Ameritrade Year In Review: Growth Supported By Interest Earning Assets And Investment Product Fees

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TD Ameritrade (NASDAQ:AMTD) has grown modestly this year bit with revenues up by about 5% for the first 9 months of the year, in comparison less than 2% growth in 2015 and 10% in 2014. However, the stock price has surged significantly by 35% since the beginning of the year, with most of the appreciation following  the announcement of the acquisition of Scottrade in the beginning of November. With low margins and declining trading volumes, acquisitions seem to have become the go-to strategy for brokerages and the company’s decision in this regard seems to have been taken positively by the investors.

Interest earning revenue have grown significantly, at least partially due to the rate hike in December 2015. The company’s continued efforts to innovate financial products and and improve on their existing technologies has propelled growth in the investment product fees.

Fed’s Guidance Continues To Boost Interest Earning Revenues

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The company generates around 45% of its revenue from this segment. We believe the 5% year-to-date growth in interest earning revenue is primarily attributed to the rate hike in December 2015. The company’s low yield on these assets at 1.5% in comparison to competitor brokerages, is a slight deterrent to the revenue growth. However, we expect the acquisition of Scottrade, which will provide scale to Ameritrade, will cause the yields to improve. Furthermore, the recent rate hike is also likely to propel the growth in these assets and revenue.

Investment Product Fees Sees Growth With Increased Demand For Tech-Advanced Financial Products

 We believe the 12% growth in investment product fees is primarily due to increase in customers seeking financial advice supported by technologically driven insights. The company has continued to cater to the demand for innovative financial products in order to suit customer needs. It recently launched a digital advisory platform, which is expected to boost the growth in the revenue from this segment.

Trading Volumes Remain Suppressed

The company generates around 40% of revenue from trading commissions. With continuous competition from discount brokerage in terms of pricing and subdued macro conditions during the first half of the year, the company saw around 2% decline in its trading commissions.

However, we expect them to recover in the current quarter with marked improvement in GDP, employment rate. The recently concluded U.S. presidential elections will possibly lead to increased volatility in the markets, thereby promoting trading volumes. Further, with the acquisition of Scottrade, the company expects to be well-positioned, if not eliminate the pricing competition.

Please refer to our complete analysis for Ameritrade.

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