Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the interactive brokers group first quarter financial results Conference call. At this time, all participant lines Arnold listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session wanting to press star one on your telephone.
Please be advised that todays conference is being recorded require any further assistance. Please press star zero I wouldn't I like to have the conference over to your speaker today man seems to be director of Investor Relations. Thank you. Please go ahead ma'am.
Good afternoon, and thank you for joining us for first quarter 2020 earnings conference call.
Once again Thomas is on the call, but asked me to presenters comments on the business he will handle the QNX.
As a reminder, today's call may include forward looking statements, which represent the company's belief regarding future events, which by their nature are not certain and our outside of the company's control.
Our actual results and financial condition may differ possibly materially from what is indicated in these forward looking statements.
Ask that you refer to the disclaimers in our press release you should also reviewed description of risk factors contained in our financial reports filed with the FCC.
I might have the cobot 19 pandemic, we want to emphasize that our focus is on or employees clients and communities.
Senior management at interactive brokers has worked together for decades, most from before the inception of the electronic broker.
We were all here during the financial crisis, many were hearing 1987 as well.
Our company's culture has been one of working hard independently and together to solve problems and come up with solutions preferably automated ones.
The strength of management cohesion and longtime experience enabled us to react to recent events in a coordinated way worldwide, which allowed us to move quickly to work from home model.
Globally. The majority of our employees are working remotely and they have the tools needed to work effectively.
Because their systems and processes are highly automated the bulk of our employees can work from outside of physical office.
A longtime focus on automated self service solutions like or I bought a I system that can answer many client questions.
Served us well during this time.
And while the market turbulence together with a high volume of new accounts had at times this quarter challenge or client service call capacity.
We activated plans to address this and have made good progress in reducing wait times.
Well the world around does this change greatly in the past few months interactive brokers ability to achieve new records has not.
Accounts rose, 22% over last year to 760000, as we added 70000 net new accounts in the quarter.
About the same number of account adds in one quarter as we added over the first three quarters of 2019.
This implies a 40% annualized account growth rate.
The kind of growth was seen in all client segments and all geographic regions.
There has been no change in the ability of China accounts to fund.
Despite markets down about 9% year on year, our total client equity rose, 9% to 961 billion.
Second highest quarterly total in our history.
As their customer base grew darts and darts per account also rose significantly as more clients treated actively during record high market volatility.
Total darts reached over 1.4 million up 71% from last year, well darts per account grew to over 450 their highest level and about four years.
And during the month of March or Darts exceeded 2 million.
We have spoken many times of our focus on growing our customer base in all segments. So we can take advantage of volatility in any market scenario.
Our business is strong even with moderate volatility, but because of the highly automated nature of our platform and our low cost structure higher volatility and trading activity sends a greater proportion of revenues to our bottom line.
When we are asked what led to the strength.
It is simple.
It all leads back to our platform its global reach in vast product offering and the strength and reliability of its automation during busy periods.
Because of this when people anywhere in the world must stay at home.
As they are during the recent Corona virus pandemic.
And they look for something productive to do.
Interactive brokers can help them find it.
However, we must fess up to the gym outlook for net interest revenue in the news zero interest regime.
Well, there net interest income husband slightly over $250 million per quarter.
We will be lucky to get to 150 million per quarter, well rates are near zero and margin loans and short interest remain at lower levels.
Finally, our total equity reached over $8 billion in the first quarter, our highest amount to date.
With no debt our balance sheet remains strong.
As we continue to grow larger our equity capital helps us attract larger customers.
We saw growth in all five of the client types that we service.
I will now go over a five client segments.
Individual customers, which made up 52% of our accounts, 36% of our client equity and 51% of our commissions were particularly strong this quarter with 12 month account growth of 29%.
Finally growth of 11% and 12% growth and conditions.
Despite a background of 9% dropped dry and I was a plus drops in most major markets. The increases we saw in client equity and conditions indicate the strength of our growth in this segment.
Well all geographic regions, we serve saw double digit account growth, we saw particularly strong increases in Europe, and Asia, showing the importance of providing a reliable platform to a global audience that offers wide product choices and worldwide access.
This way clients have the maximum opportunities to invest in the way they prefer.
