Online Brokerage Results Hold Up Despite Low Trading Volumes

Trading activity remained low in October as concerns over the potential fiscal cliff facing the U.S. deterred investors. Brokerage firms Ameritrade (NYSE:AMTD), Charles Schwab (NYSE:SCHW) and E*TRADE Financial (NASDAQ:ETFC), which rely on trading volumes for their income, have suffered from weak activity throughout 2012. Ameritrade reported an 11% decline in transaction-based revenues for the fiscal year ending September whereas E*TRADE reported a 15% decline in commission-based revenues in the first nine months of the year. Schwab also observed a fall in transaction-based revenues during the period.

Despite the worrying trend in trading activity, net revenues for the three online brokerages have not been affected as badly as the above numbers might suggest. Total revenues for all three firms so far this year are pretty much in-line with the figures reported last year. In fact, Schwab has managed a 3% increase in revenues in the first nine months of 2012.

Our current price estimate for Schwab is $15, E*TRADE is $8 and Ameritrade is $16. Our price estimates for all the three stocks are about in-line with their current market prices.

See Our Full Analysis for : E*TRADE Financial|Charles Schwab|Ameritrade

Trading Business Is Important For Brokerage Firms

Revenues from trading commissions account for about 40% of Ameritrade’s net revenues. E*TRADE and Charles Schwab have more diverse operations as trading commissions account for about 20% of their total revenues. Trading activity has fallen drastically this year, YTD trading volume for Ameritrade is down 11% while E*TRADE’s daily average revenue trades (DARTs) are down 13%.

All three companies have been able to mitigate the effect of declining revenue earning trades by consolidating client assets under management. E*TRADE’s customer assets at the end of September were up nearly 30% from 2011 while Ameritrade’s average fee-based investment balances increased from $78.3 billion to $86.1 billion. Charles Schwab was the biggest gainer as its client assets at the end of the September quarter were up 20% from the prior year. This allowed an increase in asset management and administration fees income particularly from institutional clients which grew from $665 to $688.

Ameritrade’s latest monthly report reveals that client assets are up 16% from the prior year, while Charles Schwab reported a 13% year-on-year increase. We expect the brokerage firms’ focus on consolidating client assets will help them get through the tough macroeconomic period.

Accounts Increasing

We believe that Ameritrade, E*TRADE and Schwab are on the right path for future growth. Even in a low volume environment, all three have been able to add to brokerage accounts. E*TRADE reported 23,365 gross new brokerage accounts added in October; its brokerage accounts at the end of September were up 4% from the prior year. Schwab was able to open 198,000 new brokerage accounts during the three months ending September, ending the quarter with 8.7 million active brokerage accounts. Ameritrade also reported an increase in funded accounts. An increase in brokerage accounts will eventually translate into increased DARTs as global economic conditions improve. President Obama’s re-election might also bring some much needed stability into the U.S. political environment. With a slightly better picture ahead, we expect to see trading activity improve in the coming quarters.

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