Release Date: July 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Interactive Brokers Group Inc (IBKR, Financial) reported record net revenues and pretax income for the second quarter of 2024.
- The company saw strong account growth, adding 178,000 new accounts, which contributed to a record $107.1 billion in client credit balances.
- Client equity increased by 36% over the previous year, reaching $497 billion, just shy of half a trillion in total client assets.
- Commission revenue was the second highest ever, driven by higher trading volumes from a growing base of active customers.
- Net interest income reached a quarterly record of $792 million, supported by increased margin borrowing and higher yields on margin loans.
Negative Points
- The company faces uncertainty due to geopolitical tensions and upcoming elections, which could impact market conditions and trading volumes.
- Securities lending net interest has not been as strong as in prior quarters due to reduced demand for shorting stocks and fewer hard-to-borrow names.
- The company anticipates a potential $59 million reduction in annual net interest income for every 25 basis point decrease in the Fed Funds rate.
- Higher execution, clearing, and distribution costs, up 24% over the previous year, impacted profitability despite being passed through to customers.
- The company experienced a significant loss due to a mishap on the New York Stock Exchange, with no prospects for recovery.
Q & A Highlights
Q: Can you unpack the year-to-date account growth and provide more details on the average customer profile?
A: New accounts typically take some time to bring in all intended assets. This quarter, new accounts increased by 28%, commissions by 11%, net interest income by 18%, DARTs by 28%, and assets by 36%. The S&P 500's year-over-year increase of 23% and quarter-over-quarter increase of 29% provide context for these figures.
Q: Could you clarify the $18.6 billion of rate-sensitive cash versus the total fully rate-sensitive balances of over $30 billion?
A: The rest of the rate-sensitive balances are from firm equity, which is over $15 billion. A portion of this equity is sensitive to interest rates, making up the difference.
Q: Regarding the HSBC launch in the UAE, is there a large inflow of client equity and accounts on day one, or is it a gradual ramp-up?
A: For the UAE, we will onboard existing business from Pershing, migrating around 10,000 accounts in August. Other countries will see gradual growth from zero, as HSBC offers Interactive Brokers-powered platforms to their banking clients.
Q: How have the enhanced offerings for hedge funds, like high-touch prime and global outsource trading, been received?
A: The enhancements were well received, with 30 hedge funds onboarded. Hedge funds appreciate having a single point of contact and access to various experts. The goal is to retain hedge funds as they grow, especially when they cross the $100 million threshold.
Q: Can you provide an update on the backlog with introducing brokers and who you are competing with to win this business?
A: The pipeline size is similar to a year ago. Competitors include firms in Asia and Europe. Our offering is unique due to global market access, which is attractive to introducing brokers.
Q: What is the impact of potential Fed rate cuts on your net interest income, and how do you see trading activity evolving?
A: A 25 basis point Fed rate cut would reduce annual net interest income by $77 million. While lower rates spur economic growth, current uncertainties like geopolitical tensions and upcoming elections could lead to increased volatility and trading volumes.
Q: Any update on the launch timing for ForecastEx and the opportunity for forecast contracts?
A: The launch is slightly delayed to mid-August due to additional bookkeeping work. We believe betting on economic indicators and events will become a popular and growing area, similar to the growth seen in equity options.
Q: Can you explain the new securities lending disclosures and their impact on reported revenues?
A: With higher interest rates, more income from securities lending is classified as interest on segregated cash. If benchmark rates were zero, securities lending revenue would be $194 million instead of $25 million, reflecting the reclassification of income.
Q: What is driving the growth in options volumes, and how do you see this evolving globally?
A: Growth is driven by zero-day and weekly options, particularly in the US. We expect similar growth in other regions as exchanges add shorter-term options. Our platform is well-positioned to capitalize on this trend due to its comprehensive tools and global market access.
Q: Are there any tax implications from the NYSE loss this quarter?
A: The loss flows into gains and losses and is treated as a general expense for tax purposes. There were no other notable tax items this quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