As mentioned earlier interactive brokers as a stay at home company with individuals wanting to trade and manage their money now that they have the time to do so and the growth we saw in the individual segment reflects this.
We continue to see growth in a hedge fund customer segment, despite despite world market weakness.
For the 12 months ended March 31, we fell 4% hedge fund to count growth, 2% customer equity growth and 1% Commission.
We continue to benefit from growing word of mouth reputation for best price execution low margin rates.
And from the quality of our platform and the strength of our balance sheet.
Hedge funds are present, 1% of our accounts, 8% of our client equity and 9% of our commissions.
Proprietary trading firms are 2% of our accounts, 12% of quite an equity and 15% of commissions.
For the quarter. This group grew by 11% and accounts for the 12 month period, 23% in client equity and 17% in conditions.
Prop trading firms are sensitive to the direction of volatility and trade more as volatility increases.
This quarter's high volatility led to more active trading strategies, well accounts and client equity grew due to more traders wanting to be on our platform and to capitalize on its reputation for seamlessness inefficient trade executions.
Financial advisors or 14% of our accounts, 20% of our customer equity and 15% of our commissions.
This group grew accounts by 8% for the 12 month period, well customer equity declined by 6% and commissions were flat.
World markets declines over the period meant that client equity did not keep pace with account growth.
Conditions for the segment, which typically tends to trade more conservatively were flat.
Our final segment is introducing brokers.
These represent 31% of our accounts, 24% of our client equity and 10% of our commissions.
I broker segment account growth was 19% for the latest 12 months with 18% and client equity growth and 15% and commissions.
Interactive brokers platform and its ability to offer global trading and seamless back office functionality are compelling arguments for brokers, who more and more seek a service for a global offering as people worldwide seek to trade on recent market volatility I want to be able to access many markets in order to do so.
We continue to enhance our platform and this quarter expanded our mutual fund offering to close to 25000 mutual funds, including additions to our offshore fund offerings for our global client base.
Our new offshore fun scanner allows clients to choose from a wide variety of funds.
And of course, we always aim to be significantly less expensive, we do not charge high capacity or transaction fees for offshore funds.
Rather our fees range in price from free to just under five euros.
We've also seen better response from our digital marketing efforts since yearend a positive development, we hope will continue.
With that I will turn the call over to our CFO, Paul Brody Who'll go through the numbers for the quarter Paul.
Hey, good Nancy Thanks, everyone for joining the call I Hope you all safe and healthy.
Well first I'll review, our operating results and noncore items and my comments will follow the formality earnings release.
[noise] after which we'll open up the call for questions.
You'll note that starting this quarter, you're no longer presenting separate operating business segments.
After several years winding down our market making activity.
We have reached the point, where it is not contributing materially to our overall results.
Streamlining presentation reflects our management focus on our robust electronic brokerage business.
We have also revised presentation of line items and their revenues section of our income statement.
There are being the interest income and expense lines and splitting other fees and services from other income.
It's warmer contains recurring items such as market data season, and FDIC banks, we program or the latter contains currency impacts us treasury marks to market principal trading activities and other investing gains or losses.
Turning to the operating data the operating metrics reflected record levels of trading and account openings in a high volatility environment.
It wasn't tumultuous quarter, given the impact that occur any buyers around the world.
Volatility as measured by the average backs nearly doubled 30.7 in the current quarter.
Oh from 16.7 in the first quarter last year.
In contrast to the first three months in 2019, when the VIX ranged from 15 to 20.
This quarter after showing similar levels in the first two months the index average 57 in March.
Voted to a high of over 80 to mid month.
This dramatic increase corresponded to get higher industry trading volumes you products across the board.
Compared to the first quarter 2019, our quarterly told Darts rose, 71% to a record 1.4 or 5 million.
Our customer trade volumes rose dramatically every product class led by increases of 64%, 59% and 24% [noise].
Customer options futures and stock volumes, respectively.
FX dollar volumes were strong as well increasing 58%.
Total accounts reached 760000 up 22% over the prior year.
Each contributed to customer equity growing 9%.
$160.7 billion at quarter end, despite a drop of 9%, yes would be a 500 index over the time period.
Our overall average cleared commission per Commissionable order, so 10% versus last year to $3.30.
