Schwab + TD Ameritrade: Banks Always Win

New York | The combination of The Charles Schwab Corporation (SCHW) and TD Ameritrade Holding Corporation (AMTD) says a lot about the changing economics of the wealth management business.  But as readers of ZeroHedge know very well, it also confirms Feinberg’s First Law: No private company can compete with a government sponsored entity (GSE) like a bank. And SCHW is the 14th largest bank holding company in the US.

 

Clip from BNN-Bloomberg:

 

https://www.bnnbloomberg.ca/video/consolidation-only-option-amid-zero-t…

 

BNN Bloomberg

 

The first obvious point to be made is that SCHW is a $270 billion bank holding company that boasts over $200 billion in core deposits.  That is 3x the level of core deposits of The Goldman Sachs Group (GS).  Unlike GS which barely trades at book value, SCHW trades at 3.3x book.  That is a 50% premium to exemplars such as U.S. Bancorp (USB), which we own, and 100% above the valuation for JPMorgan Chase (JPM), which we don’t own.

 

Not only does SCHW outperform most large US banks on the net income line, but that nice cushion of liquidity gives SCHW a cost of funds that is less than half the average for large banks above $10 billion in total assets (aka Peer Group 1 by federal regulators).  AMTD, on the other hand, is a non-bank finance company with a non-depository Utah industrial bank.

 

While AMTD has been rolling up the world of discount online brokerages, the end of the road came when SCHW announced that it was going to eliminate commissions entirely.  This caused AMTD’s stock price to crater to “only” 2x book, but has now quickly recovered to over 3x book with the news reports of an impending merger with SCHW.

 

With $1.3 trillion in client assets, AMTD adds to SCHW’s $3.2 trillion in AUM, creating a very efficient bank wealth management platform.  Over time, you can look for SCHW’s balance sheet to grow as the bank attracts the float from its new wealth management clients.  The Toronto-Dominion Bank (TD), which owns 40% of AMTD, may eventually take a run at SCHW.  In any event, if TD wants to retain its stake in the combined entity, it must apply to the Federal Reserve Board for permission. 

 

And remember, banks/GSEs always win.