Transcription

FallBusinessUpdateOctober 20, 2017

IntroductionRichFowlerSenior Vice PresidentInvestor Relations2Charles Schwab Corporation

AgendaWalt Bettinger, President and Chief Executive OfficerPeter Crawford, EVP and Chief Financial Officer3Charles Schwab Corporation

Today’s Dial-in Number(800) 871-6752Conference ID: 219444404Charles Schwab Corporation

Forward-Looking StatementsThis presentation contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934. Forward-looking statements include statements that refer to expectations, projections or other characterizations of future events orcircumstances and are identified by words such as “believe,” “expect,” “will,” “may,” “should,” “could,” “continue,” “growth,” “deliver,” “scenario,” “remain,”“drive,” “estimate,” “lead,” “record,” “on track,” “prepare,” “anticipate,” “potential,” “opportunity,” “intend,” “ensure,” “goal,” “progress,” “objective,” “flexibility,”and other similar expressions. These forward-looking statements relate to: growth in the client base, accounts and assets; savings for clients; disruptiveactions; growth in revenues, earnings and profits; stockholder value; investments in people, technology, and clients; client value and pricing; core net newassets; competitive position; client demand for the company’s advisory solutions; operating leverage; capital management; the monetization of client cashbalances; operating objective for tier 1 leverage ratio; deployment of excess capital; client sensitivity to yield; net total bulk transfer opportunity; preparationsfor crossing the 250B asset threshold; FHLB borrowing; bulk transfers; net interest margin; gap between revenue and expense growth; balancing near-termprofitability with reinvestment for growth; delivering incremental revenue from additional 2017 rate increases to pre-tax profit; pre-tax profit margin; impact ofany potential corporate tax reform benefit; and expenses. These forward-looking statements, which reflect management’s beliefs, objectives and expectationsas of today, are estimates based on the best judgment of the company’s senior management. Achievement of the expressed beliefs, expectations andobjectives is subject to risks and uncertainties that could cause actual results to differ materially from those beliefs, expectations or objectives.Important factors that may cause such differences are discussed in the company’s filings with the Securities and Exchange Commission, including our AnnualReport on Form 10-K and Quarterly Reports on Form 10-Q. Other important factors include general market conditions, including the level of interest rates,equity valuations and trading activity; the company’s ability to attract and retain clients and registered investment advisors and grow those relationships andclient assets; competitive pressures on pricing; the company’s ability to develop and launch new products, services and capabilities in a timely and successfulmanner; client use of the company’s investment advisory services and other products and services; the level of client assets, including cash balances; thecompany’s ability to monetize client assets; capital and liquidity needs and management; the impact of changes in market conditions on revenues, expensesand pre-tax margin; the company’s ability to manage expenses; the quality of the company’s balance sheet assets; regulatory guidance; client sensitivity torates; the timing and amount of bulk transfers; the level of interest-earning assets; the effect of adverse developments in litigation or regulatory matters andthe extent of any charges associated with legal matters; and any adverse impact of financial reform legislation and related regulations.The information in this presentation speaks only as of October 20, 2017 (or such earlier date as may be specified herein). The company makes no commitmentto update any of this information.5Charles Schwab Corporation

WaltBettingerPresident andChief Executive Officer6Charles Schwab Corporation

Schwab’s Virtuous Cycle continues to deliver strongbusiness momentum.Challenge the Status Quo toBenefit Investors9% 3Q17 Expense Growth 51.6B 3Q17 Core NNA 380M* in AnnualizedCost Savings for Clients 3.2T Client AssetsGreater Investments,Which Fund Actions to Investors Reward UsWith More of Their Assets 2.2B 3Q17 Revenue43.6% 3Q17 Pre-taxProfit Margin15% 3Q17 ROE20% 3Q17 EPS Growth7Outstanding StockholderValue, and Leading to RecordFinancial Results, Note: All metrics are 3Q17 and 3Q17 vs. 3Q16 except cost savings.*Estimated annualized cost savings for clients from strategic pricing moves announced in February 2017 and September 2017.Charles Schwab Corporation

The “Cycle” starts with our goal of providing ano trade-offs position for our clients – our “ThroughClients’ Eyes” strategy.8ValueServiceTransparencyTrustDeliver industry-leadingpricing to all of our clientsDeliver world class service toinvestors and advisorsEnsure every client interactionis clear, simple, and easyTreat clients the way wewould like to be treatedOnline Commission and IndexMutual Fund PricingJ.D. Power “Highest inInvestor Satisfaction with FullService Brokerage : Charles Schwab received the highest numerical score in the J.D. Power 2017 Full Service Investor Satisfaction Study, based on 6,579 responses from 20 firms measuring opinions of investors who usedfull service investment institutions and were surveyed in January 2017. Your experiences may vary. Visit jdpower.com.Charles Schwab Corporation

