Ameritrade Earnings Review: Interest Earnings Assets And Trading Commissions Promote Top-Line

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TD Ameritrade’s (NYSE:SCHW) modest performance continued in Q4 2016, as the company reported nearly 6% and 9% growth in revenues for the quarter and full year, respectively. While all business segments grew, an increase in TD Ameritrade’s net interest income, aided by the Fed’s rate hikes in 2015 and 2016, was the primary contributor. Trading volumes, after remaining almost flat for most of the year, saw a significant surge in November and December. This was driven by increased volatility in the stock market resulting from the recently concluded U.S. presidential elections and improved macro factors such as GDP and employment rate. amtd

Fed’s Move Drove The Growth In Interest-Earning Revenue  

Interest earning assets continued to be a big part of Ameritrade’s business, generating around 46% of the brokerage’s revenue in the December quarter. With the rate hike at the end of 2015 and 2016, the company saw 4% and 15% growth in the revenue from this segment in the quarter and full year, respectively. This trend is likely to continue in the near term as we expect a series of hikes in the year ahead.

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Additionally, the net yield on these assets for the company remains lower than that of other players such as E-Trade (2.7%) and Charles Schwab (1.8%). We expect it to increase in the future with growth in assets and Scottrade’s acquisition.

Trading Volumes Recovered Under Improving Market Conditions

Trading commissions accounted for nearly 42% of the brokerage’s revenue in the fourth quarter. Due to competition from discount brokerages 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 during the first  three quarters. However, the past two months saw a significant recovery in the trading volumes, and consequently 8% increase in commissions for the fourth quarter. 

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With the volatility likely to sustain in the near term, we expect marked growth in the brokerage’s trading commission in the near term. Furthermore, with the acquisition of Scottrade, the company expects to be better-positioned in the market.

Increased Demand For Tech-Advanced Financial Products Helped Investment Product Fees

TD Ameritrade’s investment product fees saw nearly 5% growth for the full year 2016, primarily due to an increase in the number of customers seeking financial advice supported by technologically driven insights. The company focused on addressing the demand for innovative financial products.

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With customers seeking financial advice supported by technologically driven insights, we expect a significant rise in the brokerage’s assets under management. The digital advisory business, and the company’s focus on newer investment products to meet customer demand, are likely to drive these asset volumes and, consequently, higher investment product fees in future.

Please refer to our complete analysis for Ameritrade.

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