Ameritrade Pre-Earnings: Trading Volumes And Client Assets Should Improve

Retail brokerage firm TD Ameritrade (NYSE:AMTD) is scheduled to release its earnings for the third quarter of its financial year on Tuesday, July 23. In the previous quarter, the company’s transaction-based revenue was down 2% year-over-year due to a 5% decline in trading volumes, while insured deposit account fees was down 4% due to the continued compression of interest rates. On the other hand, investment product fees and net interest revenue on client balances were up year-over-year by 34% and 7% respectively due to Ameritrade’s solid pace of gathering new clients assets. Overall, the company reported net revenue of $679 million, up marginally by 1% from the same period last year. (For details refer our previous earnings article)

In Q3, we expect the company’s transaction-based revenue to reverse its declining trend due to the recent improvement in trading volumes. Investment product fees and net interest revenue are also likely to grow as the company continues to attract client assets. However, there is a chance that the pace of asset gathering could be slower than the last few quarters because of client withdrawals in the tax season. We will also be closely watching the trends in Ameritrade’s revenue from insured deposit account fees to judge the effectiveness the company’s new insured deposit account (IDA) agreement with TD Bank in the current interest rate scenario.

See our full analysis for TD Ameritrade

Trading Commissions Could Increase Year-Over-Year

Trading volumes have been a major concern for all brokerage firms in the U.S. for the past several quarters. That is because the prevailing uncertainty in the global financial markets has scared away retail investors who account for the majority of trading activity at these brokerages. This causes a decline in trading volumes and negatively impacts the transaction-based revenue for these firms.

However, recent data from Ameritrade suggests that investors may be finally returning to the markets. Year-over-year, the daily average revenue trades (DARTs) for the brokerage were up by 4% and 13% in the months of April and May respectively. While the data for June is not released yet, we expect the trend to have continued in June. Assuming that the average commission per trade did not get negatively impacted due to changes in product-mix or customer-mix, the company is likely to report that it had a relatively strong quarter in terms of transaction based revenue.

Even if June DARTs turn out to be lower than our expectations, the company could still post a year-over-year improvement in trading volumes. DARTs for May were 417 million – the last time it was above 400 million was almost a year and a half ago. We believe May’s higher trading volumes should be sufficient to compensate for a lower level in June. It will also be interesting to see if the trading volumes sustain in the coming months.

Asset Gathering To Remain The Backbone For Growth But Tax Withdrawals May Have An Impact

Asset gathering activity at Ameritrade has historically been very strong. Fiscal year 2012 was the fourth consecutive year when Ameritrade recorded a double digit asset growth rate, and the momentum has continued in 2013 as well. During the first two quarters of this fiscal year, the company attracted a record $28.5 billion in net new assets.

The asset growth also seems to be on the right track in Q3 as Ameritrade’s total client assets reached $531 billion in May after crossing the $500 billion mark for the first time in history in February 2013. However, there is a chance that this growth in client assets during Q3 was primarily driven by a rally in stock markets rather than the addition of net new client assets. Unlike Ameritrade, its rival Charles Schwab (NYSE:SCHW) reports net new asset figures every month and has mentioned that its net new assets were down in April due to high client withdrawals in the tax season. ^[1] If the same has happened with Ameritrade, we can expect the net new asset figure for Ameritrade to be slightly lower than the previous two quarters. Nevertheless, we remain bullish on the company’s ability to attract more assets in long term.

Our current price estimate for the company is around $21 and we will update the number once the company reports its quarterly figures.

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1. Schwab Reports Monthly Activity Highlights, Charles Schwab, May 14, 2013 [↩]