TD Ameritrade (NYSE:AMTD) released its Q3 2013 results on July 23. The results are in line with our forecast mentioned in our pre-earnings article. The company’s transaction-based revenue reversed its declining trend while investment product fees and net interest revenue continues growing. Moreover, the impact of this revenue growth can be seen on the bottom line because Ameritrade was able to control costs.
Ameritrade posted an 8.7% year-on-year increase in its net revenue. The growth was primarily led by a 20.7% year-on-year increase in the brokerage’s transaction-based revenue, which came about due to a 12% improvement in trading volumes and $0.70 hike in average commission per trade over the same period.  
The company’s top line growth was also assisted by investment product fees, which continue to grow at impressive rates due to strong demand for investment advice solutions. Investment product fees grew by over 20% from $54 million in Q3 2012 to $65 million in Q3 2013, with average fee-based investment balances jumping from $88.2 billion to $118.1 billion over the same period.  
Spread Based Revenue Is Resilient
Year-over-year, Ameritrade’s spread-based revenue (referred to as “Net Interest on Client Balances” in our model) declined by only 1.5%, from $324 million in Q3 2012 to $319 million in Q3 2013, even though the brokerage’s net-interest margin (NIM) dropped by 24 basis points (0.24%) over the same period. This came about due to a nearly $10.5 billion increase in the brokerage’s average spread-based balance, a direct result of its impressive asset gathering activity.
Within the spread-based revenue stream, the performance of net interest revenue (referred to as “Net Interest Yield in Client Balances & Securities” in our model) is especially impressive because it actually grew by 1.7% year-on-year, despite a 12 basis point decline in its average annualized yield. This revenue growth was driven by a $900 million increase in average interest-earning assets from Q2 2012 to Q2 2013.
How Does It Impact Our Future Projections?
Going forward, we remain optimistic about Ameritrade’s asset gathering capability, which ensures that its net interest revenue and investment product fees continues to grow despite the tough macro-economic environment. The revenue from insured deposit account (IDA) fees, also a part of spread-based revenue, is likely to remain resilient due to the same reason.
Another positive factor for the company’s spread-based revenue is the fact that the Fed has already started contemplating the phase out of its quantitative easing (QE) program. Once this program is stopped or scaled back, interest rates are bound to increase. This will help Ameritrade’s spread-based revenue grow on the back of an interest-spread expansion. We are taking this possibility into account and have now started to project an increase in interest rates right after 2014, rather than after 2015.
On the transaction-based business front, we believe that the year-on-year increase in trading volumes in this quarter is quite impressive. However, we don’t read too much into a single quarter’s performance, especially when the preceding quarter saw a 5% year-on-year decline in volumes. Therefore, we are making only small adjustments to our projections for trading volumes and will revisit them in later months if we notice a clear trend emerging.
We are, however, increasing our short term forecasts for the company’s average revenue per trade because this figure has increased by $0.48 and $0.70 respectively in the last two quarters. The increase comes on the back of changes in Ameritrade’s trade mix, which is most likely improving due to a higher percentage of derivative trades. The increase in derivative trading seems to be driven by the fact that older retail investors have started trading more options. (Related Article: New baby boomer hobby: trading options) Over the long term, we believe that average revenue per trade will start declining again, once competitive forces start chasing a higher market share in derivative trading volumes.
Our readers should also note that we have extended our forecast period for Ameritrade by one year, and have started calculating the price estimate for the stock in mid-2014. This is an annual exercise that we conduct for all the companies under our coverage universe.
Our new price estimate for Ameritrade’s stock is around $25.50 per share, which is just below the current market price.Notes: