Charles Schwab Faces About $417 Million In Future Interest-Revenue Reductions From Rate Hedges
Lending is growing faster than deposits, requiring more wholesale borrowing even as net interest revenue rises.
Charles Schwab, which provides brokerage, wealth management and banking services, expects about $417 million in pre-tax hedge losses to reduce interest revenue over the twelve months following September 30, 2026, according to its quarterly report filed Friday. The larger expected cost comes as client lending grows faster than deposits, requiring more wholesale borrowing.
Losses Moving Toward Earnings
The previous estimate was approximately $197 million, covering the twelve months following June 30, 2026. Each forecast applies to a different rolling window; the September estimate is not a forecast for the same period revised upward.
The expected revenue reduction is only part of the accumulated hedge losses. At September 30, Schwab had $1,066 million in pre-tax cash-flow hedge losses recorded outside earnings, in the equity account called accumulated other comprehensive income.
During the third quarter of 2026, these contracts produced a $639 million unrealized pre-tax loss, compared with an $11 million gain in the corresponding quarter of 2025. Schwab also moved $24 million of realized losses from that equity account into interest revenue during the quarter, and $64 million during the first nine months.
The distinction is important for shareholders: the unrealized loss and the projected revenue reduction measure different things. The former records changes in the hedges outside current earnings; the latter estimates losses that will enter the income statement.
Fixed Receipts On Variable-Rate Loans
Schwab uses these interest-rate swaps to make revenue from client loans more stable, a purpose also described in its second-quarter report. The company receives fixed-rate payments under the contracts and pays floating rates, while the loans themselves generate variable-rate interest receipts.
At September 30, the cash-flow hedges covered interest receipts on $24.3 billion of margin loans and $26.0 billion of pledged asset lines—loans secured by clients’ securities. The associated contract amounts were $47.9 billion and $34.7 billion, respectively.
Those contract amounts, known as notionals, are used to determine payments; the principal is not exchanged. They also need not equal the loan balances being protected, because Schwab can hedge different periods of interest receipts on the same underlying loans.
Total cash-flow hedge notionals stood at $82.6 billion at September 30, compared with $18.7 billion at year-end 2025. That comparison describes the scale of the contracts, rather than an equivalent increase in client loans or a measure of losses.
Lending Growth Requires More Borrowing
The lending business is generating more revenue even as its funding needs increase. Third-quarter net interest revenue—the interest Schwab earns less its funding costs—was $3.5 billion, up 14% from a year earlier. For the first nine months, the figure was $10.0 billion, up 16%.
Schwab attributed the quarterly growth to demand for margin and bank loans. Greater reliance on wholesale funding partly eroded those gains.
Brokerage-client receivables were 22% above year-end 2025 levels, totaling $128.1 billion after 4% quarterly growth as of September 30. Bank loans reached $72.3 billion, growing 8% during the quarter and 25% since year-end, supported by pledged asset lines and residential mortgages.
Bank deposits, by contrast, were $244.1 billion at September 30, against $255.7 billion at year-end. Other short-term borrowings were $14.2 billion, compared with $6.9 billion, while Federal Home Loan Bank borrowing stood at $2.0 billion.
The year-to-date funding picture differs from the quarterly one. Schwab said lower average wholesale borrowings helped interest revenue over the first nine months, alongside loan growth; higher average wholesale borrowing partly offset lending gains in the third quarter.
The Cost Beside A Growing Business
Schwab serves individual investors through Investor Services and independent investment advisors through Advisor Services. Its business combines brokerage and advice with banking, custody and asset management, earning interest as well as trading, administration and deposit-account fees.
The company had already reported third-quarter revenue of $7.2 billion on October 15, up 17% year over year, and net income of $2.9 billion, up 23%. Client assets totaled $13.33 trillion at September 30, with 40.3 million active brokerage accounts.
Charles Schwab President and CEO Rick Wurster described the lending expansion in that earnings release: “During the quarter, Pledged Asset Line TM balances grew to $37.3 billion, up 59% year-over-year, while net flows into Schwab Wealth Advisory TM increased 55%.”
Schwab’s market capitalization was $160.1 billion as of 5:07 p.m. ET Friday.
The projected hedge losses will reduce interest revenue as they move into earnings. They sit alongside a lending business that is expanding—and requiring more borrowed funding in the third quarter.
Sources
- 10-Q Filing — Charles Schwab (SCHW) — SEC EDGAR
- 10-Q Filing — Charles Schwab (SCHW), Q2 FY2026 filed 2026-08-07 (comparison basis) — SEC EDGAR
- Earnings release (8-K Item 2.02, a3q26exhibit991.htm) — Charles Schwab, filed 2026-10-15 — SEC EDGAR
- Charles Schwab Stock: Analyst Estimates & Ratings — Yahoo Finance
- Charles Schwab (SCHW) Says It Will Not Charge RIA Custody Fees — Yahoo Finance
- 7 of the Best Charles Schwab Mutual Funds | Investing | U.S. News — money.usnews.com
- $1000 Invested In Charles Schwab 15 Years Ago Would Be Worth This Much Today — benzinga.com
- Tech in a “needed reset:” 5 sectors to own right now — thestreet.com
