Ameritrade Earnings Preview: Trading Commissions, Net Interest Margins In Focus

TD Ameritrade (NYSE:AMTD) is scheduled to release its FY2013 earnings on October 29. Like all brokerages, the company has been dealing with the low interest rate environment for quite some time. However, it continues to grow as some of its other businesses are performing well. Last quarter, it posted an 8.7% year-on-year increase in its net revenue, primarily led by trading commissions, and assisted by investment product fees, a much smaller revenue stream. Trading commissions increased 20.7% year-on-year on the back of a 12% improvement in trading volumes and a $0.70 hike in average commission per trade, while investment product fees grew by over 20% due to strong demand for investment advice solutions. ^{[1] [2]}

We expect more of the same this quarter, as trading volumes have remained significantly above their year-ago levels and the demand for advice solutions continues to be an industry wide phenomenon. Our price estimate for Ameritrade’s stock is around $26, which is nearly 10% below the current market price.

See our full analysis for TD Ameritrade

Asset Gathering To Offset The Impact Of Low Interest Rates

All brokerages generate a significant amount of their revenue by lending out the idle cash in client brokerage accounts – for TD Ameritrade this proportion is almost 50%. During the past few years, this business has been under pressure because the low interest rate environment has made it tough to generate a high yield on these assets. However, Ameritrade has done a good job in attracting more assets onto its platform – higher asset levels allow the brokerage to offset some of the revenue decline caused by yield compression. Last quarter, its spread-based revenue (referred to as “Net Interest on Client Balances” in our model) declined by only 1.5%, from $324 million in Q3 2012 to $319 million in Q3 2013, even though net-interest margin (NIM) dropped by 24 basis points (0.24%) over the same period. This came about due to a nearly $10.5 billion increase in the brokerage’s average spread-based balance, a direct result of its impressive asset gathering activity.

We expect to see more of this in its fiscal Q4 as Ameritrade’s client assets continue to increase at a rapid pace. At the end of August, its average spread-based balance was already up almost 16% over the year-ago period. ^[3]

Trading Volumes Have Also Improved

Trading commissions are another important revenue stream for Ameritrade, comprising almost 40% of its top line. These commissions were under pressure in the past few years due to a general decline in trading activity. However, we started seeing a modest improvement in trading levels last quarter, and the trend seems to have continued in Q4 as well. After a 12% year-on-year improvement in the last quarter, Ameritrade’s daily average trading activity increased by 12% and 26% in July and August, respectively. We will be watching the data released during the conference call to ascertain how much of this improvement has come from an increase in brokerage accounts, and how much is from the increase in trading levels of existing customers. ^[3]

Another data point to look out for is the company’s average revenue per trade. During the last two quarters this figure jumped by $0.48 and $0.70, respectively, on the back of changes in Ameritrade’s trade mix, which is most likely improving due to a higher percentage of derivative trades. If the trend continues going forward, we can expect Ameritrade’s trading commission revenue to increase rapidly over the next few years.

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1. SEC Filing, TD Ameritrade, July 23, 2013 [↩]
2. Q3 2013 Earnings Transcript, SeekingAlpha, July 23, 2013 [↩]
3. Monthly Metrics, TD Ameritrade, September 2013 [↩] [↩]