AMTD Initiation

RBC Capital Markets, LLCBulent Ozcan, CFA (Analyst)(212) [email protected]

Sector: Brokers, Asset Managers & Exchanges

Sector PerformNYSE: AMTD; USD 36.82

Price Target USD 43.00Scenario Analysis*

DownsideScenario

28.0022%

CurrentPrice

36.82

PriceTarget

43.0018%

UpsideScenario

50.0037%

*Implied Total Returns

Key StatisticsShares O/S (MM): 543.3Dividend: 0.60

Market Cap (MM): 20,004Yield: 1.6%Avg. Daily Volume: 2,059,886

RBC EstimatesFY Sep 2014A 2015E 2016E 2017EEPS, Rpt Diluted 1.42 1.53 1.85 2.10P/Rpt EPS 25.9x 24.1x 19.9x 17.5xEBITDA 1,479.0 1,567.5 1,848.6 2,055.8DPS 1.01 0.60 0.88 1.04Div Yield 2.7% 1.6% 2.4% 2.8%BVPS Basic 8.68 9.51 10.59 11.78P/BVPS 4.24x 3.87x 3.48x 3.13x

EPS, Rpt Diluted Q1 Q2 Q3 Q42014 0.35A 0.35A 0.34A 0.38A2015 0.39A 0.36E 0.39E 0.41E2016 0.46E 0.44E 0.47E 0.48EEBITDA2014 354.0A 369.0A 362.0A 394.0A2015 389.0A 370.4E 395.4E 412.6E2016 464.4E 439.6E 471.3E 473.3EAll values in USD unless otherwise noted.

March 26, 2015

TD Ameritrade Holding Corp.Initiating at Sector Perform: Great Company, butmore Upside ElsewhereOur view: There is a lot to like about TD Ameritrade. It is runninga "regulation light" model, which we view as a unique, competitiveadvantage. The management team is shareholder-friendly, and we viewthe firm as a likely takeover target. That said, we see more potential upsidein other names in the sector.

Key points:Our in-depth analysis of secular trends in the brokerage sector indicatesthat TD Ameritrade's shares could outperform the broader market. Wethink the shares would appeal to investors looking for a management teamworking as good stewards of capital, as well as investors seeking strongearnings growth:

• Highest payout ratio among peers is sustainable: TD Ameritrade is acapital-return story that should last. The firm generates the strongestEBITDA margins in the sector. We expect the company to return capitalat the high end of its 40%–60% of net income target via buybacks anddividends.

• "Regulation light" business model is difficult to replicate and acompetitive advantage: TD Ameritrade is unique in the sector given itsagreement with TD Bank that allows the firm to avoid some regulatoryscrutiny and significant capital charges. This should lead to strong assetgrowth.

• Significant operating leverage embedded in the business: About 97%of all client activity is transacted electronically at TD Ameritrade. Use oftechnology has resulted in margins that exceed those of its peers. Weexpect continued margin expansion given that the firm's systems canprocess significantly more utilizing the existing infrastructure.

• Asset-gathering momentum should continue: TD Ameritrade's assetgrowth rate over the past few years has been strong, and we believethat it can remain robust given favorable secular trends. The firmhas emerged as one of the largest custodians for independent RIAs.Our research shows that more wirehouse advisors could becomeindependent RIAs in 2015 than in the past. We believe that the companyis well positioned to take advantage of the forthcoming wealth transferopportunity, which is estimated to be a $30 trillion market, and thatthe rise of the "do-it-yourself" investor base should provide attractivegrowth opportunities.

• Appealing takeover target: We think that the relationship with TD Bankcould lead to more than just a collaboration. We believe the potentialrevenue synergies are meaningful.

We believe that TD Ameritrade is a great company. However, we see moreupside elsewhere in the discount brokerage sector. Our price target on thecompany's shares is $43. This is based on 24x CY2016E EPS of $1.92.

Priced as of prior trading day's market close, EST (unless otherwise noted).For Required Conflicts Disclosures, see Page 45.

