TD Ameritrade, E*Trade Downgraded on Rate Concerns
An analyst on Friday downgraded his ratings of online brokers TD Ameritrade Holding and E*Trade Financial, citing in part growing competition for customer accounts.
Deutsche Bank analyst Brian Bedell downgraded both of the discount brokers to “hold” from “buy.”
He cited declining long-term interest rates that lower the spread between what they pay on deposits and earn on loans and investments, Fidelity Investment’s introduction on Wednesday of a “much higher” cash-sweep account rate of 1.91% and the growing unlikelihood of a merger between the discount broker firms.
Shares of TD Ameritrade were off 3.0% while E*Trade was down 2.0% in early afternoon trading on Friday.
“At this stage of the market cycle, and upon market expectations of more substantial Fed easing, we think macro risks of lower interest rates and possible eventual equity market declines will restrain any sustainable upside” for discount brokerage stocks, Bedell wrote in a note to clients. In his coverage universe of online brokers, asset managers, trust banks and exchanges, Bedell has a buy only on the exchange stocks (CBOE, CME Group, Intercontinental Exchange [NYSE] and Nasdaq).
Richard Repetto, an analyst at Sander O’Neill & Partners, said Bedell’s move appears “a bit premature,” at least as it regards Fidelity’s cash-sweep yield for new accounts.
“There is going to be competition within the industry,” he said, but “we are going to have to wait and see with rates coming down just how sensitive clients are to rates paid on cash.” Repetto has a “buy” rating on TD Ameritrade and a “hold” on E*Trade.
In addition to intensifying discount-broker competition and declining rates, Bedell wrote that TD Ameritrade Chief Executive Tim Hockey’s unexpected plan to resign next year jeopardizes the firm’s “mid-to-long-term strategy.”
He lowered his expectation for a purchase of E*Trade by Ameritrade to 20% from 50% , and also backed away from his earlier assessment that TD Ameritrade and E*Trade were less vulnerable than Charles Schwab to rate cuts.
An Ameritrade spokeswoman said the company does not comment on analyst reports, and an E*Trade spokesperson did not respond to a request for comment.
Schwab’s earnings will likely be goosed by its plan to buy the brokerage assets of USAA Wealth Management next year, Bedell wrote, but the likelihood of more rate cuts will mitigate the benefit of the deal for the rate-sensitive company.
The analyst lowered his price target on TD Ameritrade to $47 from $58, on E*Trade to $45 from $52 and on Schwab to $37 from $41. TD Ameritrade was changing hands at around $44.90 on Friday afternoon, E*Trade at $42.55 and Schwab at $36.76 (down 1.8%).