TD Ameritrade’s Transaction Revenue Is a Highlight

TD Ameritrade (AMTD) reported strong fiscal third-quarter results, as high trading volumes are offsetting a decline in interest rate-related revenue. The company reported net income of $569 million, or $1.05 per diluted share, on $1.6 billion of net revenue. Net revenue increased 6% from a year ago with trading revenue increasing $175 million, or 37%, while interest rate-related revenue decreased $110 million, or 14%. We don’t anticipate making a material change to our $49 fair value estimate for TD Ameritrade that incorporates a 100% probability that its merger with Charles Schwab is completed by the end of 2020 and believe that shares are undervalued.

While the headline may be that commissions were cut to $0 per trade in late 2019, TD Ameritrade and other brokers are still generating hundreds of millions in transaction revenue. The $0-commission mainly applies to online equity and ETF trades. The retail brokers still charge a per contract fee for options and receive payments for trades from market makers. The more than 300% increase in daily average trades has more than offset the decline in revenue per trade to about $3 from $9 a year ago.

While trading revenue is a highlight, interest rate-related revenue may grind lower until TD Ameritrade’s merger with Charles Schwab is completed. The company disclosed that of the $23 billion of deposit balances maturing in the next year that are earning a 1.44% net revenue rate, it would reinvest those deposits at a net revenue rate of approximately 0.07% based on the current interest rate environment. Beyond the next year, the company has around $75 billion of deposit balances earning 1.4% or more that would be reinvested at low rates if the interest rate environment doesn’t improve. At Schwab, net revenue on new deposits should be closer to 0.8% than the 0.07% at TD Ameritrade.