On a product mix that featured smaller average trade sizes in stocks futurism, Forex and higher in options.
Moving onto our net interest margin table [noise].
Net interest margin narrowed from 1.6, 70% to 1.4 or 5% in the first quarter its benchmark interest rates decline and clients de levered, resulting in a greater proportion of their assets held in cash and less margin lending.
The Federal Reserve made a series of moves in March.
To aid the economy in light of the packed into growing virus, and resulting which was a near zero interest rate policy in the U.S.
And why that looks like yield curve, we kept the duration of our portfolio rather than short.
Recorded a mark to market gain of $11 million on our holdings in humans treasuries.
As always we plan to hold these securities to maturity, but as brokers on like bank GAAP rules require us to mark to market and our financial reporting.
Outside the U.S. benchmark interest rates would cut in many currencies as central banks love to soften the impact when it comes with 19 pandemic.
With exceptions in countries, where rates were already Bureau and negative.
This moderate somewhat our expectations on the impact of U.S. rates on net interest income.
That's about a quarter and customer credit balances are now he wants dollars [noise].
Increased customer balances despite lower rates in this quarter versus last year generated more net interest income on cash though.
In addition to the cash from customers liquidity positions, we continue to have success in asset gathering.
So long as good growth in cash balances, our FDIC insured bank deposits. We program has grown to $2.9 billion up from 1.9 billion last year.
Margin lending and segregated cash management continued to be the largest contributors to our net interest margin.
Average margin loan balances rose, 6% versus last year, however, significantly lower interest rates versus last year. It led to a 20% decline margin interest income.
Lower grades also reduced earnings on segregated cash where despite a 32% increase in segregated cash balances.
Interest income fell 22%.
Note that you expected said swung so nearly in house all of these time period.
Several factors caused the yields on our segregated cash to differ from the changes in fed funds rate.
First a portion is held in other currencies and second given an average duration of the best thing in treasuries of about 44 days during the quarter.
Reinvestments take place overtime.
So these amounts would not be expected to follow got declines immediately.
The increase in segregated cash balances is also a function of customers diminished appetite for risk that is less than bassinets stocks, particularly in purchases financed by margin loans.
Leads to more segregated cash on the sidelines to be invested.
No too that the FDIC Sweet program removes funds that would otherwise be included in our sector getting cash balances from our balance sheet for accounting purposes.
Securities lending interest income was up 19% this quarter versus a year ago.
As we capitalized on more hard to borrow names that investors are looking a short.
Now for our estimate of the impact of the next 25 basis point increase in rates. However, unlikely that may seem at the time when calculating the impact of rate changes we understand that.
The possibility of the future rate increase becomes more certain this expectation is typically already reflected in the yields like instruments in which we invest.
That's all we attempt to isolate the impact of unexpected rise and fall right.
Separate sent me, an pack and rate hikes or cuts that have already been baked into the price of <unk>.
With that assumption, we would expect the next 25 basis point unanticipated rising rates.
We produce an additional $79 million net interest income over the next four quarters.
$94 million as the yearly yearly run rate based on our current balance sheet.
These numbers are higher than our typical calculation due to the impact of low benchmark rates on the spread between what we earn on our segregated caps and won't be paid to our customers.
As you exit rates fall below 50 basis points.
Spread compresses as we earned less on our segregated cash.
However, the Congress is also true then as rates move back up towards 50 basis points the spread rises.
Your run rate includes the reinvestment of all of our President holdings at the new assumed rate, but does not take into account any change in how we might manage our segregated cash.
If we're successful [noise].
Anyone to grow our customer assets.
Higher cash in margin lending balances will provide some offset to the loss of net interest income from low benchmark rate.
Should they persist.
As I explained earlier this quarter, we begin reporting our consolidated numbers only without segments.
We define noncore items as those not part of our fundamental operating results noncore items, adjusted the numbers versus a year ago quarter as follows [laughter].
Our currency diversification strategy last $90 million a year ago. This is the loss of 49 million this quarter fill a comparative decrease in income of $30 million.
No shifts from $104 million mark to market gain to $11 million loss on investments reduced income by 150 million.
[laughter] Mark to market gains on U.S. government Securities went from 5 million to 11 million a comparative increase of 6 million.
