UPDATE 2-TD Ameritrade Q1 profit falls, even as assets soar

Tue Jan 22, 2013 12:20pm EST

By Jed Horowitz

Jan 22 (Reuters) - Quarterly profit at TD Ameritrade Holding Corp fell 3.3 percent from a year earlier on low interest margins and weak trading volume, but beat expectations as the firm collected a record amount of new client assets.

TD Ameritrade, the biggest online broker by customer trading volume, on Tuesday reported fiscal first-quarter profit of $147 million, or 27 cents a share, down from $152 million, or 27 cents, a year earlier.

The consensus estimate of 21 analysts compiled by Thomson Reuters I/B/E/S was for 24 cents a share in the most recent period.

Shares of TD Ameritrade climbed 3.5 percent to $19.10 on Tuesday.

The better-than-expected report reflected strong expense controls, torrid asset gathering and higher commissions per trade, company executives said. Trading remained sluggish, however, and net interest profit continued to be crushed by low interest rates, they said.

TD Ameritrade, which declared a special dividend of 50 cents a share last month, continued to struggle against low interest rates that have hurt its ability to book gains on clients' dormant cash, its executives said.

Like other discount brokerages, it has been forced to waive money-market fees worth hundreds of millions of dollars annually to ensure that clients do not realize negative returns.

NO TASTE FOR TRADING

Retail investors who trade at TD Ameritrade and other low-commission online brokers have been cautious for most of the past year, worried about the economy, the U.S. budget debate and market risk.

"Trading continues to be sluggish," Chief Executive Fred Tomczyk said in a phone interview.

While active traders are still interested in stocks and more risky options and futures, more conservative investors continued to worry about political gridlock in Washington that could send the economy and markets into a tailspin, he said.

TD Ameritrade is more reliant on commissions and other investments from active traders than rivals such as Charles Schwab Corp and E*Trade Financial Corp.

Its client activity rate, a measure of how many accounts were trading, fell to 5.8 percent from 6.5 percent a year earlier but was up slightly from the fiscal fourth quarter.

In another sign of investor fear, average client cash balances at the end of 2012 reached $80.9 billion, the highest in at least five years. In the fourth quarter of 2007, cash balances were $45.2 billion.

The company ended 2012 with $472.3 billion in client assets, up 7 percent from a year earlier. It collected $15.6 billion in what it calls interest rate-sensitive assets in the last quarter, bringing the total to $90 billion. That big balance positions the company to book solid gains when rates rise, but a rate hike by the U.S. Federal Reserve is unlikely for several years, Tomczyk said.

In a positive sign, daily trades so far this month have risen to an average of 370,000 from 334,000 in the previous quarter. Tomczyk was moderately cautious about the jump, noting that January trading is still below seasonal averages.

Partly in response to the prolonged period of low rates, TD Ameritrade revised its fee agreement with Toronto-Dominion Bank , its largest shareholder.

The brokerage will pay a lower management fee to the bank for holding client cash in floating-rate bank accounts when rates fall, and more on new deposits when rates rise.

The agreement lowers TD Ameritrade's fee to seven-and-a-half percentage points from 25 currently, and should add $30 million of net interest revenue to its bottom line this fiscal year, the company said.

NEW DIRECTIONS

To offset lower trading revenue and net interest profits, the company has been more aggressively pitching fee-based advisory products, such as portfolios of mutual funds, to customers. As a result, its fee-based balances climbed 28 percent last quarter from a year earlier.

TD Ameritrade plans to hire 100 new people in sales over the next three quarters, executives said on a conference call with analysts.

Its business of servicing independent investment advisers whose clients buy products and trade through the firm remains TD Ameritrade's fastest-growing customer channel. It said 110 advisers joined the "institutional" platform during the quarter from full-service brokerage firms, up 10 percent from last year.

Few of them were big hitters, however, because Morgan Stanley, Bank of America Corp's Merrill Lynch and other big brokerages have tweaked incentives for their best advisers with very wealthy clients to prevent them from bolting to firms that use discount brokers.

"They've become pretty good at keeping the big producers," Tomczyk said on the call with analysts, "and I don't expect that to change."

Still, TD Ameritrade gathered a record $15.6 billion in new client assets in the last three months of the year, up from about $10 billion in the year-earlier quarter.

Rival Charles Schwab Corp earlier this month also reported record asset gathering at the end of 2012.

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