How Would Zero Trading Commissions Impact TD Ameritrade Revenues In 2020?

TD Ameritrade (NASDAQ: AMTD) reduced its trading commissions to zero with all major brokerages doing away these commissions last October to tackle the increasing popularity of zero-commission brokerages like Robinhood. While the company followed up the scrapping of trading commissions with plans to merge with Charles Schwab in late November, the deal is pending regulatory approval and the integration of the two firms is expected to take 18 months to 36 months after the deal closes in the second half of 2020. As both companies would function as separate existing entities over the next 2 years, Trefis forecasts TD Ameritrade’s Revenues for the next two years in an interactive dashboard – parts of which are highlighted below.

We believe that the loss of trading commissions will hurt TD Ameritrade’s net revenues, as it was the single largest revenue stream for the company with an average revenue share of 36% over the last three years. This would mean a loss of at least $2 billion in revenues for the company in 2020. However, an expected growth of more than $600 million in the other revenues coupled with continued growth in bank deposit account fees should partially offset the impact of this lost revenue stream on the top line. Overall, we expect net revenues to shrink $1.2 billion in 2020 – down 21% y-o-y.

What To Expect From TD Ameritrade’s Revenues?

• Ameritrade has added $2.3 billion to its net revenues over the last two years.
• Net Revenues have grown 64% from $3.7 billion in 2017 to $6 billion in 2019, but are expected to shrink 21% in 2020.
• The decrease of around $1.2 billion in 2020 would be mainly due to loss of trading commissions, as all brokerages have removed trading commissions a couple of months ago to tackle the increasing popularity of zero-commission brokerages like Robinhood.
• However, the expected addition of $623 million in other revenues coupled with slight growth in bank deposit account fees would partially offset the impact on the top line.
• Thereafter, revenues should increase by 7% and cross $5.1 billion by 2021.

Details about how trends in TD Ameritrade revenues compare with Charles Schwab and E*TRADE are available in our interactive dashboard.

(A) Bank Deposit Account Fees are expected to face margin pressure over the next two years

• It represents the fee earned for providing cash management services such as deposit accounts and money market mutual funds.
• Bank deposit account fees have grown 55% over the last 3 years, from $1.1 billion in 2017 to $1.7 billion in 2019. This was mainly due to a 20% jump in money market account balances coupled with 34 bps increase in net interest yield on the segment’s account balances.
• Going forward, the low short-term interest rate environment and declining 5-yr bond yields present challenges to the segment’s revenues. We forecast that the segment’s net interest yield could reduce by 7 bps over the next two years.
• However, 16% expected growth in account balances should offset the impact of interest-rate declines and allow segment revenues to cross $1.9 billion by 2021.

(B) Net Interest Revenue to remain relatively flat in 2020

• It is the interest earned on loans and margin receivables net of interest expense on funding sources.
• Net Interest Revenue has increased by 122% from $0.7 billion in 2017 to $1.5 billion in 2019 thanks to the Fed’s rate hikes.
• Going forward, interest income is likely to remain relatively flat in 2020 as the impact of the Fed’s rate cuts nullifies gains from a growing base of interest-bearing assets, followed by a growth of 9% y-o-y in the subsequent year, enabling it to cross $1.7 billion by 2021.

Our interactive dashboard for TD Ameritrade details what is driving changes in TD Ameritrade’s Net Interest Revenue segment.

(C) Investment Product Fees are expected to grow consistently over the next two years

• This segment represents the fee earned on client assets invested in investor programs, mutual funds, and money market funds.
• Investment product fees have increased 39% over the last three years, from $423 million in 2017 to $586 million in 2019. This growth was supported by a 48% increase in investment product average balance, partially offset by a slight decrease in segment yield due to intense competition in the industry.
• The average fee-based balances are to observe strong growth in 2020, as the company expands its Registered Investment Advisor (RIA) network.
• Overall, the segment is expected to add more than $100 million in revenues over the next two years, mainly driven by 23% growth in investment product average balances.

(D) Other Revenues are expected to surge in 2020

• It includes proxy income, solicit and tender fees, and income from other ancillary services. We also include order flow revenues under this category (which was earlier reported by the company as a part of trading commissions)
• The company earned $458 million as payments for order flow in FY 2019 and was recognized as a recurring revenue stream under the ‘Other Revenue” category for FY 2020 projections.
• Overall, the segment revenues are expected to be around $825 million by 2021.

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