Interactive Brokers Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; financial statements are unaudited. Interactive Brokers is a global electronic broker operating across more than 150 exchanges and market centers. IBG, Inc. owned 25.4% of IBG LLC at quarter-end; the remaining 74.6% was held by IBG Holdings LLC and reported as noncontrolling interests.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Total net revenues | $1.145 billion | $790 million | +45% |
| Net interest income | $733 million | $473 million | +55% |
| Commissions | $333 million | $320 million | +4% |
| Income before tax | $840 million | $523 million | +61% |
| Consolidated net income | $772 million | $483 million | +60% |
| Net income available to common stockholders | $167 million | $99 million | +69% |
| Diluted EPS | $1.56 | $0.97 | +61% |
| Pretax profit margin | 73% | 66% | +7 percentage points |
Higher benchmark rates and larger customer credit balances drove the increase in net interest income. The average federal funds effective rate was 5.26%, versus 2.18% a year earlier; net interest margin rose to 2.46% from 1.67%. Other income was $27 million, compared with a $48 million loss, including gains associated with Tiger Brokers and a less-negative currency diversification result. Non-interest expenses rose 14% to $305 million, slower than revenue growth.
For the nine months ended September 30, net revenues were $3.201 billion, up 53%; income before tax was $2.253 billion, up 72%; net income attributable to common stockholders was $440 million, versus $244 million; and diluted EPS was $4.19, versus $2.43. Net interest income rose 87% to $2.064 billion. The nine-month pretax margin was 70%, versus 63%.
Financial position, cash flow and liquidity
- At September 30, total assets were $120.636 billion, total liabilities $107.372 billion, and total equity $13.264 billion, including $9.874 billion of noncontrolling interests. Customer payables were $94.873 billion.
- Cash and cash equivalents were $3.824 billion; an additional $26.385 billion of cash was segregated for regulatory purposes. Short-term borrowings were $11 million. Securities loaned were $10.482 billion, a secured financing balance rather than conventional corporate borrowing.
- For the first nine months, operating cash flow was $2.175 billion, compared with $3.998 billion in the prior-year period. Investing activities used $27 million and financing activities used $516 million. Cash, cash equivalents and restricted cash increased $1.606 billion to $30.209 billion.
- Management reported that 99.2% of assets were considered liquid, excess regulatory capital was $9.705 billion, and all regulated subsidiaries complied with capital requirements. Management believes available cash, operating cash flow and borrowings will meet liquidity needs for more than 12 months.
Material changes and operating trends
- Customer equity reached $369.8 billion, up 29% year over year, and total accounts increased 21% to 2.431 million. Total customer DARTs declined 1% to 1.907 million.
- Options contract volume increased 18% year over year, while stock share volume fell 22% and futures volume declined 1%. Lower stock activity and reduced trading in low-priced shares weighed on commissions; options activity supported them.
- Market conditions included falling equity markets, lower volatility and persistent inflation and geopolitical uncertainty. Management noted that higher rates benefit income on segregated cash and margin lending but also raise interest paid to customers.
- Common stockholders received $0.10 per-share dividends in each of the first three quarters. A further $0.10 dividend was declared for payment in December 2023. In July, the company issued 2.633 million shares in exchange for IBG LLC interests, raising its ownership from 24.8% to 25.4%.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management expects to fund technology-related capital expenditures from operating cash flow and available cash, and says spending can be adjusted to conditions.
- Interest-rate sensitivity analysis estimated that an unexpected 0.25 percentage-point change in U.S. rates would change annualized net interest income by approximately $56 million; a similar change in relevant non-U.S. rates would change it by approximately $20 million, assuming reinvestment of maturing instruments. These are estimates, not forecasts.
- The company reported a $35 million SEC settlement and a $20 million CFTC settlement in September relating to preservation of business communications. The settlements require an independent compliance consultant and improvements to compliance policies. General and administrative expenses also increased year over year in part because of this matter.
- A court certified a customer class in a case concerning the liquidation of margin-deficient accounts. The company sought interlocutory appeal; the potential loss or range of loss was not clearly quantified in the filing. The company also disclosed a pending appeal in the Trading Technologies patent case, involving a jury award of $6.6 million plus interest.
- The company identified risks from market and interest-rate changes, currency movements, margin lending and customer defaults, regulatory change, international operations, and competition. It added a specific risk disclosure about losses at third-party cryptocurrency service providers. Customer crypto-assets held at those providers were reflected as a $106 million safeguarding asset and matching liability; no loss event was identified at quarter-end.
- The currency diversification strategy reduced Q3 comprehensive earnings by $93 million, including a $17 million loss in other income and a $76 million currency translation loss in other comprehensive income.
Most important facts for investors to verify
- How much of the sharp earnings growth is sustainable if interest rates decline or customer cash balances change.
- The effect of trading mix and activity—especially options growth versus weaker stock volumes—on commissions, execution costs and customer engagement.
- Developments and potential financial exposure in the customer class action and Trading Technologies appeal.
- Compliance obligations, costs and any further consequences following the SEC and CFTC records-preservation settlements.
- Liquidity and regulatory-capital figures, while distinguishing customer and segregated balances from cash available for general corporate use.
- Potential exposure to third-party cryptocurrency custody failures and any resulting accounting impact under SAB 121.