2023 Q1 Earnings Review Part II: Financials

• Charles Schwab reported a mixed quarter despite beating Wall Street estimates but the business has stormy clouds ahead.
• Bank of America reported a solid quarter displaying that the bank is well-positioned to weather an economic downturn.
• Intercontinental Exchange Inc. reported a solid quarter as it looks to close its Black Knight acquisition.
• Visa Inc. reported a solid quarter and showed why the stock commands a premium valuation.

Charles Schwab Corporation

Charles Schwab (SCHW) is one of the largest brokerage firms and banks in the US, with over 32 million active brokerage accounts and $7.5 trillion in client assets as of March 31, 2023. The company reported its first-quarter earnings on April 19, 2023, beating analysts’ expectations on revenue and earnings per share. However, the stock price has been under pressure this year, falling more than 36% since January, due to concerns about its exposure to bond losses and deposit outflows amid rising interest rates. Schwab posted a net income of $1.6 billion for the first quarter of 2023, up 14% year over year, and earnings per share of $0.73, up 16% year over year. However, the earnings number was slightly disappointing compared to our fund estimate of $0.89.

The company’s revenue increased 10% yearly to $4.7 billion, driven by higher asset management and administration fees, trading revenue, and net interest income. Schwab also achieved record levels of net new assets ($132 billion), new brokerage accounts (1 million), and total client assets ($7.5 trillion) in the quarter. Schwab’s earnings were supported by its diversified revenue streams, which include fees from asset management, advisory services, trading commissions, interest income from loans and securities, and other sources. The company’s fee-based revenue accounted for 58% of its total revenue in the first quarter, up from 54% a year ago, reflecting its strategy of growing its wealth management and advisory businesses. In addition, Schwab’s trading revenue increased 18% yearly to $1.2 billion as the company benefited from higher trading activity and volatility in the market.

Schwab’s net interest income rose 6% yearly to $1.8 billion, despite a challenging interest rate environment. The company’s net interest margin (NIM), which measures the difference between the interest income it earns and the interest expense it pays, declined from 2.01% in the fourth quarter of 2022 to 1.86% in the first quarter of 2023, mainly due to lower yields on its investment portfolio and higher deposit costs. However, Schwab was able to offset some of the NIM compression by growing its average interest-earning assets by 9% year over year to $390 billion. Bank deposits shrank 11%, an indication of the regional banking crisis sparked by the collapse of Silicon Valley Bank.

The capital levels for Charles Schwab are reasonable, with over $40 billion in cash, and management has paused its share buyback program. However, management announced a 14% dividend increase, resulting in the stock popping 3% after the news. We took advantage of the pop in the stock price to exit our position in the stock because of the increase in deposit cost that will hit Charles Schwab. However, the stock has sold off significantly, and we think there are better areas to deploy capital.

Bank of America Corporation

Bank of America (BAC) is one of the largest and most diversified financial institutions in the United States, serving millions of customers across various segments and regions. BAC reported a net income of $8.1 billion, or $0.86 per diluted share, for the first quarter of 2023, beating analysts’ expectations of $0.79 per share. This was an increase of 40% from the same period last year when the bank earned $5.8 billion, or $0.61 per share. As a result, we estimated the bank would earn $0.85 per share. The bank attributed its strong performance to higher revenue from its consumer banking, wealth management, and investment banking businesses, as well as lower credit costs and expenses.

BAC’s revenue for the first quarter of 2023 was $26.3 billion, up 13% from the first quarter of 2022. The bank’s net interest income was $10.2 billion, down 4% from $10.6 billion a year ago, due to lower interest rates and loan balances. However, this decline was more than offset by a 29% increase in noninterest income, which reached $13.2 billion, driven by higher fees from card and service charges, investment banking, brokerage, and wealth management. In addition, BAC’s provision for credit losses was a benefit of $1.9 billion in the first quarter of 2023, compared to an expense of $4.8 billion in the first quarter of 2022. This reflected an improvement in the economic outlook, the credit quality of the bank’s loan portfolio, and lower net charge-offs and reserves. As a result, BAC’s net charge-off ratio was 0.28%, down from 0.45% a year ago.

BAC’s noninterest expense was $13.5 billion in the first quarter of 2023, down 1% from $13.7 billion in the first quarter of 2022. The bank achieved positive operating leverage for the ninth consecutive quarter, as revenue growth outpaced expense growth. BAC’s efficiency ratio was 57.6%, down from 65% a year ago. BAC’s capital and liquidity ratios remained strong and above regulatory requirements. The bank’s standard equity tier 1 ratio was 12%, up from 11.8% a year ago. The bank’s liquidity coverage ratio was 124%, up from 117% a year ago. BAC’s return on average assets was 1.22%, up from 0.87% a year ago. The bank’s return on average common equity was 14%, up from 10% a year ago.

