With all the angst bearing down on Charles Schwab, the brokerage may be worth a lot more without its bank.
That's the thinking of JPMorgan Chase analyst Kenneth Worthington, who argues Schwab shares would be valued more highly by investors if they were unencumbered by the risks around its bank following the tumult among regional lenders. In such a scenario, the stock could trade at a 20 times earning multiple, or $64 per share, he said, a notable premium to Friday's $53.80 close.
"Investors see a number of risks associated with the Schwab bank — sorting risk, bank run risk, regulatory risk, and valuation risk," Worthington wrote in a research note on Friday. "One way to address the bank risk is to de-bank."
Worthington's price target for Schwab in its current state stands at $85.
Schwab CEO Walter Bettinger told CNBC on Friday that the company respects Worthington's view, but de-banking "is not something we're going to look at in the short run."
"I don't think it would make sense to do long-term strategic moves based off what has been an extraordinary period of sort of unprecedented circumstances," Bettinger said.
Rising concerns over pending regulatory changes and customers moving cash to high-yield savings accounts in the wake of several regional bank collapses have erased more than $60 billion in market value from Schwab's January highs.
While Schwab has the ability to weather new, potentially onerous regulations, without its bank the broker could have a higher valuation even though such a divorce would dent earnings, according to Worthington.
"Schwab, as a broker that owns a bank, could theoretically de-bank, and return to operating the way it did historically, which was a focus on sweeping cash into money market funds and earning an elevated management fee rather than an even larger spread," he wrote.
While Schwab could operate without a bank, such a change would be costly and is an outcome the firm's management would be unlikely to support, Worthington said in his note.
But Worthington, who holds the buy-equivalent recommendation and one of the highest price targets on Wall Street, says a Schwab without a bank could be worthwhile in investors' eyes given the cash-sorting and regulatory uncertainties.
"A path toward de-banking Schwab certainly feels like a last-resort type of option at this juncture," he wrote. "That said, we think it is worthwhile to consider as we think it puts a trough scenario for Schwab's stock today."
