchange-traded products, and we remain on track to launch spot trading on Bitcoin and Ethereum in the first half of this year. Traders are highly engaged, bringing in nine times more NNA than retail clients and twice the ROCA. We'll continue to enhance our offer to meet their unique needs. We're also deepening relationships with our higher net worth clients by continuing to strengthen our alternatives offer. With our acquisition of Forge, which we expect will close in the coming months, we'll be able to provide retail and RIA clients with alternatives from leading managers, passive exposure to alternatives via funds, and direct investing in private companies. The opportunity is meaningful. In a recent survey of clients with $1 million or more in assets, retail clients said they expect to allocate approximately 5% of their portfolios to alternatives. Today, less than 40% of our RIA clients have an allocation to alternatives. Building out our alternatives offer and helping more people participate directly in the growth of private companies provides opportunities for wealth creation and diversification that we believe will be attractive to qualified individual investors and the advisers who serve them. I spent a bit of time discussing our growth levers. Our scale and efficiency initiatives make it easier for clients to do business with us while keeping our cost to serve low and enabling us to reinvest in client capabilities. With more than 220 use cases, we are leveraging artificial intelligence to help our professionals serve clients more efficiently. We continue to automate high-volume client requests, improving accuracy, speed, and our client experience. We progressed efforts to improve status notifications to clients and remove more paper from our system, reducing not-in-good-order errors and saving time for our clients and professionals. Our scale, combined with our expense discipline, has allowed us to decrease our cost per account by 20% over the last five years while driving our ability to remain the industry leader. On an adjusted basis, EOCA has decreased from about 15 basis points in 2020 to about 11 basis points today. The fourth lever that positions us for earnings growth through the cycle is our disciplined financial management and capital return. I'll turn it to Mike now to speak more in detail on our approach.

Thank you, Rick, and good morning, everyone. During today's call, I will discuss how we converted our strong business momentum into record financial results for 2025. I'll highlight some of the steps we took to further enhance our capabilities to meet our clients' evolving needs through a range of environments and finally, outline our financial scenario for 2026. Starting with the fourth quarter results. Total revenue was up 19% year-over-year to a record $6.3 billion. Net interest revenue increased 25% versus the prior year as we further reduced wholesale funding at the bank to the lower end of our BAU range and clients increased their utilization of our margin and bank loan offerings. Robust equity markets plus client demand for our wealth and asset management solutions helped asset management and administration fees grow by 15% versus 4Q '24. Daily average trades of $8.3 million, the second highest quarter on record, drove a 22% year-over-year increase in trading revenue. Now looking at expenses. Adjusted expenses for the fourth quarter were up 6% versus 4Q '24, bringing full-year adjusted expense growth to 6% as we supported record levels of investor engagement across our suite of trading, wealth, banking, and asset management solutions. While we had anticipated some moderation in client trading activity towards the back end of the year, we instead saw an acceleration in activity, which contributed to higher volume-related costs, inclusive of performance-based compensation. This incremental expense was more than offset by the significant pickup in revenues and therefore, supported stronger earnings. Putting everything together, we recorded an adjusted pretax profit margin of just over 52% in the fourth quarter and grew adjusted earnings per share by 38% year-over-year to a record $1.39. This strong finish to the year helped us print record financial results for 2025, including total revenue of $23.9 billion, up 22% versus 2024, adjusted pretax profit margin expansion of nearly 800 basis points to 50%, and adjusted earnings per share reaching a record $4.87, representing year-over-year earnings growth of 50% and putting earnings above the upper end of the updated scenario range we shared during the fall business update in October. Moving on to our balance sheet. We continue to support our clients as their needs evolve. Demand for our lending solutions increased during the quarter, led by strong performance in lending balances grew to $58 billion, representing a year-over-year increase of 28%. Client margin loan balances exceeded $112 billion at quarter end, up 34% versus year-end 2024, reflecting equity market strength and investor engagement. On the cash front, we observed typical fourth quarter seasonality, including over $26 billion of cash inflows in December, to bring the quarter end balance to $453.7 billion, which represents a sequential quarter increase of $28.1 billion or approximately 7%. This building cash, along with the use of investment portfolio proceeds and balances transferred from the bank allowed us to further reduce high-cost funding at the bank to $5 billion, the lower end of our $5 billion to $15 billion business as usual range. We'd expect normal cash behavior to continue in 2026 with cash levels generally growing in proportion with the franchise, with history suggesting we could pick up some modest amounts of incremental cash if interest rates move lower from current levels. We also expect typical intra-year cash seasonality trends to persist in 2026, including clients redeploying the fourth quarter cash build early in the first quarter as well as seasonal tax payments during 2Q. Capital levels remain strong with our adjusted Tier 1 leverage ratio finishing the year just above the upper bound of our 6.75% to 7% objective. At 7.1%, our adjusted ratio also reflects the repurchase of common shares for $2.7 billion during the fourth quarter, bringing year-to-date total capital return across all forms to $11.8 billion. As we move into the new year, our capital management framework remains unchanged. We will continue to prioritize capital levels that support long-term business growth and the evolving needs of our clients across a range of environments. Beyond that, we would seek to opportunistically return excess capital to stockholders in multiple forms. While the absolute level of capital return may vary over time, we believe capital return will continue to be a meaningful part of our through-the-cycle financial growth story. Transitioning to the setup for 2026. As is the case in any year, our financial outcomes will be influenced by a range of factors. Beginning with select macroeconomic factors, our 2026 financial scenario assumes interest rates follow the current forward curve expectations, which call for 225 basis point cuts to the Fed's target rate, bringing the funds rate down to 3.25% by the end of 2026 and 6.5% equity market returns, which is consistent with the long-term average. On the business side, we expect to sustain our momentum from 2025 into the new year with strong new account formation and full-year organic asset growth of around 5%. At the same time, we will continue to deepen relationships with the 46 million total accounts and nearly $12 trillion of client assets already on Schwab's platform today. Increased investor utilization of our expanding set of solutions across trading, wealth, banking, and more helps to further diversify our revenue as well as support franchise growth over time as clients with deeper relationships tend to consolidate more of their assets at Schwab. Specifically on trading activity, given the record volumes we supported last year, our 2026 scenario does allow for a slight pullback in volumes to roughly 7.4 million daily average trades for the full year. This level aligns more closely with volumes observed in early 2025. Under this scenario, we would expect total revenue growth of 9.5% to 10.5% in 2026. Full-year net interest margin expands to a range of 2.85% to 2.95% with average fourth quarter 2026 NIM expected to finish above 2.9% despite assuming the Fed funds rate comes down by another 50 basis points. Full-year 2026 interest-earning assets are expected to expand modestly year-over-year following the paydown of supplemental borrowings at the bank. From an expense planning perspective, we initially anchored to mid-single-digit year-over-year growth and adjust for a range of factors, including the macroeconomic backdrop, client engagement levels, our strategic initiatives, and, of course, the revenue outlook. Therefore, within this financial scenario for 2026, we anticipate annual expense growth to range from 5.5% to 6.5%. Our spending plan aligns to our key strategic initiatives and aims to help us continue delivering financial growth through the cycle by driving new client growth and deepening relationships with individual investors and RIAs by further expanding our leading suite of offerings to serve their evolving needs, bolstering our best-in-class service experience while also harnessing incremental scale and efficiency. Select examples for 2026 include investing in branches, adding more financial consultants and wealth advisers, advertising and marketing, expanding our digital asset offering to include spot crypto trading, and incorporating more AI across the firm, particularly within our service and technology organizations. So putting all the pieces together, the combination of strong top-line growth and balanced expense management implies meaningful operating leverage within this scenario with further pretax margin expansion into the low 50s.

