Interactive Brokers Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited; amounts are in U.S. dollars and, unless noted, millions. IBG, Inc. owns approximately 18.7% of IBG LLC, with the balance reported as noncontrolling interests.
Business context and results
Interactive Brokers is a global electronic broker offering execution, clearing, custody and related services across more than 135 markets. Management discontinued separate segment reporting in 2020 as it continued to wind down market making and focus on electronic brokerage.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenues | $539 | $413 | $1,071 | $971 |
| Net interest income | $196 | $259 | $452 | $505 |
| Income before income taxes | $222 | $225 | $530 | $564 |
| Net income | $207 | $210 | $497 | $534 |
| Net income attributable to common stockholders | $32 | $32 | $78 | $81 |
| Diluted EPS | $0.40 | $0.43 | $1.00 | $1.07 |
Q2 GAAP pretax margin was 41%, compared with 54% a year earlier; six-month margin was 49%, compared with 58%. Company-reported adjusted diluted EPS was $0.57 for Q2 in both years and $1.26 for the six-month period versus $1.12. Adjusted measures exclude specified items and are non-GAAP.
Key changes and operating metrics
- Q2 commissions rose 55% to $276, reflecting sharply higher trading activity. Customer options, futures and stock volumes increased 64%, 34% and 63%, respectively; total customer DARTs rose 111% to 1.75 million.
- Net interest income fell 24% in Q2 as the average federal funds effective rate declined to 0.06% from 2.40%; lower average margin loans also weighed on results. Net interest margin was 0.99%, down from 1.66%.
- Other income was $27 versus a loss of $59 in Q2 2019, mainly reflecting a reversal in Tiger Brokers investment mark-to-market results and a currency-strategy gain.
- Q2 non-interest expenses rose 69% to $317. General and administrative expense included $103 of customer compensation associated with negative crude-oil futures settlements and a $5 COVID-19-related donation. The company’s total stated loss from the crude-oil event was approximately $104.
- Customer accounts increased 36% year over year to 876,000 and customer equity rose 33% to $203.2 billion. Average commission per cleared commissionable order declined 24% to $2.81.
Cash flow, balance sheet and capital
- For the six months, operating cash flow was $3,646, investing cash outflow $23 and financing cash outflow $90; cash, cash equivalents and restricted cash increased $3,517 to $15,799. Operating cash flow was substantially influenced by changes in customer balances and segregated assets, not solely earnings.
- At June 30, total assets were $83,965, liabilities $75,711 and total equity $8,254. Cash and cash equivalents were $3,115; regulatory-segregated cash was $12,684. Customer payables were $68,796, reflecting the broker’s customer-funds balances.
- Short-term borrowings were $139, versus $16 at year-end 2019; repurchase-agreement liabilities were zero, versus $1,909. Management reported no variable-rate debt outstanding.
- Management classified approximately $83.3 billion, or 99.2% of assets, as liquid, while noting daily liquidity monitoring and significant collateral and borrowing resources. Aggregate excess regulatory capital was $6.1 billion; regulated subsidiaries were in compliance.
Outlook, risks and unusual matters
- No numerical earnings or revenue guidance is provided. Management said the future financial impact of COVID-19 could be significant but could not be quantified. Pandemic-driven volatility increased trading and commissions, while near-zero rates reduced net interest income. The company reported that its technology infrastructure had handled elevated activity and that it could operate remotely.
- Material uncertainties include market volatility, interest-rate and currency movements, margin-loan defaults, customer trading losses, cybersecurity and operational disruption, and competitive and regulatory changes. The company warned customer margin and short-sale exposures can exceed collateral and are not quantifiable in advance.
- The crude-oil futures event produced an approximately $104 million aggregate loss after the company compensated certain affected customers. Separately, the filing describes an approximately $42 million loss related to customer margin loans against a concentrated security position; collection efforts remained difficult and uncertain, with maximum loss estimated at approximately $50 million.
- The company reached agreements with FINRA, the SEC and CFTC concerning historical anti-money-laundering and Bank Secrecy Act practices; settlements were not yet public and would include monetary payments and an independent consultant. Management said the reserve was adequate. A related Department of Justice inquiry continued; its outcome was uncertain.
- Other disclosed litigation includes a patent dispute with a trial scheduled for April 2021 and a customer liquidation class action in which a motion for class certification was due in February 2021. Management could not quantify potential losses for pending litigation generally.
- The company adjusted its currency-diversification basket from 14 currencies to 10 effective June 30. COVID-19 effects, customer compensation, investment mark-to-market and currency-strategy results make adjusted figures important to distinguish from GAAP results.
Important facts for investors to verify
- Review the reconciliation and definitions of adjusted revenue, pretax income, EPS and margins; these non-GAAP measures remove items that materially affected reported results.
- Track whether elevated trading and new-account growth persist, and whether lower rates continue to pressure net interest income and margins.
- Confirm the final accounting, customer recoveries and any further costs from the crude-oil event and the separate concentrated-customer margin-loan loss.
- Monitor the AML/BSA settlements, independent consultant review, DOJ inquiry, and developments in the patent and customer litigation matters.
- Assess liquidity and capital in the context of customer-related assets and liabilities, regulatory segregation requirements, and subsidiary-level capital restrictions.