Morningstar | TD Ameritrade's Fiscal 3Q Results Show Signs of Scottrade Synergies
TD Ameritrade's fiscal third-quarter results for the period ended in June are starting to show the synergies of the Scottrade acquisition. Expenses excluding acquisition-related costs decreased to approximately $700 million in the third fiscal quarter from around $800 million in the second quarter and $740 million in the first quarter. Not only has company management stated that it's realizing synergies ahead of schedule, but expense synergies are now forecast to be $488 million compared with an initial management estimate of $450 million. Non-GAAP net income increased to $508 million, or $0.89 per diluted share, compared with $414 million in the previous quarter, as a decrease in expenses more than offset lower trading revenue. We are increasing our fair value estimate for narrow-moat TD Ameritrade to $62 from $60 per share and believe that shares are currently fairly valued.Similar to other investment service firms, net interest income will be the main driver of revenue growth in the medium-term. Interest rate-related revenue increased $30 sequentially. Much of the increase came from higher client margin balances that can be volatile. However, financial institutions continue to capture much of the economics of rising interest rates. TD Ameritrade's cost of funds from clients increased about 3 basis points after the last 25-basis point increase in the Fed Funds rate, and the company is assuming that its client funding costs will only increase 3-5 basis points with the next Fed Funds increase. Additionally, the difference in revenue yield between its maturing Bank Deposit Agreement balances and reinvestment opportunity is also more than 100 basis points. Given that margin balances could decline and client cash balances haven't been growing much in the industry, a higher net interest margin and expense savings could be larger contributors to earnings growth in the coming quarters.
TD Ameritrade recently launched its Personalized Portfolios line of advice. This complements its other digital advice and managed portfolio offering lines, namely Essential Portfolios and Selective Portfolios. Across the investment services space, the move toward asset-based revenue and digital advice offerings are major trends. For our recent analysis of robo-advisors, please see our June special report "Robo-Advisor Upgrade! Installing a Program for Profitability."
TD Ameritrade Holding is a holding company. Through its subsidiaries, the company is a provider of securities brokerage services and related technology-based financial services to retail clients and independent registered investment advisors. The products and services available to the company's clients include: common and preferred stock, Exchange-Traded Funds, options, futures, foreign exchange, mutual funds, fixed income, new and secondary issue securities, margin lending, cash management services, and annuities. The company provides the client service and support through the following means: websites, branches, email, telephone, TTY services for the hearing impaired, and mobile app.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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