Trade Volumes Remain Subdued, Asset Base Sustains Growth For TD Ameritrade

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Brokerage firm TD Ameritrade (NASDAQ: AMTD) has had a lackluster start to its fiscal 2016 beginning October, as trade volumes have remained subdued in the first two months. The number of trades executed per day on Ameritrade’s platform fell by 12% and 3% y-o-y to 437,000 and 438,000 trades per day in October and November, respectively. [1] On the other hand, Ameritrade has continued to add to its total brokerage accounts and net interest earning assets in the current quarter. 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 slightly lower than the current market price. Ameritrade’s stock price has risen by almost 20% since the beginning of the December quarter.

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See our full analysis for TD Ameritrade

Trade Volumes Remain Lackluster

TD Ameritrade witnessed a slow start to its financial year 2016 as it was unable to sustain high volumes seen through the June and September quarters in FY 2015. The November metrics reported by the brokerage saw a marginal sequential improvement to 438,000 trades per day, but volumes remained about 3% lower on a y-o-y basis. [1] The total number of funded accounts at the brokerage stood at just over 6.6 million at the end of fiscal 2015 ended September, up from just under 6.4 million in January. If Ameritrade sustains average trade volumes at November levels through the December quarter, it would imply an average of about 17 annualized trades per funded account. We currently forecast the average annual trades per account to stand at 17.9 for the full year, owing to high volumes in previous quarters. We subsequently forecast the annual trades per account to gradually rise about 20 through the end of our forecast period, as macroeconomic conditions improve.

Spread-Based Assets Sustain Growth

Ameritrade’s spread-based assets, which consist of interest-earning assets and insured deposit account (IDA) balances, grew at 8% annually to $102 billion through the month compared to November last year. [1] This was consistent with the growth reported in October when interest-earning assets registered a 12% growth while IDA balances grew by 7%. Subsequently, we forecast the combined spread-based asset balances to increase to over $110 billion by the end of our consideration period.

Net yields on client balances and securities have lingered at around 3% for the past couple of years, resulting in limited growth in net interest income for the brokerage. With FOMC’s decision to hike the interest rates in the range of a quarter to half of a percentage point, we forecast yields to shoot up to approximately 5% at the end of our forecast period, making this revenue stream highly lucrative in the coming years.

Fee-Based Balances Continue to Grow

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. At the end of fiscal 2015, fee based balances stood at $156.1 billion, which translates to impressive 12% annual growth. The growth spree continued in October, with the metric further increasing by 7% y-o-y to $157 billion. [1] In November, the company’s fee-based balances further increased to $160.5 billion, sustaining the rise observed through the year. With an improvement in the macroeconomic outlook, we forecast the company to successfully escalate its accumulation of fee based assets at a CAGR of about 7% through the end of our forecast period.

 

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Notes:
  1. Ameritrade Monthly Metrics, Ameritrade Investor Relations, December 2015 [] [] [] []