Interactive Brokers Earnings: Strong Net Interest Income, but Flat Commissions and Legal Expenses

Interactive Brokers IBKR reported fair second-quarter results. The company reported net income to common shareholders of $125 million, or $1.20 per diluted share, on $1 billion of net revenue, which increased 52% from the previous year while decreasing 2% sequentially. The increase in revenue from the previous year was primarily due to a doubling of net interest income to $694 million. Interactive Brokers’ low-duration strategy (of 40 days in its investment portfolio) benefits from the high-rate environment and has offset flat commission revenue when compared with the year-ago period. We don’t anticipate making a material change to our $113 per share fair value estimate for narrow-moat-rated Interactive Brokers and currently assess the shares as being undervalued.

Net interest income should continue to be a sweet spot for Interactive Brokers. The company’s clients hold more cash and utilize more margin loans than the customers of its brokerage peers. The management team estimates that the firm earned an additional $49 million in quarterly net interest income from each 25-basis-point hike in the federal-funds rate because it can quickly reinvest at higher rates with its short-duration strategy.

While total customer accounts grew 19%, and total client equity increased 24%, year over year, commission revenue was flat due to lower client trading volumes. To be more specific, the quarter’s daily average revenue trades decreased 14% year over year, with the most profound decrease being 28% in stock trading volumes. Options trading volumes increased 9% and futures trading dropped 3% from the year-ago period. Management estimates that the trading volume dynamics of different products would persist throughout the year. We think overall commissions will be fine because options and futures trading generate higher commissions on a per-order basis than equity trading.