And unusual customer bad debt expense of 42 million a year ago quarter did not recur in the first quarter.
That affected these adjustments reduced income by $97 million comparatively versus last year.
Net revenues were reported $532 million per quarter.
5% versus last year's first quarter.
Including noncore items net revenue was.
Up 24% to 581 million.
Commission revenue rose, 55% on significantly higher volumes all product categories.
Lower average trade sizes, nearly all product categories reduced our average cleared commission per Commissionable order to $3.30. This is often seen during high volatility high volatility periods as traders risk less in a fast moving market.
Net interest income rose, 4% to $256 million.
Despite a 48% decline in the average effective fed funds rate versus a year ago quarter.
Other fees and services revenues, which include market data exposure account activity and FDIC Bank sweep program to use as well as order flow income some options exchange mandated programs rose $3 million at 9% over last year.
Other income, which includes gains and losses on our investments and currency strategy as well as principal transactions was a loss of $31 million.
Next noncore items other income increased 29% to $18 million.
Non interest expenses were $224 million for the quarter up 2% from last year.
Adjusting 2019.
For an unusual margin loss non interest expenses were up 27% due primarily to higher execution and clearing cost.
In line with higher trade volumes.
At quarter end, our total head count stood at 1007, though too.
At 17% increase over last year.
Currently do that to cope with 19 pandemic, we have about three quarters of our employees worldwide working remotely.
After a brief pause we're hiring again to keep up with the influx of new accounts and to strengthen client services and systems development for the future.
Fixed expenses were $140 million up 22%.
Driven by higher compensation and benefits in line with the hiring that supports the growing brokerage business.
And the DNA expenses, including legal and compliance costs and reserves.
[noise] customer data that bad debt expense.
With that higher than usual $7 million, but it was well contained despite the dramatic increase in volatility.
Reported pre tax income was $308 million down 9% for a 58% margin.
Excluding non core items pretax income was 357 million.
23% for 61% pre tax margin.
Diluted earnings per share the 60 cents to the quarter person 64 cents to the same period in 2019 and parents noncore items diluted earnings per share was 69 cents versus 55 cents as adjusted last year.
To help investors better understand their earnings taxes, and the split between the public shareholders and the non controlling interest.
First quarter numbers are as follows.
Starting with our pretax income of $380 million.
We did after $9 million for income taxes paid by our operating companies, which are mostly foreign taxes.
This leads to 299 million of which 81.5% or that $244 million reported on our income statement is attributable to non controlling interest.
The remaining 18.5% or $55 million is available for the public company shareholders, but as this is a non-GAAP measure it is not reported on our income statement.
After we expense remaining taxes of $9 million.
Owed on that 55 million the public companies net income available to common stockholders is a $46 million you see reported on our income statement.
Our income tax expense of $18 million consists of this $9 million plus to 9 million of taxes paid by the operating companies.
Turning to balance sheet it remains.
Consistently remains highly liquid with low leverage with $8.15 billion and consolidated equity, where well capitalize from a regulatory standpoint, and continue to deploy our equity capital and the growing brokerage business.
We hold excess capital in order to take advantage of opportunities as well as it emphasizes strength in depth of our balance sheet and we continue to carry no long term debt.
At March 31st the margin loans were $20 billion decline or 22% from last year as clients de levered into risk off environment.
We continue to expect swings in margin lending balances due our success in attracting institutional hedge foreign customers, who are more opportunistic and taking on leverage.
After the lowest margin lending rates of our competitors and as we expand our customer base, we stand well positioned to satisfy customers risk appetite when it returns.
Now I'll turn it over to moderate and we can take some questions.
As a reminder, Casco question you want me to press Star one on your telephone to withdraw your question press the pound King please standby only composites una roster.
Our first question comes from the line of Rich Repetto from Piper Sandler Your line is now fan.
Yeah, Good evening, Thomas and Paul.
I guess my question has to do with the press release that you put out after the close about.
Both the Provisionary loss, you're going to take they are related to the W.T.I. contracts.
I guess the question is was just due to.
Customers holding the positions right. So you know close to exploration.
Because you know I'm just wondering how.
They could ever a pill like the physical delivery.
You know requirement upholding the contract.
So are each first of all I would like to apologize for spring getting these be so knowledge spend.
