Interest rate spike boosts fortunes of broker-dealers

Broker-dealer executives have been waiting since the financial crisis for interest rates to rise, presenting an opportunity to boost profits on such rate-sensitive lines of business as margin lending and money market funds.
Now, with long-term interest rates rising, the outlook for broker-dealers is improving, according to William Katz, an analyst with Citigroup Global Markets Inc.
In a research note today, “With the Rate Genie Out of the Bottle, Time to Reposition,” Mr. Katz upgraded his view on broker-dealers to “neutral/positive,” from “neutral/negative.” Specifically, he raised his rating on The Charles Schwab Corp. to “buy,” from “sell.” In addition, he lifted his per-share target price for LPL Financial Holdings Inc. and TD Ameritrade Holding Corp.
Low interest rates have erased fees on money market funds — fees that many broker-dealers used to apply directly to their bottom lines. Brokerage stocks are extremely sensitive to interest rate movements, and record low interest rates over the past few years have eviscerated formerly lucrative businesses.
A “normalized” trajectory for Schwab’s earnings-per-share yield is “coming into better view,” Mr. Katz wrote. “As rate expectations shift along with Fed ‘tapering’ discussion, [a] new $24 [per share] price target could prove conservative should non-bank-related earnings growth and capital return story both improve,” he wrote. Shares of Schwab, meanwhile, trade at $20.73 this afternoon.
Mr. Katz also raised his price target for TD Ameritrade to $25 per share, from $18, and the target for LPL Financial to $40 per share, from $39.50. Both were trading, respectively, at $23.77 per share and $36.96 per share today.