Now that the Federal Reserve has raised interest rates again, one major Omaha company is sure to see a windfall: TD Ameritrade, the nation’s largest online stockbroker.
The employer of about 2,000 people in the metro area has about $120 billion of earning assets tied to interest rates that have now risen only twice — once this year and once last year — after being locked down for nearly a decade at near zero.
The increases are an immediate tonic to anyone with investments tied to interest rates — many of which are based off the Fed funds rate. Essentially, the measure is the rate by which banks lend to one another, but other rates — credit card interest, rates on bank certificates of deposit and the like — are influenced by the key Fed rate.
The increases won’t make a huge difference to the average consumer squirreling away money in a bank account, but for a behemoth like TD Ameritrade, this quarter-point rate increase and the next one could raise annual earnings per-share by 8 cents to 10 cents — with no extra work or expense.
The U.S. central bank took another small step out of the ultra-low rates era that came about in the wake of the financial crisis when this month it raised benchmark short-term rates a quarter of a percentage point. The rate now is set in a band of 0.5 percent to 0.75 percent, up from its previous band of 0.25 percent to 0.5 percent.
It was just the second increase since the financial crisis. The first came in December of last year. Fed officials have indicated that three more small increases are possible next year.
TD Ameritrade, the largest online broker by daily trades, had no statement on the recent Fed increase, a company spokeswoman told The World-Herald on Monday.
But TD Ameritrade Chief Financial Officer Steve Boyle told investors and analysts on a conference call in October that “the most impactful items of the near term will be trading levels and interest rate assumptions” during 2017, when the company expects earnings per share to go as high as $1.80, from $1.58 in fiscal 2016.
It comes down to customer assets — the mountains of cash that traders deposit with the brokerage to buy and sell stocks, bonds or options. Those customer assets amounted to almost $800 billion at the end of the 2016 fiscal year, on Sept. 30. TD Ameritrade serves both professional wealth advisers and individual investors.
A portion of all that money can be invested by TD Ameritrade for its own purposes. The company also collects interest on loans made to customers who have borrowed from the broker to buy stock “on margin,” as it’s called in the business. At the end of fiscal 2016 the brokerage had about $12 billion in outstanding margin loans, part of the $120 billion of earning assets tied to interest rates.
Bloomberg Intelligence this month noted the lushness of TD Ameritrade’s margin-loan portfolio, saying 91 percent of the loans are in the “high-yield” category, versus 62 percent for competitor ETrade Financial and 51 percent for rival Charles Schwab.
And TD Ameritrade probably has another competitive advantage over the others: its special relationship with TD Bank, one of Canada’s largest financial institutions and the company’s largest shareholder.
Through the arrangement with TD Bank, TD Ameritrade customers can open low-cost money-market deposit accounts. That means TD Ameritrade is spared the operating expense and capital-reserve requirements of operating a bank the other online brokers are saddled with.
And there is another bonus. The bank pays TD Ameritrade a fee based on the yield the bank earns from investing the money in the accounts opened by the brokerage customers. As yields rise the bank makes more money on those accounts. TD Ameritrade then collects a larger fee from the bank.
Of course, TD Ameritrade isn’t the only company affected by interest rates — almost all are in some way.
Derek Leathers, chief executive at Omaha-based trucking company Werner Enterprises, said what the rate increases signal is as important as the bump itself, and that signal is one of economic growth.
The Fed pushed rates down to near zero in the wake of the financial crisis in an effort to goose growth; the idea is that the “cheaper” money is, the more investors will put it to use in search of greater returns.
Even with its most recent increase, the key rate still is low by historic standards; in 2007 it was above 5 percent. Still, inching closer to the 1 percent level is a good sign, economy watchers say.
“The recent Fed actions signal improving economic activity,” Leathers said. “Combined with rising consumer confidence, it may drive more shipping volume, which would be good for trucking and logistics firms like Werner.”