Target/Upside/Downside Scenarios

Exhibit 1: TD Ameritrade Holding Corporation

60m

40m

20m

N2012

D J F M A M J J A S O N2013

D J F M A M J J A S O N2014

D J F2015

M

UPSIDE 50.00TARGET 43.00CURRENT 36.82

DOWNSIDE 28.00

Mar 2016

454035

30

25

20

15

125 Weeks 02NOV12 - 25MAR15

AMTD Rel. S&P 500 COMPOSITE MA 40 weeks

Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target

Target price/base caseOur 12-month price target for AMTD is $43. We arrive at ourprice target using a price-to-earnings multiple of 24.0x on our2016 calendar year earnings estimate of $1.92 per dilutedweighted average shares. We then discount the resultingvaluation using a cost of equity of 8.9%.

Our base case scenario valuation is based on theseassumptions for 2016: Net interest margins of 163 basis pointsby 2016; avg. spread-based balances of $110.5 billion; avg.market fee-based investment balance of $187.4 billion; dailyaverage revenue trades of 457,873; average revenue perrevenue trade of $12.50; and a pre-tax margin of 40.9%.

Upside scenarioOur upside valuation is $50 based on 2016 EPS of $2.07 anda price-to-earnings multiple of 26.0x. Our upside scenariovaluation is based on these assumptions for 2016: Net interestmargins of 173 basis points by 2016; avg. spread-basedbalances of $110.5 billion; avg. market fee-based investmentbalance of $187.4 billion; daily average revenue trades of461,097; average revenue per revenue trade of $12.50; and apre-tax margin of 42.6%.

Downside scenarioOur downside valuation is $28 based on 2016 EPS of $1.76 anda price-to-earnings multiple of 17.0x. Our downside scenariovaluation is based on these assumptions for 2016: Net interestmargins of 152 basis points by 2016; avg. spread-basedbalances of $110.5 billion; avg. market fee-based investmentbalance of $187.4 billion; daily average revenue trades of454,649; average revenue per revenue trade of $12.50; and apre-tax margin of 38.9%.

Investment summaryWe think of TD Ameritrade as a lean, mean, cash-generatingmachine in the sector. The firm has a unique business modelthat is generating the most attractive margins in the sector. Webelieve that a focus on topline growth and expense control, incombination with a shareholder-friendly capital deploymentstrategy leads to a very appealing investment story. However,we are seeing more potential upside in other names in thediscount brokerage sector.

Potential Catalysts:• Highest payout ratio among peers is sustainable due to

the firm's unique "regulation light" business model: TDAmeritrade is a capital return story that should last. The firmgenerates the strongest EBITDA margins of peers. We expectthe company to sustainably return capital at the high end ofits 40%–60% of net income target. The relationship with TDBank allows the firm to avoid some regulatory scrutiny andmeaningful capital charges.

• Asset-gathering momentum could continue, adding tooperating leverage: Independent RIAs and the forthcomingwealth transfer opportunity should lead to strong balancesheet growth. There is significant operating leverageembedded in the firm's business. Heavy utilization oftechnology has resulted in margins that exceed those of itspeers, and we see further margin expansion.

• Attractive takeover target: We believe that the relationshipwith TD Bank could lead to more than just a collaboration.The potential revenue synergies are meaningful.

Risks:• Drop in consumer confidence and trading volumes could

lead to a decline in commission revenues.• Ban of payment for order flow practices could affect

earnings negatively.• Prolonged period of low interest rates could compress net

interest margins.• Unforeseen regulatory changes could affect the company's

business model, which we deem to be a competitiveadvantage.

• Earnings could decline should TD Bank terminate and/ormodify its relationship with TD Ameritrade.

TD Ameritrade Holding CorporationBrokers, Asset Managers & Exchanges

March 26, 2015 Bulent Ozcan, CFA (212) 863-4818; [email protected] 2

Key questions

Our view

1. Can TD Ameritrade continue to grow its assets at the same pace as the past few years?

We think so. The firm has done a remarkable job growing its assets. While not a major force among custodians just a few years ago, today TD Ameritrade is the second ranked custodian serving RIAs (see page 11). We believe that there are certain secular trends that will lead to strong asset growth over the coming years. These include capturing a larger share of the increasing number of “breakaway” advisors, working with Generation X and the Millennials whose wealth is expected to be significantly boosted over the coming years, or by capitalizing on the growth of the “do-it-yourself” investor opportunity.

