Interactive Brokers Group Inc (IBKR) Q1 2024 Earnings Call Trans

Release Date: April 16, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Interactive Brokers Group Inc (IBKR, Financial) reported strong account growth, adding 184,000 new accounts in the first quarter, which is the second-highest ever after Q1 2021.
• Client equity increased by 36% to $466 billion, approaching half a trillion dollars in client assets.
• Commission revenue reached the second-highest level ever, only surpassed by the peak during the meme stock spike of Q1 2021.
• Net interest income reached a record high, contributing to total revenues reaching an all-time peak.
• Interactive Brokers Group Inc (IBKR) raised its quarterly dividend to $0.25, recognizing the company’s strong financial position and confidence in future growth.

Negative Points

• Despite strong account growth, industry equities volumes are down again, following a similar pattern to 2023.
• Futures contract volumes and stock share volumes declined, in line with industry trends.
• Securities lending net interest was not as strong as in previous quarters due to a decrease in overall demand for shorting stocks and fewer hard-to-borrow names industry-wide.
• Interest on customer credit balances increased due to higher rates and balances, indicating higher costs for Interactive Brokers Group Inc (IBKR).
• The company faces challenges in the M&A space, with two large potential acquisitions not materializing due to disagreements on price.

Q & A Highlights

Q: What is the current dividend payout ratio, and how does Interactive Brokers view its capital position in relation to M&A opportunities?
A: (Milan Galik – President, CEO & Director) The dividend payout ratio is approximately 15% of earnings. The company is content with this ratio as it believes it is sustainable and allows for continued capital build-up for potential M&A opportunities. Interactive Brokers has about $6 billion in excess capital that is not necessary to run the business, but they are cautious and diligent about M&A, aiming to avoid spending hastily.

Q: How does Interactive Brokers view the recent account growth, and what customer types or geographies are driving this growth?
A: (Milan Galik – President, CEO & Director) The strongest segment in terms of new accounts was individual accounts, followed by introducing brokers. The company sees this growth as sustainable, with a healthy pipeline of introducing brokers at various stages of integration. The account growth is particularly strong in Europe and Asia, driven by global demand for access to international and U.S. markets.

Q: Can you comment on the sustainability of margin loan growth?
A: (Thomas Pechy Peterffy – Founder & Chairman) There is hope that margin loans will not go much higher, as historically, a sharp increase in margin loans is often followed by a market collapse.

Q: What is the new IBKR Desktop offering, and what does it mean for account growth?
A: (Milan Galik – President, CEO & Director) IBKR Desktop is a new, simpler, and less complex trading platform aimed at active traders. It has been well-received by clients, and there is already demand for it from professional accounts and introducing brokers, which is a positive sign for future account growth.

Q: What does the new high-touch prime brokerage service entail, and what are the expectations for growth in the hedge fund client base?
A: (Milan Galik – President, CEO & Director) The high-touch prime brokerage service is designed to attract larger hedge funds and retain those that have grown on the Interactive Brokers platform. It includes a dedicated relationship manager, direct access to experts, and a 24×5 global outsourced trading desk. The service is new, and the company has just started inviting hedge funds to join.

Q: How is Interactive Brokers utilizing AI, and could it be a driver of the next leg of volume growth?
A: (Milan Galik – President, CEO & Director) AI is seen as a potential accelerator for trading in the long run, as it could enable faster decision-making and analysis for investors. Currently, Interactive Brokers does not offer AI-based trading tools to clients, but there are plans to develop and offer such tools in the future.

Q: What is the impact of 0-day options on the marketplace, and which client segments are seeing the highest penetration rate of 0DTE?
A: (Milan Galik – President, CEO & Director) 0-day options are a powerful tool that can be misused, but they have always existed in some form. They are now more available and have become a phenomenon participated in by both professional and retail clients. The company does not focus on which client segment trades them the most, as commissions are charged transparently to all segments.

Q: What was the driver behind the higher-than-expected other income line in the first quarter?
A: (Paul Jonathan Brody – CFO, Treasurer, Secretary & Director) The increase in other income was driven by better market-making activity and interest-like income that flowed through that line, which is included in the net interest income walk but reported in other income on the income statement.

Q: How is Interactive Brokers managing expense growth, especially in light of new initiatives like the high-touch prime brokerage offering?
A: (Milan Galik – President, CEO & Director) The company is managing headcount growth and dealing with factors such as inflation and the rising cost of talent. While headcount growth is easier to control, compensation expenses have increased due to the need to pay employees more and attract new talent in a competitive market.