Trading Commissions Drive Ameritrade’s Earnings As Low Yields Subdue Interest Revenues

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TD Ameritrade (NYSE:AMTD) announced its fiscal fourth quarter earnings on Tuesday, October 27, reporting a 5% year-on-year (y-o-y) rise in net revenues to $831 million. [1] The company’s consolidated fiscal 2015 revenues were up by 4% y-o-y to $3.2 billion. Ameritrade reported healthy trade volume metrics through the September quarter, which drove a 10% annual increase in revenues generated by trading commissions to $364 million for the quarter. Additionally, Ameritrade continued to add to its interest-earning and insured deposit account (IDA) average balances through the quarter, leading to the seventh consecutive year of double-digit growth in net assets. [2]

According to our estimates, Ameritrade’s adjusted EBITDA margin improved by over 40 basis points compared to the previous year quarter due to the rise in net revenues complemented by a limited increase in cash operating expenses. This was the first quarter in the calendar year when Ameritrade’s adjusted EBITDA margin expanded on a year-over-year basis. Going forward, if Ameritrade can sustain its revenue growth, especially via trading commissions, it could help the company post healthier margins.

See our full analysis for TD Ameritrade

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High Trade Volumes Through September Quarter

TD Ameritrade averaged almost 479,000 trades per day in the quarter ended September, which was about 19% higher than prior year levels. It was also a 10% sequential rise over Q3’15 volumes. Growth was largely driven by a surge in trade volumes in August, when average trades per day increased to 537,000 – a 41% y-o-y increase. However, Ameritrade realized about $11.89 per trade during the quarter, which was about 9% lower than the average implied revenue per trade in the prior year quarter. As a result, the revenues generated via trading commissions in the September quarter were about 10% higher than the year-ago quarter at $364 million.

The total number of funded brokerage accounts stood at 6.62 million at the end of the September quarter, up from 6.55 million in the previous quarter and 6.37 million at the beginning of the calendar year. We currently forecast Ameritrade’s average funded accounts through calendar year 2015 to stand at 6.47 million, up from the implied average of 6.21 million accounts in 2014.

Ameritrade’s management mentioned that the number of trades on the brokerage’s mobile platform in the June quarter accounted for 16% of total trades — up from just 3% of total trades back in 2010. The brokerage intends to focus on the mobile segment and enhance its user experience. Mobile trades through the quarter were up by over 50% on year-over-year basis. With mobile trading on the rise, the company expects trading activity via mobile devices to surpass desktop trading before the end of the decade. [3]

Asset-Based And Net Interest Revenues Witness Limited Growth

Ameritrade’s average client balances were 12% higher than the year-ago period at $21.6 billion during the quarter. However, the implied annualized yield on these assets was about 40 basis points lower than previous year levels at at 2.81%. ((TD Ameritrade Reports Record 2015 Earnings, Ameritrade Press Release, October 2015)) As a result, net interest revenue generated by Ameritrade was flat over the year-ago period at $155 million.

Similarly, investment product fee revenues also stayed flat over the prior year period at $82 million. This was a fast-growing revenue stream for Ameritrade over the last few quarters, with a double-digit annual growth in nine successive quarters before the June quarter this year. The growth slowed to about 8% y-o-y through the June quarter, which further suppressed through the September quarter. The brokerage’s total fee-based asset balance stood at $157.1 billion in Q4’15, which was 9% higher than the prior year period. However, the average annualized yield was 3 basis points lower than the previous year quarter at 0.20%, resulting in limited revenue growth.

On the other hand, Ameritrade witnessed a moderate 5% y-o-y rise in revenues to $218 million from insured deposit accounts (IDA) in Q4 FY’15. Ameritrade’s average IDA balances in the prior year quarter stood at $73.6 billion, which rose to $78.2 billion in the quarter ending September this year. In addition to the increase in average IDA balances, the yield on these assets stayed roughly flat over the previous year period at around 1.10%.

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Notes:
  1. TD Ameritrade Reports Record 2015 Earnings, Ameritrade Press Release, October 2015 []
  2. TD Ameritrade Q4 FY 2015 Earnings Call Transcript, Seeking Alpha, October 2015 []
  3. TD Ameritrade Q3 FY 2015 Earnings Call Transcript, Seeking Alpha, July 2015 []