Business context and reporting period
Interactive Brokers Group, Inc. (IBKR) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company operates a global electronic brokerage business across more than 135 exchanges and market centers. IBG, Inc. owned approximately 19% of operating company IBG LLC at quarter-end; the remaining 81% was held by IBG Holdings LLC and is reflected as noncontrolling interests.
COVID-19-related market volatility and increased customer participation materially affected activity. At September 30, customer accounts totaled 981,000, up 47% year over year, and customer equity was $232.7 billion, up 49%. Third-quarter total customer DARTs increased 113% to 1.83 million.
Financial results and key metrics
Amounts below are in millions of dollars except per-share data and where otherwise stated.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total net revenues | $548 | $466 | $1,619 | $1,437 |
| Net interest income | $195 | $291 | $647 | $796 |
| Income before income taxes | $334 | $281 | $864 | $845 |
| Net income | $302 | $261 | $799 | $795 |
| Net income available to common stockholders | $46 | $36 | $124 | $117 |
| Diluted EPS | $0.58 | $0.45 | $1.58 | $1.52 |
| Non-interest expenses | $214 | $185 | $755 | $592 |
| Pretax profit margin | 61% | 60% | 53% | 59% |
- Third-quarter commissions rose 49% to $279 million, led by higher options and stock trading. Average commission per cleared commissionable order fell 27% to $2.69.
- Net interest income fell 33% in Q3 as the average federal funds effective rate declined to 0.09% from 2.19%. The nine-month net interest margin was 1.10%, versus 1.70% a year earlier.
- Management’s non-GAAP adjusted diluted EPS was $0.53 for Q3, versus $0.57; adjusted pretax income was $304 million versus $340 million, and adjusted pretax margin was 59% versus 65%. For the nine months, adjusted diluted EPS was $1.79 versus $1.68. These company-defined measures exclude specified items and are not substitutes for GAAP results.
- Cash from operating activities was $3.472 billion for the nine months, compared with $2.178 billion. Investing cash flow was negative $28 million and financing cash flow was positive $326 million. Cash, cash equivalents and restricted cash increased $3.799 billion to $16.081 billion; this includes $12.789 billion segregated for regulatory purposes.
- Total assets were $84.698 billion and total liabilities $76.152 billion at September 30. Total equity was $8.546 billion, including $6.937 billion of noncontrolling interests. Short-term borrowings were $628 million, compared with $16 million at year-end 2019; repurchase-agreement liabilities were zero, versus $1.909 billion.
- Management stated that 99.3% of assets were considered liquid and that available cash, operating cash flow and borrowings were expected to meet liquidity needs for more than 12 months. Operating subsidiaries had $5.9 billion of excess regulatory capital and were in compliance with requirements.
Material changes versus the prior comparable period
- Higher trading activity drove strong commission growth, while low benchmark rates reduced net interest income. Management attributed Q3 results to both trends.
- Q3 other income was $29 million, compared with a $47 million loss a year earlier. The change included a $27 million gain from the currency diversification strategy versus a $47 million loss, and a $13 million impairment of the OneChicago Exchange investment.
- Nine-month non-interest expenses increased 28% to $755 million, including a $103 million customer-compensation expense related to the April crude-oil futures event and a $5 million COVID-19 donation. General and administrative expense rose to $206 million from $80 million.
- Effective Q1 2020, the company stopped reporting separate business segments as it continued winding down market making, and revised income-statement presentation; prior-period figures were reclassified for comparability.
Outlook, commentary, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management said future COVID-19 effects could be significant but could not be quantified. It cited potential changes in customer activity, market conditions, regulations, staffing and the broader economy.
- Management reported that its technology infrastructure handled extraordinary volatility and increased trading volume, and that the business could operate remotely if offices closed. It also identified risks from low or changing interest rates, competition, market-center consolidation, cyber and operational disruption, and market-making activity.
- On April 20, 2020, negative WTI futures prices caused customer losses exceeding account equity. IBKR compensated certain customers and recognized an aggregate loss of approximately $104 million; $103 million was included in nine-month general and administrative expense.
- The company recognized an aggregate $42 million loss on customer margin loans tied to a concentrated position in a security that sharply declined in 2018–2019. Maximum aggregate loss was estimated at approximately $50 million if the security became worthless and no debts were collected; recovery efforts remain uncertain.
- In August 2020, the company agreed to AML/BSA settlements involving penalties of $15 million to FINRA, $11.5 million to the SEC and $11.5 million to the CFTC, plus approximately $0.7 million in disgorgement, and continued use of an independent consultant. It was also cooperating with a Department of Justice inquiry; management did not believe its resolution was likely to materially adversely affect results.
- Other disclosed matters include patent litigation, a customer class action concerning margin-liquidation practices, and clearing-house guarantees whose potential liability is not quantifiable, though management considered payment under the guarantees remote. The filing states that legal and regulatory accruals were not material at quarter-end.
- Brexit-related licensing applications in Ireland and Central Europe were pending. The company warned that delays after the UK-EU transition period could temporarily limit service to some EU customers or account openings.
- Subsequent to quarter-end, on October 30, the company disclosed an issuance of 11,710,608 shares valued at $557 million in exchange for IBG LLC interests, increasing IBG, Inc.’s ownership from 19.0% to 21.8%.
Important facts for investors to verify
- Whether elevated trading volumes and account growth persist, and whether lower commission per order offsets part of the volume benefit.
- How continued low or changing interest rates affect net interest income, margin and customer cash economics.
- The final financial impact and recoveries related to the WTI event and the concentrated customer margin-loan loss.
- Any further costs, outcomes or disclosures from the AML/BSA matters, DOJ inquiry, litigation and regulatory proceedings.
- The composition and availability of reported liquidity: much of the balance sheet reflects customer-related and segregated assets, not unrestricted corporate cash.
- The effects of subsequent share issuance and future IBG LLC exchanges on ownership, share count and the portion of earnings attributable to IBG, Inc. common stockholders.