Bond investors show confidence in Schwab after cost-cutting

By Matt Tracy

(Reuters) -Investors shrugged off a slump in the shares of Charles Schwab (NYSE:) to pile into the firm’s bond offering on Tuesday, in a sign of renewed confidence in the credit fundamentals of at least some regional banks after the March banking crisis.

Schwab raised $2.35 billion selling two tranches of bonds on Tuesday, a day after it announced plans to layoff staff and close or downsize some corporate offices to save about $500 million. The announcement led to a 5% fall in Schwab shares on Tuesday but did not hurt investor appetite for its new bonds.

Schwab’s sale of $1 billion in three-year bonds and $1.35 billion in 11-year bonds – callable after 10 years – attracted investor orders worth three times the amount sought by the company.

“The strong response shows bond investors, at least in the near term, have gotten over their worries about the credit fundamentals of top-tier regional banks after the banking crisis in March,” said Richard Wolff, head of U.S. syndicate at Societe Generale (OTC:).

Dan Krieter, credit strategist at BMO Capital, said Schwab may be more insulated from the risk of significant deposit outflows since “their deposit situation is not akin to traditional banks.”

Schwab has been losing cheap deposits – unused cash lying in brokerage accounts – as customers moved that money to other banks or products paying higher interest rates.

The company has previously made public statements this year that while client deposits may move, they are not leaving the firm.

The company’s picture is “not very rosy but they are not doing as bad compared to some of their peers,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.

“They were losing out deposits earlier this year – which seem to have stabilized now as they became more competitive – and we don’t see any liquidity crisis with them at the moment,” he said.

Schwab has had to rely on more expensive funding sources to supplement its cash flow, such as certificates of deposit (CD) or borrowings from the Federal Home Loan Bank. This has hurt the company’s profitability.

Schwab’s management expects deposits to increase by the end of the year, and said the company has already reached peak usage of high-cost funding.

The improved outlook likely helped generate interest from fixed income investors, according to David Del Vecchio, co-head of U.S. investment grade corporate bonds at PGIM Fixed Income.

Schwab’s bond trade also drew attention as new investment grade bond supply this month has so far been lower than expected.

“It’s been very, very light with the calendar the past few weeks,” said Natalie Trevithick, head of investment-grade credit at asset manager Payden & Rygel in Los Angeles.

Counting Schwab’s $2.35 billion in bonds, investment-grade bond volume sits at just $3.45 billion for the week and $67.1 billion so far in August, according to Informa Global Markets data. That tally is much lower than the $95 billion total supply previously expected this month.

Schwab declined to provide comment.