Charles Schwab delivered solid headline numbers for its September quarter, but not all analysts were impressed. Revenue climbed 17% to $7.17 billion, roughly matching Wall Street's expectations, and adjusted earnings per share came in at $1.69, topping forecasts. Yet UBS, the global investment bank, labeled the results “low quality” and trimmed its price target on the brokerage's stock to $109 from $113.
What UBS saw in the numbers
On the surface, Schwab's quarter looked healthy. The company attracted new client money at a solid pace, with net new assets growing 5.8% on an annualized basis. Its Advisor Services business, which serves independent financial advisors, also picked up. That suggests the core brokerage franchise remains strong.
The problem, according to UBS, was how Schwab made its money. The key metric was net interest income — the profit a bank or brokerage earns from lending out client cash and margin loans, minus what it pays out in interest on deposits and other funding. Schwab reported net interest income of $3.48 billion, which UBS flagged as a miss.
Why the shortfall? Higher funding costs. Schwab, like many brokerages, pays interest on client cash balances and other funding sources. When those costs rise faster than the income from margin loans and other lending, the spread narrows, squeezing net interest income. Even with strong client activity, that squeeze weighed on the quarter's quality.
Why the price target moved
UBS kept its buy rating on Schwab but lowered its price target by $4, to $109. The stock was trading around $92 at the time of the note. The bank also trimmed its longer-term earnings estimate for 2027 to $7.45 per share from $7.75, a cut of about 4%.
That adjustment reflects a key point for investors: analysts often anchor their price targets to a company's “earning power” several years out. If net interest income is less dependable because funding costs stay elevated, the long-run ceiling for the stock may be lower than previously thought.
UBS did lift its full-year earnings view slightly, acknowledging that the near-term picture is a bit better than expected. But the bigger message is about sustainability. The bank is essentially saying: Schwab's growth story is increasingly tied to whether its deposit-and-borrowing costs cool down.
What it means for investors
For everyday investors, Schwab's results are a reminder that a company can grow revenue and beat earnings estimates yet still face headwinds beneath the surface. The “low quality” label from UBS highlights that not all growth is created equal.
When funding costs stay high, they eat into the spread Schwab earns on margin loans and client cash. That makes net interest income less predictable, even if clients keep adding assets. And because analysts anchor price targets to future earning power, a lower 2027 estimate suggests a reduced long-run valuation.
Schwab's stock has been a favorite among retail investors for its low-cost brokerage services and its role as a major custodian for advisors. But its profitability is closely tied to interest rates and the cost of funding. If the Federal Reserve cuts rates, funding costs could ease, potentially boosting net interest income. If rates stay higher for longer, the pressure may persist.
Investors should watch Schwab's net interest income in coming quarters, as well as any commentary from management about deposit costs and client cash behavior. The company's ability to manage its funding costs will be a key driver of its stock price, regardless of how many new accounts it opens.
For context, Schwab's situation is not unique. Many financial firms are navigating a higher-for-longer rate environment, where the cost of deposits and other funding has risen. The broader market has also been reacting to economic data, such as stronger-than-expected factory output and hotter eurozone inflation, which could influence central bank policy and, in turn, funding costs.
UBS's move also comes amid a mixed earnings season for financials. Some banks have beaten expectations on trading revenue, while others have flagged margin pressures. Schwab's results fit that pattern: solid growth, but a nagging profitability issue.
For now, UBS's $109 price target implies upside from current levels, but the cut from $113 signals caution. Investors should weigh Schwab's strong franchise and asset growth against the ongoing drag from funding costs. The stock may still have room to run, but the path could be bumpier than the headline numbers suggest.
