TD Ameritrade Q2 Earnings: Increase In Trading Volumes, Client Assets Drive Growth

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TD Ameritrade (NYSE:AMTD) reported a strong set of results in its fiscal second quarter earnings on April 23. The brokerage’s revenues for the quarter grew by 20% year-on-year (y-o-y) to $812 million. The top-line growth was driven by a 28% y-o-y increase in net interest revenues from client assets and a 30% increase in trading commissions during the March quarter. [1] However, the surge in these two revenue streams was partially offset by flat revenues from insurance deposit account (IDA) fees.

Ameritrade’s operating expenses grew by only 11% over the prior year quarter – with a rise only in the advertising costs and employee compensation expenses.  According to our analysis, the company’s adjusted EBITDA margins for the quarter were 45.6%, about 4 percentage points higher than the prior year quarter. We expect EBITDA margins to remain 3-4% higher than 2013 values for the rest of the year as well, given that the high-margin trading business is growing. As a result, the company’s net income was up by almost 33% year-over-year to $194 million for the quarter. We expect Ameritrade to continue to deliver strong results in the coming quarters as well, based on the continued growth in trading volumes and improving EBITDA margins. We have a $33 price estimate for Ameritrade’s stock, which is slightly higher than the current market price.

See our full analysis for TD Ameritrade

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Net Interest Revenues On Client Balances And Securities Grow

The revenue generated by Ameritrade from net interest on client balances in the quarter grew by 28% y-o-y to $148 million. Both the interest earning assets and the yield on those assets were up during the quarter. The average balance of interest-earning assets was up from $15.5 billion in the previous year quarter to the current $18.5 billion, while the average annualized yield on those assets increased 22 basis points to 3.17%. We expect average balances to remain high as the company continues to attract more customers. We have a conservative estimate for both the yield (3.13%) and the average balances ($18 billion) for the full year. If the yield and average client balances both grow more than anticipated, and reach  3.5% and $19.5 billion respectively, there could be a 4-5% upside to our price estimate.

IDA Balances Flat

In the last few quarters, the company’s insurance deposit assets (IDA) have been somewhat flat and the trend continued in the second fiscal quarter as well. After declines in the yield on IDA or money market account balances since 2008, we expect it to bottom out this year and gradually increase thereafter since the Fed has initiated its QE tapering program. Looking ahead, we expect the low yield on IDAs to continue for remainder of the year. Comparatively, there was a 8% y-o-y increase in the average interest earning assets during the quarter since the company has been able to attract more clients. An 8-10% increase in the the average IDA balances is likely to keep revenues flat for the full year due to the low yields.

Trading Activity And Investment Product Fees Increase

Ameritrade’s average client trades per day went up by more than 30% y-o-y to 493,000 trades per day The growth was mainly driven by a 40% increase in derivatives trading volumes, which were up to 192,000 trades a day. Additionally, the number of funded accounts breached the 6 million mark in December 2013, more than the full year average of about 5.7 million accounts. [2] As a result, Ameritrade’s commission and transaction fee revenues grew by over 30% to $374 million. The company expects the trading volumes to continue to be high for the full year, with derivatives trading and market volatility fueling the growth.

Revenues generated by marketing, record-keeping and support services on insured deposits in money market accounts grew by almost 30% to $266 million last year. The growth in these investment product fee-based revenues can be attributed to a 31% increase in the average investment product balance during the year, which stood at almost $120 billion. The company’s average investment product balance was up to $128 billion for the March quarter – a 20% year-over-year increase. We expect the company to maintain a growth rate of over 20% in investment product revenues for the full year since we expect the yields on investment products to remain at previous year levels.

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Notes:
  1. TD Ameritrade Q2 2014 Earnings Call Transcript, Seeking Alpha, April 2014 []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, April 2014 []