Okay. Operator, looking at the clock, I think we have time for one final question.

So I just wanted to ask about on the margin here. So guide to the low 50s for 2026, great to see that the margin continues to march higher here. How should we think about that longer-term potential? What's the ceiling there? And then specifically on the AI opportunity, can you maybe talk about some of the measurable revenue lift that we could see in terms of conversions, retention, adviser productivity, service triage? And what are kind of the key KPIs we should track here to know how well it's working and then how your key proprietary data gives you an advantage over some of the new entrants in the fintech space?

Mike, thanks for the question. First, regarding margin growth, we've seen significant margin expansion, which stems from a balanced approach to managing our finances. As Rick and I discussed today, we're doing more for our clients, and we're seeing strong uptake of our broader product offerings. This leads to good revenue diversification, which supports the sustainability of those revenues. Additionally, our balanced approach to expense management involves investing in our strategic priorities while also boosting efficiency, allowing us to maintain a low cost to serve. This positions us for stronger financials and margin expansion. While we could see further margin growth, there isn't a fixed target or limit; it reflects our financial management approach. In terms of AI, we've already noticed efficiencies from having our client-facing representatives utilize AI. We've increased client accounts and assets while moderating the growth of client-facing reps, demonstrating our existing efficiency. We intend to expand AI use, particularly within our technology and service areas. The key metrics we'll keep focusing on include the cost per account, which is essential for tracking our progress. We aim to maintain a low cost to serve and further reduce those costs.

Thank you for your questions and engagement. We have an incredible opportunity ahead of us to deliver for clients and stockholders alike as we look to 2026 and beyond. We have two equally powerful levers for growth, attracting more clients and doing more for the 46 million client accounts that we have. Our scale and efficiency initiatives will continue to fuel our ability to invest in our clients while keeping our cost to serve them low. Taken together with this disciplined approach to financial management and capital return that Mike just described, we are confident that we'll continue to deliver earnings growth through the cycle. Thank you.