Ameritrade Q4 Earnings: Asset-Based Income Offset By Decline In Trading Commissions

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TD Ameritrade (NASDAQ: AMTD) reported its Q4 fiscal 2016 results, with revenues marginally lower and EPS down 13% year over year. This was in stark contrast with the trend observed in previous quarters. Trading volumes have slowed down over the past two quarters, leading to a steep decline in trading commissions. This can be attributed to uncertain macro-economic conditions.

The revenue growth for Q4 and the full year was primarily driven by a notable increase  in interest earning assets and fee-based balances. The growth in interest earning assets was supported by the rate hike in 2015, and another possible hike in 2017 is likely to propel this growth further. Spread-based balance grew under the likelihood of customers looking for expert financial advice to manage their assets. With the company expanding into digital advisory and focusing on newer investment products to meet customer demand, we expect further growth in these balances and consequently, higher investment product fees.
It must be noted that the company has agreed to acquire Scottrade Financial Services for $4 billion in cash and stock. The acquisition is likely to expand Ameritrade’s client base and assets and Scottrade’s customers will have access to Ameritrade’s diverse financial products and enhanced investor guidance. As of 2016, the combined entity would have seen around 35-40% growth in key metrics such as client trades and accounts, spread-based, and interest earning balances. We will follow up with a more detailed analysis on the synergies from the acquisition.

Our price estimate for Ameritrade stands at $29, implying nearly 15% discount to the market. We are currently reviewing our estimates in the light of recent earnings, and will have an update ready soon.

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Please refer to our complete analysis for Ameritrade.

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Interest-Earning Revenues Continue Sustained Growth Under Fed’s Guidance

Interest earning assets continued to be a big part of Ameritrade’s business, generating around 45% of the brokerage’s revenue in the 4th quarter. With the rate hike at the end of 2015 and the likelihood of another hike in early 2017, the company has seen 5% growth in the revenue from this segment in fiscal 2016. This trend is likely to continue in the near term.

Additionally, the net yield on these assets for the company remains lower than its competitors like E-Trade (2.7%) and Charles Schwab (1.8%). We expect it to increase in the near future with growth in assets.

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Enhanced Technology And Financial Products Have Propelled Growth In Investment Product Fees

The company has continued to innovate new financial products and improvise on their existing technologies to provide customers with more earning opportunities. This has led to around 12% growth in investment product fees for Q4 and the year. The company has recent launched a digital advisory platform in alliance with Riskalyze and Adhesion Wealth. With customers seeking financial advice supported by technologically driven insights, we expect a significant rise in the brokerage’s assets under management, which should boost the brokerage’s investment product fees.

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Trading Commissions Decline Notably Under Unfavorable Macro-economic Conditions

Trading volumes have seen a notable decline in the recent times, possibly due to investors looking for safer investment alternatives.

However, the company has seen a continuous increase in brokerage accounts. This, and improving macro conditions in the U.S., are likely to improve the trading volumes. This will consequently boost the brokerage’s trading commissions.

 

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