In summary, BAC delivered a solid earnings report for the first quarter of 2023, reflecting its diversified business model, resilient customer base, and disciplined cost management. The bank also benefited from an improving economic environment and lower credit costs. BAC’s outlook for the rest of the year remains positive, as it expects to grow its revenue and earnings while maintaining its substantial capital and liquidity position. In addition, the company returned $4 billion to shareholders through dividends and share buybacks. The bank’s Global Banking franchise is growing at a great rate of 47%, and its deposit base grew over $1 trillion during the quarter. We like the stock, and we continue to add to the name.

Intercontinental Exchange Incorporated

Intercontinental Exchange (ICE) is a leading operator of global exchanges, clearing houses, data, and listings services. ICE (Intercontinental Exchange) reported its Q1 2023 earnings on May 4, 2023. The company beat analysts’ expectations on revenue and earnings per share (EPS). ICE’s revenue was $1.87 billion, up 12% year-over-year (YoY) and 4% quarter-over-quarter (QoQ). The gain exceeded our expectations of $1.92 billion due to slower IPO activity and tightening credit conditions. ICE’s EPS was $1.45 (up 15% YoY and 6% QoQ), beating analysts’ estimates of $1.42. Compared to our fund estimate, the headline number aligned with our expectations.
The company attributed its strong performance to its diversified business model, which includes trading and clearing, data and listings, and mortgage technology. ICE’s trading and clearing segment generated $1.03 billion in revenue, up 9% YoY and 3% QoQ, driven by higher volumes and fees across its futures, options, and cash markets. ICE’s data and listings segment generated $755 million in revenue, up 16% YoY and 6% QoQ, driven by growth in its fixed income, exchange-traded funds (ETFs), and index services. Finally, ICE’s mortgage technology segment generated $82 million in revenue, up 28% YoY and 11% QoQ, driven by increased adoption of its digital mortgage solutions.
ICE’s operating income rose 14% year-over-year to $1.1 billion, while its operating margin expanded 100 basis points to 46%. In the third quarter, ICE generated $791 million in operational cash flow and $689 million in free cash flow. In addition, ICE returned $625 million to shareholders in the quarter through dividends and share repurchases. ICE’s CEO Jeffrey Sprecher commented on the results: “We delivered another quarter of record revenues and earnings, demonstrating the strength and resilience of our business model. We continue to invest in our core franchises and pursue strategic growth opportunities that enhance our value proposition for our customers and shareholders.” ICE’s outlook for Q2 2023 is positive, with revenue expected to grow by low double digits YoY and EPS expected to grow by mid-teens YoY.

The company delivered a solid quarter, and investors cheered the earnings news as the stock recorded modest gains. We hope the company can close the Black Knight acquisition, but the chances have been significantly hampered by an FTC lawsuit seeking to block the acquisition. The purchase will help bolster ICE’s mortgage segment and will help diversify the company’s revenue streams. We will continue to add to our stock position in ICE and helps to diversify our financial sector exposure.

Visa Inc.

Visa Inc reported second-quarter fiscal 2023 earnings of $2.09 per share, which beat the Wallstreet estimate of $1.99 by 6.1% and our estimated $2.03. The bottom line improved 17% year over year. Net revenues amounted to $8 billion, representing 11% year-over-year growth driven by higher payments, cross-border volumes, and processed transactions. Steady cross-border travel growth and lower-than-expected client incentives aided the results, partially offset by higher costs. Operating margins stayed steady at 66.8%, and net income margins improved by 300 basis points to 53.3%.
Visa’s payment volume grew 10% yearly on a constant-dollar basis in the fiscal second quarter. Processed transactions (implying transactions processed by Visa) totaled 50.1 billion, which rose 12% annual and beat our estimate of 45 billion. On a constant-dollar basis, the cross-border volume of Visa climbed 24% year over year in the quarter under review. Excluding transactions within Europe, its cross-border volume advanced 32% year over year on a constant-dollar basis. Service revenues improved 7% yearly to $3.8 billion in the March-end quarter due to better payment volume. Data processing revenues of $3.8 billion grew 10% year over year in the quarter under review.

Total operating expenses of $2.6 billion increased 11% yearly, missing wall street estimates of $2.7 billion. The increase was due to elevated personnel costs and professional fees. Interest expenses were $142 million, up 3.6% year over year. The company had a free cash flow of $7.57 billion, up from $7.28 billion as it repaid $2.3 billion of its debt. In addition, Visa returned $7.2 billion to shareholders through dividends and share buybacks. The company ended with $19.13 billion in cash & cash equivalents, up from $16.52 billion. Overall, this was a solid report from the company; stock is one of our core positions in the fund. We are stock buyers on any market weakness or broad market selloff.

Disclosure: Cresco Investments is long Bank of America Corporation (BAC), Intercontinental Exchange (ICE), and Visa Inc. (V).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and consult with their financial advisor(s).