Morningstar | We Expect Continued, but Slower, Earnings Growth for TD Ameritrade
Similar to other investment service firms, previous tailwinds for narrow-moat TD Ameritrade's earnings are diminishing. On an adjusted basis that primarily excludes acquisition-related expenses, net income increased 26% to $522 million, or $0.93 per diluted share, for the fiscal second quarter, ending in March. The increase from the previous year was primarily from interest rate-related revenue that increased about $100 million and about a $50 million decrease in adjusted expenses. We don’t anticipate making a material change to our $62 fair value estimate for TD Ameritrade.Somewhat unintuitively, while the year-over-year growth was strong, adjusted net income actually decreased 17% sequentially, although market sentiment improved, from fears of an imminent recession to an economic slowdown. Part of the decrease was from seasonally higher compensation expenses. On the revenue side, trading declined to 860 thousand trades a day, compared with the exceptionally volatile and active December quarter that had 928 000 average trades a day. Interest rate-related revenue streams also had a net negative dynamic in the quarter. On the positive side, the yield on the company's bank deposit accounts increased to 1.5%, from 1.47% the previous quarter, and overall yields on interest earning assets increased 18 to 25 basis points. However, the balance of the company's highest yielding asset, margin loans, declined to $19.4 billion from $22.1 billion and this lowered margin loan revenue by $32 million.
We continue to expect a gradual increase in earnings. This past quarter's trading revenue was at a normalized level, so we don't expect further material declines. On the interest rate-related revenue side, this should increase, as the fixed portion of its bank deposit account, or BDA, fees reprice. The BDA balances maturing in the next 12 months are expected to yield 1.2%, but the company forecasts they will yield 1.65% to 1.7% after repricing.
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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