In the first 9 months of 2017, we have takenbold steps to benefit investors.Schwab Intelligent Advisory Lowest Index Mutual Fund Pricingwith No Minimums9Note: See appendix for important notes and disclosures.Charles Schwab Corporation

and in early Q4, we took another step bylowering expenses for money funds.New NetExpense Ratio1Minimum InitialInvestment2InvestorSharesPrimeNational MunicipalGovernment3TreasuryState-Specific Municipal0.35%NoneUltraSharesPrimeNational Municipal0.19% 1,000,000Included Purchased Money Funds:Lower Pricing withReduced Expense RatiosIncreased Access withLower MinimumsStreamlinedShare ClassesPotential for as much as 20 million a quarter in savings for clients across all money funds10Note: 1Funds may have waivers in effect, without which performance will be lower. 2The Funds’ Investor Shares have no initial investment minimum; however, Schwab systems require a minimum of 1 pertrade. 3Schwab Retirement Government Money Fund is designed for use only by participants in employee-sponsored retirement plans such as 401(k)s and 403(b)s (not clients with individual IRAs) with a0.19% net expense ratio and 1,000,000 minimum.Charles Schwab Corporation

further enhancing the competitiveness of ouroverall cash solutions for investors Our Cash Philosophy: Clients should have access to smart features for all oftheir cash, from everydayuses to savings andinvestments with attractive yieldsrelative to ourcompetitive set and transparency from us,giving them the informationthey need to make informeddecisions.Product lineup spans Bank/BD sweep, checking,savings, CDs, and money funds11Charles Schwab Corporation

while making substantial investments tohighlight the role of RIAs and our support for them.The “Independent Difference” campaign advocates for independent advisors, raising awareness of the benefits ofindependence among HNW investors, and underscoring Schwab’s longstanding commitment to RIAs20162017Debuted anationaladvertisingcampaign in printand digital12Starting inOctober, we arerunning TVcommercials onCNBC & FoxBusinessCharles Schwab Corporation

Challenging the status quo yielded record growthin client accounts 2519S&P 500Daily AverageTrades (K)2258Most consecutivemonths of100,000 newaccounts inSchwab’s history740607605638550584553574565633543336264New BrokerageAccounts JulAugSep20173Q163Q17Charles Schwab Corporation

and record core net new assets – 26% higherthan our prior 1Q-3Q record.Core Net New Assets(billions)YTD 3Q17 coreNNA surpasses allbut one priorfull year total 136.7 108.8 91.6 102.0 88.6 64.6Clearing*IS and AS (ex-Clearing)YTD 3Q12YTD 3Q13YTD 3Q14YTD 3Q15YTD 3Q16YTD 3Q17On track for sixth consecutive year in excess of 100 billion14Note: Core net new assets is defined as net new assets before significant one-time flows, such as acquisitions/divestitures or extraordinary flows (generally greater than 10 billion) relating to a specific client.Charles Schwab Corporation* Includes all clearing flows under 10 billion.

while our overall competitive positioncontinues to strengthen and strengthen.Net TOA FlowsTOA Ratio2/2/2017: Pricing Movesand Satisfaction GuaranteeAnnouncement2.12.12Q173Q17 71%1.81.7151.61.61Q162Q161.63Q164Q161Q17YTD 3Q16Note: TOA Transfer of Accounts. TOA Ratio is total assets transferred in divided by total assets transferred out. Net TOA Flows represent total net TOA inflows from all competitors.YTD 3Q17Charles Schwab Corporation

as both primary businesses show strong progress.Advisor Services continued rapid asset growth Our number of AITs is 35% higher than2016, surpassing all full year totals with the average AIT size up 60%. helping to drive a 74% overallincrease in NNA.Source of Advisors in Transition (AIT)Average AIT Size ( M)Advisor Services Institutional NNA 35%173 74% 151128 95IBD 59%WirehouseRBDOtherYTD 3Q1616New RIAsYTD 3Q17YTD 3Q16Existing RIAsYTD 3Q17Note: Excludes Retirement Business Services. IBD Independent Broker Dealer; RBD Regional Broker Dealer; Other Banks, Institutional BDs, Trusts, and Insurance.YTD 3Q16YTD 3Q17Charles Schwab Corporation

while Investor Services broke net new assetrecords and grew advisory services.YTD 3Q17 vs. YTD 3Q16Retail is gathering net newassets at record levels as more clients are enrollingin advised offers with total assets in Retail and OtherAdvisory Solutions growing fasterthan total company assets. 255BTotal Accounts in RetailAdvisory Solutions 213B597K695KYTD 3Q16 62%17 16%YTD 3Q17 19%Charles Schwab Corporation

