TD Ameritrade Earnings Preview: Asset-Based Revenues To Drive Results

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Brokerage firm TD Ameritrade (NASDAQ: AMTD) is scheduled to announce its Q1 fiscal 2016 earnings on Wednesday, January 20. [1] We expect continued growth momentum in spread-based assets and fee-based balances to drive revenues for the quarter. However, deteriorating trade metrics from the first two months of the quarter could lower transaction revenues, pressuring the company’s earnings.

On the asset front, while TD Ameritrade witnessed a slight decline in spread-based assets in November on a sequential basis, average balances through Q1 fiscal 2016 were approximately 8% higher on an annual basis. Also, fee-based balances increased by 7% year over year (y-o-y) in the months of October and November, which bodes well for the quarter. On the other hand, subdued trade volumes could offset TD Ameritrade’s gains on the asset side of the business.

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

See our full analysis for TD Ameritrade

Spread-Based Assets Will Likely Rise

Spread based assets, which consist of interest earning assets and insured money-market deposit accounts (IDA) balances, have seen strong growth in the last year, rising 8% y-o-y to 102 billion in November. [2] However, they were down slightly from $102.2 billion in October. Nevertheless, we expect the brokerage to boost its balances of spread based assets in December on the back of Federal Open Market Committee’s (FOMC) recent decision to hike interest rates to the range of 0.25%-0.50%. Consequently, we expect the combined spread-based asset balances to increase in December and for the full quarter.

Owing to the low interest rate scenario in the U.S., net yields on client balances and securities have lingered at around 3% over the past couple of years, resulting in limited growth in net interest income for the brokerage. However, with Fed’s decision underway, we expect net yield to rise slightly in 2015 and then more rigorously in the coming years.

Fee-Based Balances To Continue Improvement

In the high volatility environment of 2015, the demand for TD Ameritrade’s asset management service increased to an extent that Q4 fiscal 2015 (quarter ended September) saw a 10% y-o-y rise in fee-based balances to $157 billion. [3] In October, the growth continued and November saw the metric further increasing to $160.5 billion, sustaining the rise observed throughout the year. With an improvement in macroeconomic conditions, we expect the company to have successfully escalated its accumulation of fee-based assets in December.

 

Despite rising balances, the fee charged by TD Ameritrade on client balances stagnated in 2015 at around 0.21% of balances. As the economic conditions improve and the brokerage no longer needs to waive fees, we expect to see a gradual improvement in the average yield on fee-based balances.

 

Trade Volumes To Grow Marginally

TD Ameritrade, finished the last quarter of its financial year 2015 at 6.6 million funded accounts, a rise of 5% y-o-y. After an impressive September quarter (19% y-o-y), growth in trade volumes subsided in the months of October and November. While October saw a 12% y-o-y drop to 437,000 trades per day, November volumes grew marginally at around 2% y-o-y to 438,000 trades per day in November. [2] If TD Ameritrade sustained average trade volumes at November levels throughout Q1 fiscal 2016, 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 (CY 2015), owing to high volumes in previous quarters.

For fiscal 2015, the average commission and transaction fee realized per trade of $12.09 was 4% lower compared to fiscal 2014. Despite a gain in daily trades of 8% for the fiscal year, the loss in average revenue per trade caused transaction based revenues to grow only by 4% y-o-y to 1.4 billion for the whole year. And we expect average revenue per trade to be approximately 2% lower y-o-y in the calendar year 2015, which includes Q1 fiscal 2016.

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Notes:
  1. TD Ameritrade to host earnings conference call, Ameritrade Investor Relations, December 2015 []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, December 2015 [] []
  3. Ameritrade Annual Report, The SEC, October 2015 []