Interest Earning Assets Drive Ameritrade’s Earnings; Decline In Trading Commissions To Be Offset By Rate Hikes

TD Ameritrade (NASDAQ: AMTD) recently reported Q2 fiscal 2017 revenue of $904 million, implying growth of 6.9% over the same period last year. The company’s focus on client engagement and advisory services has helped it expand its customer and asset base. Aided by the Fed’s two interest rate hikes in the last 4 months, revenues from interest earning assets continue to be the primary growth driver. Additionally, the price cut in equity trading commissions did not impact Ameritrade’s overall trading revenue as the announcement came in the end of February, and any adverse impact was more than offset by recent IPOs such as that of Snapchat. The company’s operating margin declined by around 90 basis points to 39.6%. Expenses grew as the company continued to improve on its existing technology and sales and marketing capabilities. The costs incurred due to the Scottrade acquisition, which is due to close later in the year, will keep the operating expenses around the same level through the year.

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 47% of the brokerage’s revenue in the March quarter. The rate hikes in December 2016 and March 2017 helped drive nearly 11% growth in the company’s revenue from interest earning assets in the quarter. This trend is likely to continue in the near term as we expect a series of hikes in the next 12 months.

Additionally, the net yield on these assets for the company, at 1.4%, 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 the Scottrade acquisition.

Trading Revenue Remained Unaffected Despite Cut In Commissions  

Transaction-based revenue accounts for 40% of Ameritrade’s overall revenue. The second quarter saw around 2.6% growth in trading commissions despite the company’s decision to slash its commissions from $9.99 to $6.95 per trade. Trading volumes grew by over 3%, and the company’s decision to slash its commissions came at the end of February, thereby affecting only a third of the trading volume for the quarter. Ameritrade expects to lose up to $80 million for the entire year due to the price cut, but expects the loss to be offset by the growth in interest earning revenues.

Increased Demand For Tech-Enabled Products Helped Investment Product Fees

TD Ameritrade’s investment product fees saw nearly 17% growth for the quarter, 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. Within 4 months of Essential Portfolio’s launch, the brokerage’s robo-advisory segment managed to gather around half a billion dollars in assets.

With more customers seeking financial advice supported by technology, 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.

See our complete analysis for Ameritrade.

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