Mild Growth In Asset Base, Trade Volumes For TD Ameritrade In April

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AMTD IDEA Group

TD Ameritrade (NYSE:AMTD) reported modest growth in trade volumes in April after witnessing high volumes in the quarter ended March 31. The company initially reported a rise in trading activity in the December quarter after sluggish volumes in mid-2014. In its most recent earnings (Q2 FY 2015), Ameritrade reported a 1% year-over-year  growth in net revenues to $803 million. The company witnessed a 6% y-o-y decline in commission and transaction fees revenues mainly due to a tough year-on-year comparison over the comparable prior year period. On the other hand, net-interest revenues rose by 2% y-o-y to $149 million while investment product fee revenues were by by 13% y-o-y to $85 million. [1]

According to our estimates, Ameritrade’s adjusted EBITDA margin in fiscal Q2 compressed by almost 3 percentage points over the prior year quarter to 42.5%. Limited revenue growth complemented by a rise in operating expenses led margins to fall through the quarter. Although most cash operating expenses remained flat over the comparable prior year period, the brokerage incurred about 8% higher employee compensation and clearing costs. Below we take a look at some of Ameritrade’s key metrics and our forecasts for these metrics.

We have a $34 price estimate for Ameritrade’s stock, which is about 10% lower than the current market price. Ameritrade’s stock price has risen by 5% since its Q2’15 earnings in late April.

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See our full analysis for TD Ameritrade

Asset Base Sustains Growth

Ameritrade’s average client balances were 9% higher than the year-ago period at $20.2 billion for the month of April. [2] In the most recent quarter, the net yield on these assets fell by about 20 basis points over the prior year period to 3.07%. However, high average balances meant that net revenues were up by about 2% y-o-y to $149 million. We currently forecast the average yield for the current calendar year to be around 3.40% and the average balance to be about 8% higher than the prior calendar year at about $20.5 billion.

The other fast-growing revenue stream for Ameritrade has been investment product fees, or the fees charged for its services on money market mutual funds and other funds. The brokerage’s average fee-based asset balance for 2014 stood at $142 billion — nearly 18% higher than the average balance in 2013. The average balance has further improved to over $160 billion through April.  Investment product fee revenues have witnessed double-digit year-over-year  growth in nine successive quarters. Going forward, we expect the company to continue to attract clients at similar rates through the end of this calendar year, which could lead to significant growth in investment product fee revenues.

Ameritrade’s average insured deposit accounts (IDA) balances stood at $74.5 billion through April, which was about 2% higher than the year-ago period. The company witnessed a modest 1% y-o-y rise in revenues to $205 million from IDA balances in the most recent quarter. We currently forecast Ameritrade’s IDA balances to increase by 4-5% for the full year. However, Ameritrade’s management expects yields to remain flattish for the full year owing to the current interest rate scenario.

Slowdown In Trading Activity Through April

After a sustained period of high trading activity, especially in January and February, volumes seemingly subsided in April. The company averaged 476,000 trades per day through the March quarter, which has fallen to about 457,000 trades per day in April. Despite a sequential decline, volumes are 2% higher than the year-ago period. The total number of funded accounts at the brokerage stood at 6.46 million accounts at the end of March quarter, which is about 5% higher than the prior year period. [2]

Ameritrade realized about $12.04 per trade during the most recent quarter, which was 4% lower than the average implied revenue per trade in 2014. Resulting revenues generated via trading commissions in the quarter were about 6% lower than the year-ago quarter at $350 million. We currently forecast Ameritrade’s average revenue per trade through 2015 to be about 2% lower on a y-o-y basis at $12.35 for the full calendar year.

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Notes:
  1. TD Ameritrade Q2 FY 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, May 2015 [] []