Asset-Based Revenues, Trading Commissions Drive TD Ameritrade’s Earnings

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TD Ameritrade (NYSE:AMTD) announced its fiscal fourth quarter earnings on October 28, reporting 12% year-on-year (y-o-y) growth in net revenues to $795 million. Top line growth was driven by the asset-based business, which grew by 16 % y-o-y to $450 million, and the transaction-based business which grew by 8% to $332 million. [1] Within combined asset-based revenues, net interest revenues on client assets grew by 34% over the prior year quarter to $159 million, while investment product fee revenues rose by 24% over the prior year quarter to $83 million. On the other hand, revenues from insured money market deposit accounts grew by about 3% to $208 million for the quarter ending September.

According to our estimates, Ameritrade’s adjusted EBITDA margin improved by almost 250 basis points over the prior year quarter to 48.3% in Q4. The growth in net revenues was largely responsible for the margin improvement as most expenses remained flat. The only significant rise in the company’s operating expenses was in compensation and benefits costs, which rose by nearly 15% to $195 million during the quarter. Employee compensation and benefits expenses grew mainly on account of the brokerage increasing its employee headcount to cater to the rise in trading volumes and investments. Going forward, the brokerage should continue to witness an improvement in margins in the coming quarters, corresponding to growth in net revenues.

See our full analysis for TD Ameritrade

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Asset-Based Revenues Sustain Growth

Ameritrade’s average client balances were 15% higher than the year-ago period at $19.3 billion during the quarter. Moreover, the net yield on these assets increased, due to which revenues generated by interest on these balances grew by 34% y-o-y to $159 million in the quarter. This was the third consecutive quarter of annual revenue growth of more than 25% in this division. The implied yield on these assets was almost 50 basis points higher than the prior year quarter at 3.26%. We currently forecast the average yield for the year to be around 3.21% and to grow to over 5% by the end of our forecast period.

The other fast-growing revenue stream for Ameritrade this year has been investment product fees, or the fees charged for its services on money market mutual funds and other funds. The brokerage’s total fee-based asset balance rose to $145 billion by the end of September – nearly 17% higher than the balance at the end of September last year. As a result, the revenues generated by investment product fees grew by over 24% y-o-y to $83 million in the fourth fiscal quarter. Investment product fee revenues have witnessed double-digit y-o-y growth in eight successive quarters, with a year-to-date average growth rate of over 20% y-o-y. Going forward, we expect the company to continue to attract clients at similar rates through the end of this calendar year, leading to significant growth in investment product fee revenues.

Ameritrade witnessed a slight rise in revenues from insured deposit accounts (IDA) on a year-over-year basis. Ameritrade’s average IDA balances in the prior year quarter were around $72 billion, which rose to just over $73.5 in the quarter ending September this year. Moreover, low interest rates meant that revenues were only about 3% higher than the prior year quarter at $208 million. The company expects balances to grow by 5-10% in the coming fiscal year, which could result in a corresponding 5-15% increase in revenues even if yield rates stayed nearly flat.

Trading Commissions Rise

Trading activity on Ameritrade’s platform picked up slightly in the quarter ending September, with an average of 403,000 trades per day. [2] However, volumes were nearly flat from the previous quarter. Management mentioned that the number of trades on Ameritrade’s mobile platform accounted for 13% of total trades – up from 3% in 2010. The number of trades rose by 60% year-over-year to over 3 million trades conducted via the mobile platform. The brokerage intends to focus on the mobile segment and enhance its user experience. With mobile trading on the rise, it is imperative for established large brokerages to provide mobile trading tools and capabilities to its customers as a safeguard against upcoming apps that are targeting this particular market segment (see Can Zero-Commission Trading App Robinhood Challenge Large Brokerages?).

Ameritrade realized a slightly higher average revenue per trade of about $12.99 per trade in the quarter, due to which trading revenues rose to $332 million during the quarter. We currently forecast Ameritrade’s average revenue per trade to be 2% higher on a y-o-y basis at $12.76 for the full calendar year.

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Notes:
  1. TD Ameritrade Q4 2014 Earnings Call Transcript, Seeking Alpha, October 2014 []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, October 2014 []