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TD Ameritrade (AMTD): Stock Down Despite In Line Earnings

Shares of TD Ameritrade Holding Corporation (AMTD) declined over 2% in a day’s trading following its fiscal 2016 second-quarter (ending March 31) earnings release on Tuesday, before the market opened. The company reported earnings per share of 38 cents, in line with the Zacks Consensus Estimate. Notably, the bottom line improved 8.6% year over year.

Results reflected strong trading activity that was driven by the heightened volatility in the quarter. Also the quarter benefitted from the December rate hike with improved spread-based revenues. The company witnessed record client assets and interest rate sensitive assets. Higher revenues and reduced expenses acted as tail winds.

However, the share price movement probably reflected the investors’ concern over the company’s continued decline in net interest margin (NIM). Notably, NIM decreased because the benefit from the rate hike was more than offset by reduced net stock lending and lower margin loans which are high spread products.
TD Ameritrade’s net income for the quarter was $205 million, up 8.5% from the prior-year quarter.

Performance in Detail

Net revenue for the quarter came in at $846 million, missing the Zacks Consensus Estimate of $859 million. However, net revenues increased 5.4% year over year. The rise was primarily due to higher transaction-based revenues as well as asset-based revenues.

Total asset-based revenues for the quarter amounted to $470 million, up 7.1% year over year. Commissions and transaction fees increased 2.9% from the prior-year quarter to $360 million.

The quarter's NIM was 1.43%, down 7 basis points (bps) year over year.

Total operating expense declined slightly year over year to $503 million. The decrease was mainly due to lower professional services and other expenses.

Average client trades per day increased 6.9% year over year to 509,120.

At the end of the quarter, net new client assets totaled $14.1 billion, down 13.5% year over year. However, total client assets came at $711.2 billion, up 2.3% year over year.

While average spread-based balance was $105.8 billion, increasing 12.2% year over year, average fee-based investment balance edged down 1.3% to $153.1 billion.

Balance Sheet

As of Mar 31, 2016, TD Ameritrade’s cash and cash equivalents were $2.5 billion, compared with $2.0 billion as of Sep 30, 2015 and shareholders’ equity remained stable at $4.9 billion.

Share Repurchase Update

During the second quarter of fiscal 2016, TD Ameritrade repurchased 8 million shares.

Our Viewpoint

Innovations in online trading, long-term investment in products and services, delivery of advanced customer service, and creative marketing and sales are some of TD Ameritrade’s key strategies for boosting it’s trading and investing business.

Amid a tough operating environment, the company witnessed a continuous rise in organic client assets which bode well, going forward. However, we remain cautious regarding elevated expenses, margin pressure and stringent regulations, which may weigh on the company’s financials in the upcoming quarters.

At present, TD Ameritrade carries a Zacks Rank #3 (Hold).

Performance of Other Investment Brokers

Interactive Brokers Group, Inc. IBKR reported first-quarter 2016 adjusted earnings per share of 51 cents, which beat the Zacks Consensus Estimate of 45 cents. Earnings improved substantially from a loss of 22 cents recorded in the year-ago quarter. Results primarily benefited from a strong growth in commissions and execution fees and net interest income. Also the quarter witnessed rise in daily average revenue trades (DARTs) and lower expenses.

The Charles Schwab Corp.’s SCHW first-quarter 2016 earnings of 29 cents per share were in line with the Zacks Consensus Estimate. Further, it was up 32% from the prior-year quarter figure. Revenue growth, primarily driven by increased equity market volatility, and benefit from provisions acted as the tailwinds. However, higher expenses remained a concern.

E*TRADE Financial Corp. ETFC is slated to report results on Apr 21.

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