Schwab earned 40% more from 15% less swept-deposit balances after net yield rose 77 basis points

Charles Schwab earned 40% more from its Bank Deposit Account arrangement in the third quarter even though the average balance fell 15%. Fee revenue from the sweep programme rose to US$345 million from US$247 million while average balances declined to US$68.3 billion from US$80.0 billion. The mechanism was yield, not deposit growth: average net yield increased from 1.21% to 1.98%, a rise of 77 basis points, and Schwab said lower amounts paid to clients and lower other applicable fees contributed. The result is a useful reminder that “cash balance” and “cash revenue” can move in opposite directions when the contractual spread changes.[1]

The arrangement involves deposits placed at TD Bank USA and TD Bank under an insured-deposit agreement. Schwab records a fee net of interest paid to clients and other charges. That is different from carrying the same deposits on Schwab’s own bank balance sheet and earning net interest income from assets funded by them. During the first nine months of 2026, Schwab transferred US$3.0 billion of BDA balances onto its own balance sheet, following US$6.7 billion transferred after September 2025. Those transfers reduce the base on which BDA fees are earned but provide funding for interest-earning assets or reduce borrowing. A fall in external sweep balances can therefore be part of a deliberate funding migration rather than simple customer cash flight.[1]

The rate composition also changed. Fixed-rate obligations represented 86% of average BDA balances in the quarter, up from 77%, while floating-rate balances fell to 14% from 23%. Schwab said higher yields on fixed-rate balances more than offset lower floating-rate amounts and yields. Because the fee is presented after amounts paid to clients, the economic result depends on the contractual return from the TD banks, the rate Schwab passes to customers and the mix of fixed and floating obligations. The reported 1.98% net yield is not the customer deposit rate and should not be presented as such.[1]

Cash migration coincided with rapid growth in loans secured by client assets

At the same time, Schwab’s credit balances expanded. Average receivables from brokerage clients rose to US$123.1 billion in the third quarter from US$87.3 billion a year earlier, an increase of about 41.0%. The filing says a large share related to client long/short strategies from which Schwab earns a fixed net yield; average balances for those strategies were US$51.4 billion in the quarter compared with US$2.8 billion a year earlier. The company changed their presentation beginning in late 2025, moving related revenue and expense to other interest lines and recasting comparative periods. That classification change makes a naive year-on-year comparison of traditional margin income unreliable even though the balance growth itself is clear.[1]

Bank loans also increased. The quarter-end balance reached US$72.3 billion, 25% above December 2025 and 35% above September 2025, driven mainly by pledged asset lines and first mortgages. Pledged asset lines rose to US$37.3 billion from US$26.6 billion at year-end, a 40.2% increase. These are bank loans secured by client assets, distinct from broker-dealer margin loans even though both depend on securities collateral and client wealth. Their expansion moves Schwab further from a pure agency-broker model toward a financial group where lending, deposit allocation and interest-rate management materially affect earnings.[1]

Wholesale funding supported the margin expansion

Schwab states that higher interest-earning assets were driven primarily by margin lending supported in part by wholesale funding. The company lists commercial paper, secured credit lines, repurchase agreements, securities lending and capital-markets issuance as possible sources used to support margin-loan growth while meeting Liquidity Coverage Ratio requirements. That disclosure establishes a funding dependency but not a shortage. Wholesale funding can be efficient and diversified; it can also become more expensive or less available during stress. The relevant question is the match between the maturity and liquidity of client-secured assets and the instruments used to finance them.[1]

The filing’s hedging disclosures add another layer. At September, cash-flow hedges covered interest receipts on US$24.3 billion of margin loans with US$47.9 billion of notional, while pledged asset lines of US$26.0 billion were hedged with US$34.7 billion of notional. Schwab explains that notional can exceed the underlying principal because multiple hedges may cover different periods. The 2-to-1-looking ratio on margin loans is therefore not hidden leverage and not the amount exchanged. It is evidence that interest-rate risk management became more extensive as the loan book grew. Any analysis that adds derivative notional to loan principal would materially overstate exposure.[1]

The economics favour Schwab when client cash rates fall faster than its contractual return

Schwab’s explanation for the BDA fee increase is unusually direct: lower interest rates reduced amounts paid to clients, while fixed-rate BDA yield improved. That can create a lag in which a broker benefits from repricing customer cash faster than the return on a fixed-rate obligation changes. It does not establish unfair pricing; customer cash rates, product alternatives and disclosure determine that assessment. It does show why headline deposit levels are an incomplete predictor of earnings. A 14.6% smaller balance produced an annualised fee-to-average-balance rate of roughly 2.02% based on the quarter, compared with about 1.23% a year earlier.[1]

The commercial alternative is client choice. Schwab says BDA balances also fell because customers changed cash allocations, and clients can move into money-market funds or other products. Higher market yields can encourage that migration. The firm’s transfer of balances onto its own balance sheet further complicates the interpretation: an external sweep balance may decline while total client cash remains within the Schwab ecosystem. To assess customer outcomes, a reporter needs the rates paid across sweep cash, money-market funds and bank products, plus the share of clients using each option. The 10-Q gives the company economics but not a full distribution of customer yields.[1]

The BDA mechanism also distributes interest-rate risk among three parties. The TD banks owe Schwab under fixed- and floating-rate obligation formulas, Schwab decides what it pays customers subject to product terms and competition, and customers decide whether to leave cash in sweep balances or move it. A fixed-rate obligation can protect Schwab when market rates fall but constrain it when rates rise. The quarter’s higher fixed-rate share helped explain the reported result, yet the filing does not provide the complete maturity ladder needed to project when that advantage reprices.[1]

Credit quality provides an important counterweight to the growth figures. Schwab reported only US$38 million of allowance against US$72.3 billion of bank loans and no accruing loans contractually 90 days or more past due. Pledged asset lines had no reported allowance in the table. Those data support management’s view that current credit performance was strong, although secured lending can produce low observed losses until collateral and borrower conditions change together. Tracking delinquency, collateral coverage and realised liquidation losses is therefore more informative than assuming that rapid growth is either harmless or dangerous.[1]

The disclosed fee and balance figures independently reproduce the yield change. Annualising the US$345 million quarterly BDA fee and dividing by the US$68.3 billion average balance gives about 2.02%; the same calculation for US$247 million on US$80.0 billion gives about 1.24%. The increase is roughly 78 basis points, close to Schwab’s reported 77-basis-point rise after rounding. That reconciliation supports the stated mechanism while also showing that the revenue gain came from yield and pricing, not a larger swept-deposit base.[1]

The evidence establishes a coordinated shift: Schwab earned more from fewer externally swept deposits, transferred more cash onto its own balance sheet, expanded both brokerage and bank credit, and used wholesale funding and derivatives to manage that growth. It does not establish hidden risk or customer mistreatment. Bank-loan credit metrics remained strong, the filing reported very low allowances relative to balances, and client-secured lending generally has substantial collateral. The original insight is structural: Schwab’s earnings increasingly depend on where client cash sits, what rate it receives, and how that funding supports lending—not merely on trades or account growth. That mechanism should be tracked through rate cycles rather than judged from a single balance.[1]

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