2. Should investors be concerned that buyback activity could be restricted given TD Bank’s 41% ownership?

While the company’s ability to buy back shares appears to be limited, due to TD Bank’s 41% ownership, we view the glass to be half-full. We believe that any increase in TD Bank’s ownership could ultimately result in a potential acquisition by TD Bank. Our view is that there are significant synergies to be realized by combining both firms. Moreover, we think that TD Bank could be willing to pay a premium to expand its US footprint. Clearly, recent transactions seem to show an appetite for inorganic growth by the Canadian banks. Disregarding any acquisition, it would take over three years for TD Bank to reach a 45% ownership. This is based on the 3.7 million shares the firm repurchased in 1Q/15. Thus, we believe there is no immediate threat to the pace of current buybacks. This should put investors viewing the glass as half-empty at ease, in our view.

3. Could TD Ameritrade be required to hold more capital, which would negatively affect capital distributions?

We do not see any immediate risk to the firm’s “regulation light” model. We believe that a majority of regulatory changes have already taken place. Unlike its peers, the firm does not own a bank. The relationship with TD Bank is one that seems to be tilted in TD Ameritrade’s favor. The firm does not have to incur capital charges, which explains why it is able to return a high percentage of its earnings in the form of dividends and share buybacks. These are now around 90% of net income, and we expect this ratio to remain high absent of any major acquisition opportunity the firm might pursue.

4. Will margins continue to expand?

We believe so. There were periods in the past when pre-tax margins exceeded 50%. The firm ended 2014 at around 41%. The firm’s business model has significant operating leverage. TD Ameritrade is a heavy user of technology, and there seems ample capacity to process client trades. However, we would not expect margins to exceed 50%. Management could at that point make a decision either to invest more into the business, upgrading its infrastructure, or to reduce pricing to make its products even more competitive.

5. How asset sensitive is TD Ameritrade and are there better opportunities to take advantage of rising rates?

We estimate that earnings per share could increase to the tune of 12 cents to 14 cents (9% accretive based on 2014 EPS) for a 50 basis point move in rates, which seems light relative to our estimate of 41 cents (33% accretive based on 2014 EPS) for The Charles Schwab Corporation. Thus, investors who buy shares of discount brokers in order to capitalize on higher interest rates would be better off investing in Charles Schwab. This is because yields on about 56 percent of AMTD’s interest-bearing assets would reset only gradually over time. Only about 44% of the assets would be affected from rising rates immediately. However, we must admit that this is a simplified view of the world.



Table of contents

Key questions ....................................................................................................................... 3

Why we would be buyers ..................................................................................................... 5

TD Ameritrade is a capital return story that should last ..................................................... 5

With its “regulation light” model, TD Ameritrade should be less constrained in growing its assets ................................................................................................................ 7

Significant operating leverage could drive margins even higher ........................................ 8

Asset growth could continue to be strong ........................................................................ 10

Downside protection as there is value to TD Bank – think acquisition ............................. 17

Investment considerations ................................................................................................. 19

While the company has made significant progress in growing its business, the business model remains fairly narrow .............................................................................. 19

AMTD’s earnings are not as sensitive to rising interest rates as that of peers ................. 20

Payment for order flow could affect revenues to the tune of $150 million ..................... 21

We are not certain whether trading volume can increase meaningfully from here on, driving revenues higher .............................................................................................. 22

Sharp increase in short-term interest rates could negatively affect the firm ................... 24

Investors in TD Ameritrade have limited voting rights ..................................................... 24

Valuation framework ......................................................................................................... 26

Risks and price target impediments ................................................................................... 28

Quick overview of TD Ameritrade Holding Corp. ................................................................ 29

Revenue breakdown .......................................................................................................... 31

Products ............................................................................................................................. 38

Distribution ........................................................................................................................ 40

Competitors ....................................................................................................................... 41

History ................................................................................................................................ 42

Management team ............................................................................................................. 43



Why we would be buyers

TD Ameritrade is a capital return story that should last TD Ameritrade is a highly cash-generative company that is run by an investor friendly management team. This bodes well for future capital distributions.

