Online Brokerages Rely On Assets Consolidation As Investor Confidence Remains Low

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Online brokerage firms continue to suffer as concerns over the U.S. economy led to low trading levels in August. Below we look at certain metrics such as daily average revenue trades (DARTs), new client accounts, and client assets for Ameritrade (NYSE:AMTD), Charles Schwab (NYSE:SCHW) and like E*TRADE Financial (NASDAQ:ETFC) and the potential impact of these metrics on the respective stocks.

See Our Full Analysis for : E*TRADE Financial | Charles Schwab | Ameritrade

Schwab reported a 31% year-on-year decline to 375,900 in DARTs for August. [1] The corresponding figure for E*TRADE was 121,570, a drop of 5% from July and a 37% decrease from the year-ago period. [2]

Ameritrade suffered the most as its daily average trades stood at 303,000, declining by 9% from July 2012 and by 37% from August 2011. [3] Trading commissions account for about 45% of Ameritrade’s revenues but, due to a decline in trading activity, our forecast for the division remains conservative.

The trading division accounts for only 38% of our price estimate for the company’s stock. Our $18 price estimate for Ameritrade’s stock is 10% above the current market price. You can gauge the effect of a change in our forecast for annual average number of trades per account by modifying the interactive chart below.

Despite the lack of trading activity, all the three major brokerage firms continue to attract clients with their lucrative trading and investing products and cost-effective marketing and sales.

Charles Schwab recently launched the Schwab Global Account platform to provide investors access to 12 highly liquid equity markets outside the U.S. (See Chuck Looks Beyond The U.S. For Growth Opportunities for more details) The company opened 72,000 new client accounts in August, almost in-line with the number of accounts opened in the same period last year. E*TRADE also followed the same trend, opening 33,303 new brokerage accounts, in-line with last year, but 48.5% more than July 2012.  The opening of new accounts might help compensate, particularly in the long run, for the lack of trading activity. The following graph shows our forecast for E*TRADE’s brokerage accounts, which we expect to grow to 3.8 million by 2019.

Another positive for the firms is the rate at which they are consolidating client assets. E*TRADE reported a 16% year-on-year increase in total customer assets, reaching $200.3 billion, an increase of 3.5% over July. Ameritrade’s total client assets were $461.2 billion, up 15% from August 2011 and 3% from July. Although Charles Schwab reported a 12% year-on-year increase in total client assets, reaching $1.86 trillion, the rate at which clients bought assets fell considerably. Net new assets for the company plummeted 89% over August 2011.

Despite the slump, we maintain a positive outlook for Schwab’s assets under management, with propriety fund assets reaching $300 billion by the end of our forecast period. There is potential downside of 10% to our price estimate for the company’s stock, should the growth rate not match our expectations, and propriety fund assets reach $200 billion instead. You can gauge the effect of a change in forecasts by modifying the chart below.

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Notes:
  1. The Charles Schwab Corporation Monthly Market Activity Report For August 2012, Press Release []
  2. E*TRADE FINANCIAL CORPORATION REPORTS MONTHLY ACTIVITY FOR AUGUST 2012;PROVIDES UPDATES TO ITS LOAN DELINQUENCIES, Press Release []
  3. TD Ameritrade Reports Monthly Metrics, Press Release []
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