Interactive Brokers Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Interactive Brokers is a global electronic broker operating across more than 150 exchanges and market centers. IBG, Inc. owned 23.7% of IBG LLC at quarter-end; the remaining 76.3% is reported as noncontrolling interests.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenues | $656 million | $754 million | $1.301 billion | $1.647 billion |
| Net interest income | $348 million | $274 million | $630 million | $579 million |
| Income before taxes | $392 million | $541 million | $786 million | $1.180 billion |
| Net income | $360 million | $506 million | $726 million | $1.092 billion |
| Net income available to common stockholders | $72 million | $92 million | $145 million | $199 million |
| Diluted EPS | $0.72 | $1.00 | $1.46 | $2.17 |
| Adjusted diluted EPS (non-GAAP) | $0.84 | $0.82 | $1.66 | $1.80 |
| Pretax margin | 60% | 72% | 60% | 72% |
Q2 commissions rose 5% to $322 million, with higher options and futures activity offsetting a 53% decline in stock share volume. Other fees and services fell 22% to $43 million, partly because minimum activity fees were eliminated for most account types. Other income was a $57 million loss, versus $118 million of income a year earlier. Net interest income increased 27%, supported by higher benchmark rates and customer balances; Q2 net interest margin rose to 1.27% from 1.15%.
For the six-month period, commissions fell 7%, other fees and services fell 14%, and other income declined to a $96 million loss. These declines outweighed the 9% increase in net interest income. The company attributed the year-over-year decline in other income largely to the absence of prior-year Tiger Brokers investment gains and to losses from its currency diversification strategy and U.S. government securities mark-to-market.
Balance sheet, cash flow and capital
- At June 30, 2022, total assets were $113.4 billion, total liabilities $102.8 billion and total equity $10.6 billion. Customer receivables were $42.6 billion and customer payables $90.8 billion.
- Cash and cash equivalents were $2.9 billion; cash segregated for regulatory purposes was $23.5 billion. Management stated that 99.3% of assets were considered liquid.
- For the first six months, operating cash flow was $1.584 billion, investing cash outflow $26 million and financing cash outflow $278 million. Cash, cash equivalents and restricted cash increased $1.134 billion to $26.4 billion. Operating cash flow is materially affected by movements in customer balances and segregated assets.
- Short-term borrowings were $17 million at quarter-end. The filing reports no variable-rate debt outstanding and no senior notes issued in the first half of 2022.
- Aggregate excess regulatory capital was $7.7 billion, and regulated subsidiaries were in compliance with applicable requirements.
- Customer margin loans were $42.6 billion, down from $54.9 billion at December 31, 2021. The company paid $20 million in common dividends during the first half and declared another $0.10-per-share dividend payable in September 2022.
Material changes, outlook and risks
- Q2 adjusted net revenues were $717 million, up 10% year over year, and adjusted pretax income was $453 million, up 4%; these non-GAAP measures exclude currency diversification effects and investment mark-to-market gains or losses. GAAP revenue and pretax income declined. For the first half, adjusted net revenues declined 3% and adjusted pretax income declined 9%.
- Management cited generally weaker global equity markets, rising volatility, geopolitical uncertainty and higher U.S. interest rates. Customer options and futures volumes increased year over year, while stock volumes fell sharply from unusually high 2021 levels. Total customer accounts rose 36% year over year to 1.923 million, while customer equity fell 19% to $294.8 billion.
- Management said cash flows, available cash and borrowing capacity should cover liquidity needs for more than the next 12 months. It provided no formal earnings or revenue guidance. It noted that further rate increases could benefit interest-sensitive assets, while rapid rate changes can affect net interest income and mark-to-market values. A 0.25% U.S. rate increase was estimated to raise annualized net interest income by about $57 million; a 0.25% decrease was estimated to reduce it by about $59 million, subject to the filing’s assumptions.
- The currency diversification strategy reduced Q2 comprehensive earnings by $158 million: $53 million in other income and $105 million in other comprehensive income. Approximately 24% of equity was denominated in currencies other than the U.S. dollar.
- The company adopted SEC Staff Accounting Bulletin 121 retrospectively, recognizing a $72 million crypto-asset safeguarding asset and matching liability for customer assets held at a third-party provider. The company states that the provider, not IBKR, executes, custodies and safeguards those assets.
- Legal and regulatory matters include an appeal in the Trading Technologies patent case, where a jury awarded $6.6 million plus interest, and a pending customer class action concerning margin-account liquidations. Accruals for legal and regulatory matters were not material; management said outcomes can be uncertain and may affect results in a particular period. The company also disclosed a continuing DOJ inquiry related to historical AML/BSA matters, while stating it did not expect a materially adverse financial effect.
- Other risks discussed include margin-credit and collateral exposure, market and foreign-exchange risk, competition and regulatory scrutiny of payment for order flow, and political or regulatory developments in international markets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported net income and EPS is attributable to IBG, Inc. common stockholders versus the noncontrolling interests in IBG LLC.
- Whether the improvement in adjusted Q2 EPS is sustainable, given that the non-GAAP adjustments remove material currency and investment valuation effects.
- How rising rates, customer cash and margin balances, securities-lending demand, and currency movements affect net interest income and comprehensive earnings.
- Trends in customer equity, DARTs, trading volumes and the mix between options, futures and stocks, as well as the cost impact of higher execution and compensation expenses.
- Developments in the patent appeal, customer class action and DOJ inquiry, including any change in potential exposure or accruals.
- The composition and availability of liquidity and regulatory capital, recognizing that much of the balance sheet relates to customer activity and regulatory segregation requirements.