Onto everybody.
So on expects that the these happen to US just last night.
You bet at all or most of them I've tried to figure out what's going on and we still do not have all of our complete for me. The order book I said that yep.
Please note.
No.
I see your question.
These rose.
The calling Charles.
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The Guy swiftly I've gone through up right off of.
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But the assessment on Friday, or do you guys federal them.
Called Trump.
So most of the laws game from W.P.I. on some of these game for.
Well you remember the name of that future.
Oh, QM, which is which is the menu of crude oil contract I.
Maybe color, though your Cogs or.
Moving on to see or me.
Okay. So oh well both the contracts are lifted contracts on on the CMB that is that correct no no. They did WCS.
Yes, good on Ice Bureau.
Got it okay. So okay.
I hope you have Bragg.
That's very didn't leases.
Oh I'm sorry.
Embolism that's gone.
Understood.
Okay.
Oh I guess the next question is Paul.
On the of the.
The expected outlook on the net interest income I said going from 250, I think you said purpose I start you said recorded a 150.
I guess, if you could just sort of walk through sort of the.
Sensitivities, yes would just better understand how how you come up with <unk>.
With that.
Number.
Well naturally there's a lot of moving parts in there.
So you have to make certain assumptions some of them are relatively broad.
About what rates might do and or they're gonna do nothing and then of course, what balances or are likely to be.
And and you know the balances are not a small part of the equation because we've seen radical increases in and cash credit balances as customers on wound positions.
They're happy to leave the cash with us.
And then of course, a big part of the projection has to do with due to the spread compression and and what I alluded to when the fed goes below 50 basis points is that our our base credit rate is fed funds less 50 basis points, that's a very good rate versus our competitors, but.
Of course become zero.
When the benchmark goes below 50 basis points. So that's that creates the spread compression which is also why there's this big elasticities. When you see as we talk about rates going back up because they were to go back up you get a lot back quickly because.
For a certain portion of it the customer side that we're paying on still doesn't go up until that path sort of zero right.
So there are a lot of moving parts in there you have to make certain assumptions at the moment you know this is our our best projection.
Yes.
Got it that that's very helpful.
And I guess the last thing Tom as you know you mentioned or above stay at home you know a phenomena, where you seems like you're benefiting more client activity and [laughter] I guess.
The question is.
With all this activity, we still not seeing you know.
Could you refresh us in regards to any material difference in.
Mix for the I'd be care, a light persons I'd be careful we still see it people still choose IP guar.
Pro.
Even in this you know even with high.
Great and volatility and maybe just maybe that drives to even more so they require the smart grow to reach even more so.
Right. So the more walk through their market paid but more importantly, these but you've got a their execution privacy because you might know valuable up to a marked a bit execution. So I was just got deferred to the fraud issues that you see because it changes so often much much much more so yeah.
People choose I'd be appropriate over about the majority of them so far rehab.
Oh between 20 and 21000.
At College does have chosen.
Number two or opened or I became our lives are gone.
And.
Fixed because you're not pro <unk>.
Oh I'm sorry.
These are two days number so so I'm, sorry, I I should go up but too.
Yeah go vote school yeah.
No worries that that's all I had thank you Thomas and thank you Paul good.
Right.
Thank you. Our next question comes from a line of Chris Allen from Compass Point. Your line is now open.
Evening, everyone, Oh, just wonder if we just dig into the notion and come out look a little bit more.
You gave us kind of the starting point to think about customer alone margin loans for the two Q, although it can make some assumptions around that and the cash levels. Oh. How are you guys thinking about the SEC lending book and then also does it contemplate continued growth in Europe your customer base.
Oh from here I'm, obviously, we can.
The bottom at a certain level, but then even if rates are stated we should start to see some growth sort to drove the car. So any color on that would be helpful.
Right, but you see us.
You'd be dogs girl.
The the.
Everything for the numbers bad what they are they for at least a a day there have been booked at quarter end to the project. The interest income would be either lower big most told me you to the fact that me get basically 15 basis points.
Cost about yeah.
And that's the biggest I've gotten their eyes, because yeah, they're off to et cetera, the ability of those cost Oh, gosh, overage, Tony busy and Glenn Dolphin marching loans.
