TD Ameritrade, Charles Schwab, E*TRADE Growth Looking Up on Rising Interest Rates

April 9, 2018 — 2:10 PM EDT

Thanks to tax reform and rising interest rates, online brokerage firms Charles Schwab and TD Ameritrade stand to benefit, with Morningstar forecasting that both companies will have double-digit percentage point increases in earnings. E*TRADE, although not predicted to see growth by Morningstar, also stands to benefit from a rising interest rate environment.

In a recent report, Michael Wong, director of equity research for financial services at Morningstar, said that the main driver of revenue for online brokerages going forward will be asset-based fees, including net interest income and the fees related to assets under management. He noted that, in the fourth quarter of 2017, less than 10% of The Charles Schwab Corporation's (SCHW) revenue was from trading, while under 40% of TD Ameritrade Holding Corporation's (AMTD) revenue came from that area.

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"Charles Schwab and TD Ameritrade are currently about fairly valued. However, that compares favorability to many financials that we evaluate as being fairly valued to overvalued," wrote Wong. "Even if the stock market were to fall and client assets were to also fall, the earnings of Charles Schwab and TD Ameritrade will likely still go up along with rising interest rates."

While Morningstar did not highlight the impact rising interest rates will have on the business of E*TRADE Financial Corporation (ETFC), Trefis, a platform created by a team of MIT engineers and Wall Street analysts, recently said that net interest yields have been around 2.65% for E*TRADE in recent years, which is higher than those of rivals Charles Schwab and TD Ameritrade. Interest-earning assets are made up of loans, mortgage-backed securities and investment securities. If rates go up more, E*TRADE and its competitors should see that side of their business increase. Trefis pointed out in a recent research report that interest-earning assets account for more than 65% of E*TRADE's revenue and that interest-earning assets jumped close to 30% in the fourth quarter thanks to a 32-basis-point increase in yield.

Shares of TD Ameritrade were recently trading up $1.51, or 2.6%, to $59.08. So far this year, shares of TD Ameritrade are up more than 15%. Meanwhile, Schwab's stock was recently up $1.34, or 2.67%, to $51.45, with shares up slightly for the year. E*TRADE stock was recently trading at $57.06, up $1.82, or 3.3%. Shares of E*TRADE are up more than 16% so far in 2018.