These outstanding metrics helped to driverecord earnings Schwab Diluted EPS 87% 27% 1.31 0.9518 0.70 0.6920112012 1.03 1.21 0.95 0.782013201420152016YTD 3Q16YTD 3Q17Charles Schwab Corporation

substantial progress in the value of SCHWstock SCHW Stock Price 43.74 17.5020111920122013201420152016YTD 3Q17Charles Schwab Corporation

and position us to continue investing in ourclients.20YTD 3Q17ExpensesYTD 3Q17Headcount2017 Annualized CostSavings for Clients 10% 7% 380MNote: Expenses and headcount growth compare YTD 3Q17 vs. YTD 3Q16; estimated annualized cost savings for clients from strategic pricing moves announced in February 2017 and September 2017.Charles Schwab Corporation

Schwab’s Virtuous Cycle continues to deliver strongbusiness momentum.Challenge the Status Quo toBenefit Investors10% YTD Expense Growth 136.7B YTD Core NNA 380M* in AnnualizedCost Savings for Clients 3.2T Client AssetsGreater Investments,Which Fund Actions to Investors Reward UsWith More of Their Assets 6.4B YTD Revenue42.3% YTD Pre-taxProfit Margin15% YTD ROE27% YTD EPS Growth21Outstanding StockholderValue, and Leading to RecordFinancial Results, Note: All metrics are YTD 3Q17 and YTD 3Q17 vs. YTD 3Q16.*Estimated annualized cost savings for clients from strategic pricing moves announced in February 2017 and September 2017.Charles Schwab Corporation

AppendixPage 9:Restrictions apply: Standard online 4.95 pricing does not apply to certain transactions. See schwab.com/pricing.Schwab Intelligent AdvisoryTM is made available through Charles Schwab & Co., Inc., a dually-registered investment adviser and broker dealer.Charles Schwab Investment Management, Inc., the investment advisor for Schwab Funds, and Charles Schwab & Co., Inc., Member SIPC, the distributor for Schwab Funds, are separate butaffiliated companies and subsidiaries of The Charles Schwab Corporation.If you are not completely satisfied for any reason, at your request Charles Schwab & Co., Inc. or Charles Schwab Bank will refund any eligible fee. See schwab.com/satisfaction.22Charles Schwab Corporation

PeterCrawfordExecutive Vice President andChief Financial Officer23Charles Schwab Corporation

We posted the strongest third quarter in thecompany’s history. Record success with clients,meaningful operating leverage, anddeliberate capital managementcontinue to drive the business We are following our strategy toeffectively monetize client cashbalancesToday we’ll discuss: Q3 2017 results Capital picture 2017 financial outlook 2018 planning considerations We remain flexible as we look tofinish 2017 and prepare for 201824Charles Schwab Corporation

Total NetRevenues* (millions)We generated record revenues and pre-tax profitmargin in the third quarter 1,914Pre-tax Profit Margin 2,165 AMAF NIRTradingOther3Q16Total Expenses(millions)3Q1625Asset management andadministration fees and net interestrevenue also set new quarterlyrecords at 861 million and 1.1 billion, respectively3Q17 1,120Ninth consecutive quarter of recordrevenues 1,2203Q17Compensation and benefits weredriven by strong asset gathering andincreased staffing to serve ourexpanding client base Professional services grew primarilydue to increased project spendingand asset-related fees Remaining non-comp expenses wereconsistent with our planned pace ofgrowth investments*Revenues include net litigation proceeds relating to RMBS settlements totaling 14M in 15%15%15%1Q172Q173Q17ROE14%14%3Q164Q16Charles Schwab Corporation

supported by our all-weather balance sheet.(in millions, EOP)Total Assets2Q173Q17* 209,337 220,601 230,714Bank Deposits 149,630 162,300 165,263Payables to Brokerage Clients 32,961 33,039 31,480Short-term Borrowings 3,001 300 5,000Long-term Debt 2,876 3,518 3,268Stockholders’ Equity 15,470 17,489 18,027Parent Liquidity 1,604 2,451 2,7377.1%7.4%7.7%Tier 1 Leverage Ratio263Q16Bank deposits grew in 3Q, helped by organiccash and the transfer of 1.4 billion in sweepdeposits from Schwab One to the Bank and 300 million from money funds to the BankApproximately 5 billion of FHLB advances soinvestment can occur before sweep balancesgrow through deposits or bulk transfersOperating objective remains 6.75%-7%;Ratio may continue to rise temporarily aswe near 250 billion;We intend to more fully deploy excess capitalin 2018Note: FHLB is Federal Home Loan Bank of San Francisco. Parent Liquidity equals Parent Working Capital plus Level 1 Securities (market value) as defined by the Liquidity Coverage Ratio rule. Tier 1 LeverageRatio is based on Tier 1 Capital, which is End of Period Capital (Stockholders’ Equity less AOCI and other regulatory adjustments) divided by Average Total Consolidated Assets.* Preliminary.Charles Schwab Corporation

