Discount broker TD Ameritrade (AMTD) reported Q3 earnings on July 21, and the results were relatively within Wall Street expectations. The highlights:

  • Net revenue of $794 million, up 4% from last year.
  • Net new client assets up $11.7 billion, a 7% increase.
  • Average client trades per day fell sequentially but increased from last year. 
  • Earnings per share of $0.36 up sequentially and from year-ago quarter. 

Let's take a closer look at the keys behind the quarter and the two most important things for the company's long-term success.

Building up the asset base for the eventual increase in rates
TD Ameritrade has counted on fee-based revenue for the majority of its business over the past several years, and this was no different last quarter. Of the $794 million total, $328 million was transaction-based commissions and fees, while $294 million was deposit account and investment product fees, with only $156 million coming from the interest spread on interest it pays on deposits and what it is able to earn on deposits. 

The company continues to focus on growing client assets, in accounts that create fee-based revenue and also interest-bearing accounts, due to the huge uplift that will come from increased interest rates:

Source: TD Ameritrade earnings presentation.

While interest rates remain near historical lows, they are expected to begin increasing later this year, and even a relatively small increase of 100 basis points -- equal to 1 percentage point -- would be huge for TD Ameritrade. The company estimates that on its current $102 billion in rate-sensitive assets, a 1 percentage point increase in the interest rate would generate an additional $0.38 in earnings per share over a full year. That's like adding an extra quarter of profits, just on rates rising to a level that's still well below the historical average. 

Rates could begin rising as soon as September of this year, which would be a real positive for TD Ameritrade's bottom line. 

Average commission per trade down again but not a big concern 
Average commission per trade came in at $11.99, slightly below last quarter's $12.02 and last year's $12.52. However, the company indicated that, much like last quarter, this is a product of the trade mix -- higher commodity future trading, which collects lower commissions than equities -- and not lower pricing for its commissions. It sounds like this is cyclical, with commodities like oil trading at record low prices and likely increasing interest from traders looking to profit on a recovery. 

This is the sort of thing that's almost completely out of TD Ameritrade's control, and is simply a product of trader sentiment. What's more important is that the 7% growth in assets led to 10% more total trades versus last year. Average annualized trades per account (of 16.7) and the activity rate (of 6.7%) were slightly up from last year. 

In short, the company's focus on growing its base of clients continues to pay off. 

Final thoughts
There's nothing sexy about TD Ameritrade's quarterly results, but in a relatively mature and quite competitive discount brokerage business, the company continues to grow its asset base quite well. Even with the occasional hiccup and the cyclical nature of trader sentiment that can affect its commissions slightly from one period to the next, the consistent growth of client assets has regularly pushed trading volume and fee-based revenue higher.

And the company has managed its costs and directed a lot of that growth to the bottom line:

AMTD EPS Diluted (Quarterly) Chart

AMTD EPS Diluted (Quarterly) data by YCharts.

Factor in the prospects of interest rates going up, and the interest rate sensitive assets it manages could lead to even bigger earnings growth ahead.