Interactive Brokers Earnings: Strong Net Interest Income but Lower Client Account Growth Outlook

Interactive Brokers IBKR reported strong third-quarter results. The company reported net income to common shareholders of $167 million, or $1.56 per diluted share, on $1.15 billion of net revenue. Net revenue increased 45% from the previous year and 15% sequentially. The increase in revenue from the previous year was primarily from a 55% increase in net interest income. We don’t anticipate making a material change to our $112 fair value estimate for narrow-moat Interactive Brokers and view shares as undervalued.

Interactive Brokers’ net interest income continues to benefit from the current high-interest rate environment. The interest income the company earns from clients’ margin loans is tied to short-term rates, and it also remains ultrashort in duration with its investments (26 days in the investment portfolio). As rates have the potential to stay “higher for longer,” we assume the company’s earnings power will stay at an elevated level. However, if the Federal Reserve cuts rates rapidly, we think net interest income will see pressure.

Commissions increased slightly to 4% from a year ago. Like the pattern we saw last quarter, equity trading volumes were down 22% compared with a year ago while options’ trading volumes increased by 19%.

The management team also guided a lower client account growth from a slower onboarding of introducing broker client accounts. The updated client account growth was low- to mid-20% compared with 30%. As we update our model, we do not think this lowered guidance will have a material effect on our fair value estimate as we have already taken a more conservative view—our current forecast of 10-year client account CAGR is 14%.