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- Charles Schwab plunged 19% on Monday as investors dump shares of banks that have big unrealized losses on their bond portfolios.
- The decline comes after the swift implosion of Silicon Valley Bank, which was taken over by the FDIC on Friday.
- Charles Schwab has nearly $28 billion in unrealized losses across its held-to-maturity and available-for-sale bond portfolio.
Investors are growing more and more concerned about the massive unrealized losses banks are sitting on in their bond portfolios following the swift collapse of Silicon Valley Bank on Friday.
According to the FDIC, at the end of 2022 US banks were sitting on $620 billion in unrealized losses on their bond assets. Charles Schwab is one of those banks, with a combined $27.9 billion in unrealized losses across its held-to-maturity and available-for-sale bond portfolios, according to its annual 10-K filing.
The bank, which is the eighth largest in the country, saw its stock price crash as much as 25% in early Monday trades. The stock pared some losses but was still down 19% shortly after the opening bell. The stock is down 30% since Wednesday, when the first domino fell that ultimately took down Silicon Valley Bank.
Charles Schwab is one of many banks that poured billions of dollars into US Treasury securities at a time when interest rates were at rock bottom levels. Since rates have soared over the past year, those bonds have declined in value, and in the event that the bank needs to sell them, as Silicon Valley Bank did, they could realize significant losses that could ultimately wipe out shareholders' equity.
According to Charles Schwab's 10-K filing, the bulk of the bank's bond holdings across both its available-for-sale and held-to-maturity securities had a duration of more than 10-years with a weighted-average yield significantly lower than today's yields.
Schwab's available-for-sale securities totaled nearly $150 billion with an average-weighted yield of 2.13%, while its held-to-maturity securities totaled $159 billion with an average-weighted yield of 1.74%.
Investors today can buy a 2-year US Treasury note with a yield that is nearly triple the yield of Schwab's bond portfolio.
But as long as Charles Schwab is not forced to liquidate some or all of its bond portfolio, it should be able to avoid the financial mess that has put Silicon Valley Bank and others like First Republic and PacWest Bancorp in dire financial straits.
And there has been no sign that Schwab is experiencing a run on its deposit base, as was the case for Silicon Valley Bank, which received a stunning $42 billion in withdrawal requests on Thursday. Additionally, Schwab has plenty of liquidity options, even before including the Federal Reserve's new Bank Term Funding Program.
Morgan Stanley defended Charles Schwab in a Monday note, arguing that is has ample liquidity to meet customer deposits in the event of a bank run.
"We see ~$275 billion immediate liquidity available in a draconian short-term stress scenario, and ~$375 billion available over a 12-month stress scenario that fully covers their $366 billion bank deposit base," Morgan Stanley said.
"Notably, in a worst case scenario, if Schwab were to fund customer withdrawals via liquidating their $148 billion available for sale securities portfolio and crystallize $12 billion of unrealized securities losses, their Tier 1 leverage ratio would be largely unchanged," Morgan Stanley said.