Interest-Earning Assets To Provide Growth For Ameritrade Despite Decline In Volumes

TD Ameritrade’s (NYSE:AMTD) trading volumes were up by 30% year-on-year (y-o-y) in the March quarter, contributing significantly to its 20% annual growth in net revenues. However, the company’s trading have suffered and sequentially dropped by 15% and 7% in the months of May and April, respectively. ^[1]

According to our estimates, trading commissions constitute 26% of Ameritrade’s value, with almost three-fourths of the company’s value coming from non-transaction based revenue streams. Below we take a look at the limited impact of the short-term decline in revenues and the main drivers for Ameritrade’s growth during 2014. We have a $32 price estimate for TD Ameritrade, which is slightly higher than the current market price.

See our full analysis for TD Ameritrade

Decline In Trading Volumes

Ameritrade’s daily average revenue trades (DARTs) sequentially increased in each of the three quarters beginning July 2013 – from about 380,000 in Q4 FY 2013 to 492,000 in the second fiscal quarter of 2014. The company’s DARTs took a hit in the following two months, declining to an average of 415,500 daily trades during the months of April and May of this year. Going forward, this number could decline further in the short term for Ameritrade, but its impact is likely to be limited. Taking an aggressive estimate, even if the DARTs for the full year stay at current level of 415,000 trades per day, it would imply a downside of less than 2% to our price estimate for Ameritrade. We have a conservative forecast of about 430,000 DARTs for Ameritrade through 2014, with an average 17 trades per account during the year.

Sustained Growth Expected From Non-Trading Business

While investors could have concerns with the reduction in trading activity, we expect the company’s other revenue streams to sustain growth during the year. Ameritrade’s money market mutual funds and net interest on client assets businesses constitute about 40% and 17% of the company’s value, according to our estimates, while investment product fees contribute 13%.

The revenue generated from net interest on client balances in the most recent 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.

Additionally, 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 an increase of about 30% in the average investment product balance during the year (through May), which has been in excess of $130 billion all year. The company’s average investment product balance stood at $120 billion for 2013. ^[2] We expect the company to sustain a similar growth rate for the full year, while we expect the yields on investment products to remain relatively constant.

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1. Ameritrade Monthly Metrics for May, TD Ameritrade Investor Relations, June 2014 [↩]
2. TD Ameritrade Q2 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩]