Banking & Finance

What the Latest Trading Metrics Mean for Potential Online Brokerage Mergers

Interactive Brokers

Interactive Brokers reported that the DARTs in May were 617,000, which was 19% higher than prior year and 2% lower than prior month. Its May ending client equity of $66.7 billion was up 31% from the prior year. Its ending client margin loan balances were $19.3 billion, and its ending client credit balances were $33.8 billion. Interactive claims 306,000 client accounts, up 18% from a year ago and 1% higher than the prior month. Also, the firm claims 468 annualized average cleared DARTs per client account, with an average commission per cleared client order of $4.27 if you include fees.

Shares of Interactive Brokers were trading around $35.50 Monday morning, in a 52-week trading range of $21.92 to $39.55. The stock has a consensus analyst price target of $35.00.

TD Ameritrade

TD Ameritrade reported that its average fee-based balances totaled $161.8 billion in May, up 17% from a year ago, while it had $710.8 billion in total client assets as of May 31 for a gain of 12%. There was also 427,000 client trades per day, for a gain of 11%. At the end of the first quarter, TD Ameritrade had 6,467,000 funded accounts.

Ameritrade shares were trading near $38.5o Monday morning. The stock has a consensus analyst price target of $39.13 on a 52-week trading range of $28.34 to $39.05. Its market cap is right at $21 billion.

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24/7 Wall St. has counted E*Trade as one of six dream mergers. As a reminder, it has barely been a month since the last analyst report signaled the potentiality of a consolidation round in the online brokers again. Merrill Lynch said at the time:

While we think the upside from rising rates and margins, as well as business growth could be significant, other factors could also impact the earnings potential and the stocks, including competitive pricing (where we see Schwab as most defensive and TD-Ameritrade and E*TRADE as more exposed) and/or possible M&A activity …

We view Schwab as well positioned given its exposure to higher short term rates, stronger organic growth (both NNA and balance sheet growth with capital deployment), and less pressure from competition …

While we do not view M&A activity as imminent, if these events were to play out, we view the most likely scenario being TD-Ameritrade acquiring E*TRADE. Based on the normalized earnings, potential pricing cuts, synergies, and premium paid, we see the potential for ~30% upside for Ameritrade and E*TRADE, though at current net interest margins, the upside gets cut by roughly half.

More details are available on the Merrill Lynch call from May.

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