TD Ameritrade offers the highest dividend yield in the discount brokerage sector, and we expect the company to remain the leader in respect to cash generation over the next three years. This should appeal to investors looking for income.

In fact, close to half of the revenues could be considered free cash. The exhibit below shows the company’s earnings before taxes, depreciation, and amortization over time, which we view as a cash proxy. We believe that the firm will continue to be the best among its peers.

Exhibit 2: TD Ameritrade generates the strongest EBITDA/revenue ratios

0%

10%

20%

30%

40%

50%

60%

2010 2011 2012 2013 2014 2015E 2016E 2017E

AMTD SCHW ETFC

Source: Company filings; RBC Capital Markets

The company’s business model provides a competitive advantage. It pursues a strategy that is heavily dependent on usage of technology to interact with clients. Thus, there is no need to invest in physical offices. Despite its size, TD Ameritrade only has 105 branch offices. This compares to over 300 for the Charles Schwab Corporation. TD Ameritrade’s approach makes sense as about 97% of client transactions are done electronically—via the Internet, mobile devices, and the telephone.

We believe that the firm’s ability to generate significant cash coupled with its leadership’s “investor friendly” capital management approach should bode well for future capital distributions via dividends and share buybacks.

About 15.2 million shares remain under the current stock repurchase authorization. As a reminder, the firm’s board of directors authorized a share repurchase program October 20, 2011, of up to 30 million shares of common stock. So far, the company repurchased 14.8 million shares through 1Q/15 (December quarter).



Moreover, we do not expect large M&A transactions to impact the capital return story negatively. While the company was M&A centric in the past, having completed 18 transactions from 2000 to 2007, share buybacks have been the preferred method of returning capital to shareholders after the financial crisis. More recently, the company started re-emphasizing dividend payment. The table below shows the change in the composition dating back to 2010.

Exhibit 3: More recently, AMTD prefers dividends over share buybacks

($ in million) 2010 2011 2012 2013 2014 1Q/15

Share repurchases $259 $395 $196 $0 $188 $118

Dividends $0 $114 $132 $471 $540 $82

Total capital returned to shareholders $259 $509 $328 $471 $728 $200


However, the change in the mix of how the company returns its capital to shareholders did not have an impact on the total amount distributed. In fact, distributions have increased since 2012.

While TD Ameritrade did not declare a special dividend in 1Q/15, the payout as a percentage of net income was nonetheless very high. The exhibit below shows the percentage of total capital returned to shareholders in the form of dividends and share buybacks to net income.

Exhibit 4: We would expect the firm to continue to pay out around 90% of its net income

43.8%

79.8%

55.9%

69.8%

92.5% 94.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 1Q/15 Source: Company filings; RBC Capital Markets

We believe that there are a number of reasons as to why the firm’s business model lends itself to high payouts. One of the advantages that the company enjoys is that it can run its business under what we call a “regulation light” model. This allows the firm to set a long-term target of returning 40% to 60% of its net income in the form of buybacks and dividends to its shareholders.

Management has effortlessly exceeded the firm’s objective to return 40–60% of net income in the form of dividends and buybacks, and we expect payouts to remain high



With its “regulation light” model, TD Ameritrade should be less constrained in growing its assets TD Ameritrade has gained financial flexibility by outsourcing its cash management function to TD Bank, allowing TD Ameritrade to keep the spread-based fee income, less a servicing fee that is capped at 35 bps. This seems very attractive as the firm avoids incremental regulatory scrutiny and capital charges.

TD Ameritrade stands out among its peers as a firm that does not have to face the same level of regulatory scrutiny as The Charles Schwab Corporation or E*TRADE. The acquisition of TD Waterhouse put TD Ameritrade in an enviable situation, in our view. It does not have to hold as much capital as its peers in order to grow its balance sheet. This provides a competitive edge, in our view.

