Rise In Trade Volumes For TD Ameritrade In July, Asset Base Sustains Growth

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TD Ameritrade (NYSE:AMTD) revealed its plans for 2016 to attract more high net worth clients on its trading platforms earlier this year. The company will take initiatives to offer better personalized services and investment consultants to individuals with $1 million or more in their accounts. [1] The brokerage firm has added over a million net new brokerage accounts in the last five years on the back of competitive pricing on brokerage fees and trading commissions, while keeping its minimum account balance requirements at reasonable levels.

The company recently reported a sustained rise in trade volumes for July, while total client assets continued to improve. Below we take a look at some of Ameritrade’s key metrics and our full-year forecasts for these metrics.

We have a $34 price estimate for Ameritrade’s stock, which is in line with the current market price.

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See our full analysis for TD Ameritrade

Trading Activity Remains High In July

TD Ameritrade averaged 476,000 trades per day through the March quarter, which was about 3% lower than prior year levels. Although volumes fell to about 434,000 trades per day in the June quarter, volumes were about 8% higher than the previous year levels. This further rose to about 455,000 trades per day in July – almost 12% higher on a year-over-year basis. The total number of funded accounts at the brokerage stood at 6.46 million at the end of March, a 5% year-over-year increase, and increased to 6.55 million at the end of the June quarter. [2]

Ameritrade realized about $11.59 per trade during the most recent quarter, which was about 10% lower than the average implied revenue per trade in 2014. It was also about $1 per trade lower than the 2014 average implied revenue generated per trade. As a result, the revenues generated via trading commissions in the June quarter were only about 3% higher than the year-ago quarter at $328 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.

Asset Base Sustains Growth

Ameritrade’s average client balances were 8% higher than the year-ago period at $21.2 billion during the month of July. ((Ameritrade Monthly Metrics, Ameritrade Investor Relations, August 2015)) However, the implied annualized yield on these assets was about 15 basis points lower than previous year levels at at 3.04%. [3] As a result, net interest revenues generated by Ameritrade were only about 4% higher than the year-ago period at $156 million. We currently forecast the average yield for the year to be around 3.40% and to grow to over 5% by the end of our forecast period.

TD Ameritrade’s average insured deposit accounts (IDA) balances stood at $76.7 billion through July, which was about 6% higher than July last year. The company witnessed a modest 3% y-o-y rise in revenues to $209 million from insured deposit accounts (IDA) 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.

Investment product fees, or the fees charged for its services on money market mutual funds and other funds, have been a fast-growing revenue stream for Ameritrade. 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 almost $161 billion through July. However, a slightly lower yield offset some of that growth in revenues in the most recent quarter. Resulting investment product fee revenues increased by about 8% y-o-y to $85 million in the fiscal third quarter ended June. Investment product fee revenues had witnessed double-digit y-o-y growth in nine successive quarters before the June quarter this year.

Impact On Margins

According to our estimates, Ameritrade’s adjusted EBITDA margin in fiscal Q2 (quarter ended March) 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 in the quarter. The adjusted EBITDA margin compressed by over 80 basis points in fiscal Q3 from the prior year quarter to 46.6%. Despite meaningful top line growth, a more rapid 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 7% higher employee compensation and clearing costs at $202 million. Going forward, if Ameritrade continues to post healthy trade volumes through the latter half of the year, it could boost top line figures and help margins recover.

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Notes:
  1. TD Ameritrade moves upmarket to millionaires, Reuters, June 2015 []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, August 2015 []
  3. TD Ameritrade June Quarter Earnings, Ameritrade Press Release, July 2015 []