50 million food could be other dogs.
And and.
Short term factored in markets and that they use on 15 basis points. So that's that's the called for it.
As far out their lives they decide but the margin roller skate and from close to 30 Amelia due.
Two.
Oh, My God, and 30 billion to 20 billion.
I love to a big grow back and that's a good stuff Vicki you showed boot game the from roughly.
Their own them barrier to.
Seven or 8 billion.
No part of that Lifepoint, if I can jump in.
That prices are down right, but clearly has been some winding up the position, but let me state what we've talked about before which is that the securities lending business is very driven by.
Stocks that get special for period of time were great interest, particularly in the short side kicks up and they become expensive to borrow in land and if our customers are on the alongside of that generates a lot of revenue. So that there is of course a base.
Both the shorts and along but it's very much driven by these stocks that become special for short periods of time.
Understood and then just.
Switching over to the provision law suit appreciate the color. There I was just a lot of each other's around whats go on an oil you yeah. So you're seeing any other dislocations in marketplace there.
Any thoughts in the market structure in India in these partnerships.
In terms of things, we have to worry about moving forward from a record credit loss perspective.
Well hopefully not on our end, but I think.
Other people out there.
Yes problems are having to do we.
Exchange traded notes and bonds.
Oh, that's those are all doing.
For your future.
And.
And as I've said on the TV and so you are.
Are you know there are folk so we had 15% of the.
Oh put into it so that is basic 5% out there in somebody some other folks.
And Oh there.
Chrome proportional.
With that person to use.
And then you don't show up big window dogs that off lease lawn well Buddy.
<unk> was holding we off those itself.
Understood. Okay back with you. Thank you.
Thank you. Our next question comes from the line I will now from Goldman Sachs. Your line is now fan.
Hi, good afternoon.
Thomas I was wondering.
I was wondering if you can provide some more clarity around the regulatory matters and mentioned in the press release and if you could provide some more clarity around the findings around the B.S.J.M.L. practices, maybe if you had some sort of idea around what the shortcomings identified were and what it will take to remedy them.
And then I guess where either Thomas.
Good.
With all I can say about that that he has been on this.
Ah topic working on this topic for about these two years.
And.
As you can imagine D that sparked of the performance was very carefully that's good.
And.
Yes, given that the things given up has not close but these are likely to be closing with him. Let me then probably.
So for me by the next.
Quarterly meeting.
Even though you do you just have to wait time in Doug.
Oh, I'm, sorry buses either [laughter], Lord lawyers I've found they use would be very very careful in both of you say about opening cases sorry.
Sure I mean, maybe leaving aside and I totally understand but there's probably you're probably limited what you can say, maybe leaving the fine aspect. Aside you can you talk about what you're thinking about with the third party consultants and you know, what's the kind of scope for what that might entail from.
From a cost perspective going forward would be.
Oh, well he had been working with these calling solve them for.
Please state your I'm sure.
And so that would be the same calling saw offense and be working we've done very well I assume that because we will be.
Going forward were good being similar to what they've been in the fat so.
Oh, Hi on thing I'm very very.
Ah surprises coming from there.
Got it does that make sense and then maybe switching gears over to expenses I guess.
One just spend a little housekeeping item the the given the strong volumes I would've thought execution and clearing might've been a little bit higher was there anything to call out that drove that could be a little bit lower than expected. This quarter, and then separately more bigger picture given the decline in net interest income that you expect.
Given the rate environment, you know are there any levers to pull on the cost side that my offset some of this and and maybe you know.
If you retain some of your kind of best in class margins.
So.
Well, that's probably the second question goes. It is you know we have always been threw out though are you still have you been focusing on growth.
And sometimes revenues on our flow sometimes they are I mean, we are doing though luca.
Right and be a big it'll be the expenses. The all they've spent as much money I was very productive and he can.
To grow with at least that's always been our focus and we have never look those expenses.
Oh No of course, you Oh boy.
So I don't remember [laughter] first question by remember that the answer you.
That's great.
HM.
Generally slow smaller do school, it's Oh, you outside the grading hi, Dave I expenses on the I'm good grades and that's how I guess, it's because trades are generally lower yeah size.
Dan.
Then a previous call it 30 them, though do you.