We have made significant progress in advancingour client cash strategy.Our offerings have evolved to more effectivelymeet client needs and monetize client cashLateOffered 3rd party money funds1970s271983Schwab One launched with broker-dealer sweep option1986Started Schwab CD Service1990In 1989, founded Charles Schwab Investment Management;offered proprietary money funds in 19902003Established Charles Schwab Bank and the Bank sweep feature;initiated Sweep Transition Program2005Integrated checking and brokerage accounts2007Released Schwab Bank High Yield Investor Checking 2008Began bulk transfers from money funds to the Bank2009Introduced Schwab Bank High Yield Investor Savings 2016Bank sweep becomes the default option for all new accountsSince 2008, we have bulk transferrednearly 50 billion to Schwab Bank 46B 19B 27BSchwab One toBank SweepMoney Funds toBank SweepBulk Transfers 2008-YTD 3Q17Charles Schwab Corporation

Our future bulk transfer opportunity is unchanged.Most client cash is in sweep and we estimate that the majorityis relatively yield insensitive – about 7.5%-8.0% of total client assetsAs rates normalize with a 2%-3% Fed Funds target, the yield sensitivecash will find its level in sweep and the remainder will seek higher yieldsCash as a % of Total Client Assets – 3Q17Cash as a % of Total Client Assets – Potential Future %3.8%5.3%BalanceSweepPurchasedSheet Sweep Money Funds Money FundsChecking/Savingsand OtherTotal Cashas a % ofClient AssetsBalanceSweepPurchasedSheet Sweep Money Funds Money FundsTotal Cashas a % ofClient AssetsChecking/Savingsand OtherThis 7.5%-8.0% estimate implies a net bulk transfer opportunity of 60- 80 billion28Note: Based on 3Q17 actuals.Charles Schwab Corporation

We are maintaining balance sheet flexibility for therest of 2017 as we prepare to cross 250 billion.Bank ting 4Q17,inform impactedclients Allows for flexibility in timing Provides relationship managementteam time for training and clientconversations Draw on FHLBin advance ofdeposit liabilitiesOpportunity to invest and earninterest revenue for a longer periodof time prior to bulk transfersPotentially more in 4Q17,depending on organic activityBulk TransfersTransfer assetsat a measuredpace Likely wait until 2018 to do anysignificant bulk transfers Monitor rate at which approaching 250 billion in consolidated assetsCharles Schwab Corporation

As we near the end of 2017, we remain consistentin our approach and financial expectations.RevenuesExpensesPre-taxProfitMargin30 Without a further rate hike, we would expect FY 2017 revenue growth to reach the middouble-digit range – the effect of a December rate move would be de minimis Net interest margin likely to remain relatively flat if: Organic client cash has minimal growth with a modest December seasonal increase Short-term rates persist at current levels 10-year Treasury rate stays below 2.45%, affecting long-term reinvestment rates Under these circumstances, we expect to be ahead of our baseline scenario with a gapbetween revenue and expense growth of around 400 basis points Our spending decisions will remain focused on balancing near-term profitability withreinvestment to drive long-term growth Clients, technology, and people remain our key investment areas We aim to deliver the majority of any potential incremental revenue from any additional2017 rate increases to pre-tax profit We expect a pre-tax profit margin of around 42%Charles Schwab Corporation

Looking ahead to 2018: We anticipate crossing the 250 billion consolidated asset threshold in the first half 250 billionConsolidatedAsset Threshold Over the course of 2018, we intend to execute on bulk transfers utilizing existing capital,bringing our Tier 1 Leverage Ratio closer to our 6.75%-7% objective; pace will depend onseveral factors, including operational considerations We will provide more details at the February Business Update in terms of timing and amountof bulk transfers We are currently developing our 2018 plan and will continue to assess the revenue outlookpending the Fed’s December meeting2018Forecasting Without further rate hikes, expense planning will, at a minimum, take into account necessaryoutlays for regulatory, infrastructure, and other critical-path projects We anticipate that any potential corporate tax reform benefit would fall to the bottom line31Charles Schwab Corporation

Our model continues to succeed in this uncertainenvironment. Record success with clients,meaningful operating leverage, anddeliberate capital managementcontinue to drive the business We are following our strategy toeffectively monetize client cashbalances We remain flexible as we look tofinish 2017 and prepare for 201832Our overall priorities aresimple: Continued business growththrough our client-first strategySolid revenue growth throughmultiple sourcesExpense discipline leading toenhanced performanceCharles Schwab Corporation

Q&A33Charles Schwab Corporation

FallBusinessUpdateOctober 20, 2017

Charles Schwab Corporation. Today's Dial-in Number (800) 871-6752 . Conference ID: 21944440 4