UPDATE 2-Falling Apple hits TD Ameritrade's margin loan business

Wed Jul 24, 2013 8:13pm EDT

By Jed Horowitz

NEW YORK, July 24 (Reuters) - The drop in Apple Inc's stock over the last year spread to a core business of discount broker TD Ameritrade Holding Corp - lending to customers against their stock portfolios.

The result is that investors who typically borrow from TD Ameritrade and have large holdings in Apple now have less buying power.

The discount broker, the biggest as measured by client trades, said Tuesday that balances in its clients' margin accounts have remained stuck at about $8.6 billion since last year for one reason.

One-third of the multi-billion dollar margin balances at TD Ameritrade are in accounts that have more than 25 percent market exposure to Apple.

"Our most widely held stock, our most actively traded stock and our most margined stock is Apple," TD Ameritrade Chief Executive Fred Tomczyk said on a conference call to discuss the firm's quarterly earnings report.

"A very large company that makes up a big part of our margin book has not participated in this rally over the last year."

Retail brokers lend money to clients to invest in the market through margin accounts, using client stock portfolios as collateral. The usually lucrative business has been less profitable in recent years because interest rates are so low and because retail investors since the financial crisis have been timid about stock investing.

TD Ameritrade, however, boasts more active trading clients than rivals such as Charles Schwab Corp. Average daily trades at TD Ameritrade rose 12 percent in the quarter ending on June 30 from a year ago to just under 400,000, but client margin balances of $8.6 billion barely moved from $8.7 billion a year ago and $8.5 billion at the end of this year's first quarter.

There has been "a big depletion in clients' buying power" because of the fall in Apple's shares, Tomczyk told Reuters.

Tomczyk did not say how much of clients' stock portfolios were tied up in Apple stock to have such an outsized impact on values. Shares of Apple are down 25.4 percent over the last 12 months, including reinvested dividends, but the S&P 500 stock index is up 27.4 percent.

Alex Kramm, an analyst at UBS who follows TD Ameritrade, asked Tomczyk on the earnings call whether the stagnant margin balances reflected the firm's own failure to aggressively push margin lending. The executive responded that TD Ameritrade, puzzled earlier this year by persistently low margin balances, researched the issue and attributed the phenomenon to Apple.

The technology giant reported stronger-than-expected third-quarter earnings Tuesday afternoon, sending its shares up more than 5 percent in after-market trading.

That may be a hopeful sign not only for Apple shareholders but for Apple-dependent broker-dealers. In the meantime, however, analysts assume that the Apple effect on margin accounts goes beyond TD Ameritrade.

"It should be true for a lot of other brokers on the assumption that it's such a large holding," Kramm told Reuters.

A spokesman at Schwab, which last week said margin loan balances rose to $11.7 billion at the end of June from $11.2 billion a year earlier, declined to comment on Apple's effect on margin balances. Kramm described Schwab's margin balances as "range-bound," as are TD Ameritrade's, for the past year or so.

A spokeswoman at Bank of America's Merrill Lynch brokerage unit declined to comment on the Apple effect. Spokespeople at Morgan Stanley and UBS Wealth Americas did not respond immediately with comments.

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