Do you see the volume goes much much much greater.
Got it sounds old accept you can just extrapolate by volume because you have to include the size of the phrase I mean, if you I mean, if you got the most movie leases you can see.
Right.
Right. So looking at a more on chest trading right then right got it Okay and then if I could squeeze one more quick one and just sure for Paul. It's I think some people are probably a bit surprised by the magnitude of the decline in net interest margin I think everyone understood that lower rates pressure the pressure the spread but the absolute.
Good size is probably a little bit larger is it a fair statement to say that.
A big driver that is just the decline in margins and could you maybe talk about you know how how sensitive that $150 million run rate could be if we see kind of a rebound in margin balances over the next several quarters.
So 45 wells I mean.
For <unk>.
Responsible for investing.
The.
The.
Customer cash.
And.
The fact is definitely do not do anything sensitivities, we are investing in short term treasuries.
So we fluctuate the short term telco today and as you know when they're actually go above half third fan.
Extra really to the or customer.
So.
The.
We need all the we'd all these sensing things here.
Or whether they into that dangerous crazies between zero and that's it for Sam.
Wants me to above habit for said really turned up access to their customers with me those who has that gone are larger than on the thousand dollars, which I think he's <unk>, which I think he's the over.
Only $10 billion or customer phones are you back on that I looked at all and its Cogs in dollars.
As far as the margin balances.
As I've said before.
I've gone down from 30 billion to 20 billion.
And obviously, we do not gone to increase the margin rates, because we hope to.
Pick up back up to 34 events to go ahead.
Ah So we would not where we have never try to maximize.
Income for the next several quarters, we are always strive to maximize income for they used to call.
Got it I appreciate you taking my question.
Thank you. Our next question comes from the lineup Kyle Voigt from KBW. Your line is now open.
Hi, good evening, [laughter], sorry, sorry to belabor the point on net on and I, but I I just want to ask a couple more questions.
Won I you just mentioned you're responsible for investing <unk> net client cash I remember that back in 2016, I think over 90% of just the securities portfolio at that time with invests in U.S. government Securities and Repos are really small part of what you're doing now it's kind of inverted it's mostly just overnight.
Though.
Could you take any more duration risk go out to your three year for you or are cheap to a five year on the treasury curve.
And then the second part of that question is is there could you are you were looking previously I potentially expanding the securities that Youre that you will be comfortable investing in fact securities portfolio I think some other agency.
Securities is that on the table as well to maybe pick up but some additional yield in that in that book.
I think it's basically the same question, but it'd be too.
Ah agent [laughter] [laughter] longer term through activities my on Saturdays, that's actually got these great I mean, yeah, it's hard to match and they can go any further das as a no effect you know there.
And pushing all this money a hot that more and more and more and more I think you eventually HM.
You know the.
The you know <unk>.
<unk> inflation view will add to the picture.
And that Fred do you have to do something too.
Two gone correct.
So I would not do Stein certainly with abuse time would not go for their awesome. They use cook.
Got it and then maybe.
Maybe just a follow up for Paul I and I know you mentioned that 150 run rate. He's got a run rate as of today. Because you also mentioned that you still had securities that had some duration to then those treasury securities with maybe a year over the duration and that portion of the book, but I would assume would.
Provide you kind of more of a gradual landing point to maybe get to 150, several a couple of quarters or a few quarters out but it sounded like that's that's really the run rate today. It should maybe you can give you clarify that.
Yeah, so because the duration is fairly short.
The roll off.
Happen you know basically in and if you were to project out four quarters. It all happens in the first quarter and then your Reinvestments happened that whatever you assume the reinvestment rate is so depending on the scenario you know say up 25 basis points.
Start to pick that up a little bit of a lag which is why.
Projected.
You know 79 million herb.
Four quarters, what about 94 million.
Full year run rate, that's exactly why because it just seems that full.
Investment you know similarly on the downside vote, you don't have too far to go down but HM.
You have that greater impact.
As we said before you have that greater impact because essentially you're not paying anything good customers on their credit balances at the moment, therefore any pickup in the rates.
Go straight to the bottom line, if you're well until you get to that 200 basis points and then as Tom said it becomes a spread.
