Key Takeaways From Ameritrade’s Q2

by Trefis Team
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TD Ameritrade‘s (NASDAQ: AMTD) stock price fell around 2% as the company missed EPS expectation for Q2 fiscal 2018, though it managed to beat revenue estimates by over $40 million.

The company’s focus on client engagement and advisory services has helped it expand its customer and asset base, and consequently, quarterly revenues grew by nearly 56% year-over-year. Additionally, with the completion the acquisition of Scottrade, this is the second quarter with combined earnings of the two entities. The acquisition is expected to further the brokerage’s customers and asset growth in the future. Additionally, the company’s foray into bitcoin bodes well for its trading segment in the near term.

Aided by the Fed’s multiple interest rate hikes in 2017, revenues from interest earning assets continue to be the primary growth driver. Additionally, the price cut in equity trading commissions was more than offset by the increase its daily trading volumes due to a larger customer base. The growth in expenses due to investments in technology and sales and marketing capabilities, as well as the Scottrade acquisition, has put some pressure on the company’s operating margins. However, we believe the scale provided by the Scottrade acquisition will help boost revenues and margins in the upcoming quarters.

Rate Hikes Drove Growth In Interest Revenue  

Interest earning assets remain a key part of Ameritrade’s business, generating around 49% of the brokerage’s revenue in the March quarter. The rate hikes in 2017 and the Scottrade acquisition helped drive nearly 63% growth in the segment’s revenue. This trend is likely to continue in the near term, as we expect rate hikes in the year ahead. You can modify our forecasts for the asset base and yield on assets in our interactive dashboard to assess their impact on revenues.

Additionally, the net yield on these assets for the company, at 1.8%, remains lower than those of other players such as E-Trade (2.9%) and Charles Schwab (2.1%). We expect it to increase in the future driven by rate hikes.

Trading Revenues Grew Despite Cut In Commissions  

Transaction-based revenue accounts for 40% of Ameritrade’s overall revenue. The second quarter saw around 52% growth in trading commissions despite the company’s decision to slash its commissions from $9.99 to $6.95 per trade in 2017. However, 82% growth in trading volumes managed to offset that impact and propel growth in trading commissions.

Increased Demand For Tech-Enabled Products Helped Investment Product Fees

TD Ameritrade’s investment product fees saw nearly 37% growth for the quarter, primarily due to an increase in the number of customers seeking financial advice supported by tech-driven insights. The company remains focused on addressing the demand for innovative financial products.

With more customers seeking financial advice and services 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 higher investment product fees in future.

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