Money Markets are Ameritrade's Biggest Revenue Source


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Ameritrade ( AMTD ) is an online brokerage that allows individual investors to trade equities, options and other securities. Ameritrade also offers money market account services to clients through TD Bank USA. It competes with other online brokerages and financial services firms like E-Trade ( ETFC ), Charles Schwab ( SCHW ), Wells Fargo ( WFC ) and Bank of America ( BAC ).

Following results we have updated our price estimate to $22.65 . The company's shares are currently trading at a discount of almost 10% to our estimate. We believe that the biggest contributing factor to the difference in prices is the outlook for Ameritrade's earnings from money market deposit accounts.

Understanding Money Market Deposit Accounts

A money market deposit account (MMDA) is like a savings bank account where clients deposit money and in earn a slightly higher interest rate on it. Account holders can typically make a few transactions a month that are free and are governed by a slightly different set regulations and rules.

MMDAs became a source of revenue for Ameritrade in 2006 resulting from an agreement with TD Bank USA. This agreement was inked as a part of Ameritrade's acquisition of TD Waterhouse in January 2006. Prior to 2006, interest revenues for Ameritrade were a significantly smaller part of the total revenues and included interest earned on the cash and securities that clients deposit with Ameritrade in order to trade online.

Contribution of MMDAs to Ameritrade's value

Ameritrade receives a fee from TD Bank for providing marketing, record keeping and support services for their money market deposit accounts. The fee is based on the yield earned on the client assets less the actual interest paid to clients, a flat fee to the banks of 25 basis points and the cost of FDIC insurance premiums. It is also a high margin service as Ameritrade enjoys EBITDA margins as high as 50% from MMDA services.

The net yield for Ameritrade from an MMDA was as high as 4% in early 2008, before it fell to under 2% in 2009. We believe that the interest rate will gradually increase over the years to reach the highs it achieved in the pre-recessionary years. Moreover, the increasing popularity of an MMDA over normal savings account among clients due to the higher interest offered is also a significant draw for Ameritrade.

In 2008-2010, Ameritrade migrated client cash held in client credit balances and money market mutual funds into money market account offerings. The total balance in these money market accounts with Ameritrade almost doubled each year during this time period. Going forward, we expect the balance in these accounts to  grow by at least 5% annually.

The estimated values of MMDA yields and client balances likely contribute to as much 42% of Ameritrade's share. You can modify the forecast above to see how they impact Ameritrade's price estimate.

You can see the complete $22.65 Trefis price estimate for Ameritrade's stock here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: AMTD , BAC , ETFC , SCHW , WFC

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