No I get that I guess, it I'm, just saying that on the Securities book yield I thought there was some of the security spoke doubled invested in treasuries that may have had a duration of a year or over that portion of the buckets that wouldn't be priced over a year incident, we priced immediately but I guess, you're saying anything from its essentially repriced already.
Well, you're right some of that as treasury zones, that's primarily for the commodities business to meet regulatory requirements. Yeah. It's a it's a much smaller piece of the total and some of those do mature a bit further out, but we take all that into account when we talk about that overall duration.
Okay got it and then just last one for me. It's just a follow up on that the losses and related CW T. I. Just wondering if you could just let us know what it does losses were from had from clients or retail clients or just kind of giving us the non dnbi client segment.
Well you know endeavor.
Many clients but.
So we would go but we don't have hedge fund clients are either acquired or institutional clients and individual clients and Ah yes.
And Oh, Hi, my understanding is that most of these are from individuals bugs.
As you know Ah I mean, these individual clients tend to be you know all three dogs them. So people are there.
You know do Mike.
Understood. Okay. Thank you [laughter]. Thanks Thomas.
Right.
Yes.
Thank you. Our next question comes from the line up Chris Harris from Wells Fargo. Your line is now fan.
I'm, sorry, if I missed it but can you elaborate a little bit on on why do you think account growth picked up so materially in the quarter.
They help home company.
So.
You know I think there are many people left for you it's been telling them that some of these days I'm going to show courage are gone and I'm going to begin to manage my final decision myself.
And digest never got their onto it.
And so fine nobody that have the time than they have the motivation. So they are doing good.
[laughter] that you could educated guess on my part side.
That's a lot of thing.
Okay, and we've been talking a lot about net interest and.
The impact on your business one thing I was thinking about is you know one of the value propositions up by Dkr is the favorable rate you you pay the customers on deposits.
But now that everybody's they unfortunately, a that has gone away right. Yeah, yeah right exactly so that you think that's gonna have much of an impact on the outlook in terms of growth or people still going to be attracted to the other parts of your business whether it be you know the smart.
Routing order capability or whether it's the lower rate on margin and so on.
Oh, you know it remains that's really [laughter] remains.
Well you know as interest rates that are coming down it became but that's something that's where I live on door Abbey.
In the quarters preceding these but Uh huh.
Oh of course, I mean, it is there too.
We are not being able to give them anything going through.
Fed goes over half a percent bugs.
I could tell your frankly, I do not saying that.
I do not here that that these as important.
The margin rate these bugs.
No I I really don't know I mean, it's a different thoughtful person who.
Oh, it's probably a lot smoke <unk> percent movies worried about receiving interest on the carrier spend the person who these are trying to get that few module.
Okay. Thank you.
Thank you as a reminder, Casco question, you will need to press star one on your telephone.
Our next question comes from a line of Mac Sykes from Gabelli. Your line is now open.
Oh good afternoon Thomas.
Can you just talked about the.
Can you just talk a little bit about the level of volatility you know the trade off between what's good for commission revenue, but still okay for the sustaining your customer base.
Oh, that's hard to.
So very difficult.
Because the higher the volatility.
The more trades, they do and their customers tend to do less about.
I don't think it's that's much due to their bullets typically as you know the flow through the two times could be I read the market goes down basically so that's why customers tend to do less route and so you know a up on through the market turns around them.
Who are three days or so.
Things are looking pretty good Oh.
Of course, it's a deeper and story again.
I I really can't tell you where the balances these data ideal a ratio of Oh.
Well I'll turn the T. and Uh huh.
Great.
Okay, and then on margin lending I know you have the.
The card facility.
Have you noticed in the last month any kind of additional margin loan that would.
Be suggestive of abstracts versus just kind of increase in.
Allocation to the market.
No so our margin loans, that's come down drastically.
And.
They may be picked up justifying the big.
And.
And got a lot of two or three weeks.
No I'm not really not much so no we haven't seen under you have to no.
Thank you.
Thank you at this time I am showing no further questions I would like to turn the call back over to Nancy Stuebe for closing remarks.
Thank you everyone for participating today as a reminder, this call will be available for replay on our website and will be posting a clean version of our transcript on our site tomorrow. Thank you again, and we will talk to you next quarter end.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect.
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