Concerns over slowing economic growth, falling interest rates and a trade war between the United States and China have been weighing on Canadian bank stocks for more than a year. Now, investors have something else to consider: tumbling U.S. brokerage fees.
Charles Schwab Corp., one of the largest U.S. discount brokerages with more than 12 million active brokerage accounts, upended the industry on Tuesday by announcing it will cut commissions for online trades of U.S. stocks, exchange-traded funds and options to zero from US$4.95 previously.
The news hit Toronto-Dominion Bank, which owns 42.7 per cent of TD Ameritrade Holding Corp., a competitor to Schwab. TD Ameritrade lost more than one-quarter of its market capitalization – shrinking the value of TD Bank’s stake by $2.8-billion in a single day.
The bank saw its shares fall 2.6 per cent, which far outpaced declines among the other Big Six Canadian banks.
Ameritrade is more dependent on trading commissions than some competitors are: they represented 23 per cent of its revenue so far this year compared with just 7 per cent from Charles Schwab, according to National Bank Financial.
Gabriel Dechaine, an analyst at National Bank, noted that TD Ameritrade’s accounts for about 10 per cent of TD Bank’s total consolidated profit. Therefore, the analyst said, for every 10 per cent reduction to TD Ameritrade’s profit forecasts, the bank’s forecasts should decline by 1 per cent.
“This level of downside is not dramatic. However, it does compound existing growth headwinds in the U.S., namely the downward trajectory of [personal and commercial banking] segment margins,” Mr. Dechaine said in a note.
Though Canadian bank stocks have been rallying over the past month, they have been zigzagging for more than two years amid a challenging operating environment. Domestically, banks have had to contend with a wobbling housing market in some cities, slowing loan growth, rising loan losses and low interest rates, in addition to global economic headwinds such as trade.
What’s more, falling rates are putting pressure on lending margins for Canadian banks with substantial U.S. banking businesses, such as TD and Bank of Montreal.
Over all, these changes are taking a toll. In the fiscal third quarter, which ended July 31, total aggregate profit from the Big Six banks increased just 3.7 per cent year-over-year and was unchanged from the previous quarter, according to DBRS.
Does the move to free online stock and ETF trading by Charles Schwab – and the strong possibility that other major U.S. brokerages will follow – suggest that Canadian banks are about to face yet another challenge?
“The news from the U.S. will reverberate initially because it sets consumer expectations,” said Josh Book, founder and chief executive officer at Toronto-based Parameter Insights, a market research and financial services consultancy.
Mr. Book added: “If I’m leading an online brokerage in Canada, I am obsessing over ways to monetize away from commissions and fees.”
Right now, trading commissions at the online brokerages operated by the Big Six banks range from $6.95 a trade at CIBC Investor’s Edge to $9.99 at TD Direct Investing and Scotia iTrade. However, National Bank Direct Brokerage offers free online trading of Canadian and U.S. ETFs and WealthSimple, an independent online investment management firm, already offers commission-free stock trading.
Canada’s big banks are well-diversified beyond stock trading, of course, and they tend not to compete on fees. As well, the big banks have been trying to protect themselves from online competition by expanding their full-service wealth management businesses. The most recent big deal: Scotiabank acquired Jarislowsky Fraser Ltd. and MD Financial Management Inc. in 2018, raising its assets under management.
“There is loads of research that talks about the poor performance in the online brokerage channel. Consumers might have been driven there because they were unhappy with the fees they were paying. But they are ultimately not performing as well as they could be from an investment perspective,” Mr. Book said.
In cutting most trading commissions to zero, analysts expect Charles Schwab will take a revenue hit of about US$90-million per quarter. But that amounts to just 3 to 4 per cent of the company’s current revenue. Going commission-free matches a similar move by Interactive Brokers LLC, ensuring that Charles Schwab remains competitive in an area that supports other financial services – including banking and investment management – that are more profitable for the firm.
with a file from Clare O’Hara