Quick history TD Ameritrade is the creation of E*TRADE’s unsuccessful bids for TD Waterhouse and Ameritrade. The management teams of all three firms, E*TRADE, Ameritrade, and TD Waterhouse, had been engaged in merge conversations going back to 2002, according to Joe Moglia, the then CEO of Ameritrade. All three firms wanted to create a bigger firm, with the ultimate goal of eliminating competition. In 2005, E*TRADE made an unsolicited bid for Ameritrade. However, Ameritrade was already in negotiations with TD Bank Financial Group (TD Bank) in pursuit of its own acquisition. Ameritrade’s management wanted to make sure that it remained relevant and did not lose control over the company in any sort of merger. Both firms agreed on a deal and Ameritrade announced the acquisition of TD Waterhouse.

Ameritrade exchanged 196.3 million of its own shares and $20,000 in cash for capital stock of TD Waterhouse USA. That gave TD Bank a 32.5% ownership in the new TD Ameritrade entity. TD Bank was also given the right to own up to 39.9% of the TD Ameritrade following the first three years post the close date and than a maximum of 45% for up to 10 years thereafter—this is unless TD Bank bids for all of TD Ameritrade’s shares and acquires the company.

While Ameritrade’s primary objective for the acquisition was an attempt to fight declining trade volumes by eliminating a competitor and an attempt to branch into wealth management (AMTD also acquired a network of 2,600 financial advisors), the deal turned out to be of significant value to Ameritrade post the financial crisis.

Following the acquisition, TD Ameritrade became an affiliate of TD Bank. TD Bank has the right to designate five of 12 members of the board of directors. In exchange for giving up some control, TD Ameritrade gained a partner. This partnership would prove to be of great significance following the financial crisis of 2008. In fact, they entered a contract of great value, in our opinion. The company refers to this contract as the “Insured Deposit Account Agreement”. We refer to it as having your cake and eating it too.

Why we view the TD Bank agreement as unique and highly valuable TD Ameritrade can avoid some of the regulatory burdens by not having to operate a bank. This provides financial flexibility and a competitive edge.

TD Ameritrade gives up 25 to 35 basis points in exchange for avoiding capital charges and increased regulatory scrutiny. The economics favor TD Ameritrade, in our view.

Based on their agreement, TD Ameritrade’s customers are given access to TD Bank’s FDIC insured money market deposits accounts, either as a designated sweep vehicle or as a non-

TD Ameritrade’s effort to avoid an acquisition by E*TRADE financial has resulted in a windfall and led to the current TD Bank relationship



sweep deposit account. TD Ameritrade earns a yield on its clients’ cash assets, less a servicing fee and the cost of FDIC insurance.

The biggest advantage of this agreement is that TD Ameritrade does not have to run a bank. There are important implications in terms of regulator scrutiny and capital management. While Schwab had to comply with modified Liquidity Coverage Ratio Rules (LCR), which puts constraints on how Schwab can invest its interest-earning assets, TD Ameritrade does not have to worry about LCR. And while E*TRADE was given permission to restructure its broker–dealer entities, removing them from under the E*TRADE Bank and closer to the parent company, the firm continues to remain under tight control of its banking regulator.

Certainly, there is still a sizeable amount of regulatory oversight that TD Ameritrade has to deal with. TD Ameritrade is considered a non-bank subsidiary of TD Bank under the Bank Holding Company Act of 1956, as TD Bank’s ownership is in excess of 25% of the firm. Thus, the firm is subject to the supervision and regulation of the Fed. The firm stated in its 10K that “these banking regulations limit the activities and the types of businesses that we may conduct and the types of companies we may acquire, and under these regulations the Federal Reserve could impose significant limitations on our current business and operations.” However, TD Bank is regulated as a “financial holding company” under the BHC Act. This, according to the company’s filings allows it and TD Ameritrade to engage in a much broader set of activities than would otherwise be permitted under the BHC Act.

We see the “regulation light model” as a competitive advantage. The firm runs a lean business with a focus on avoiding regulatory burden as much as possible. The aim is to steer clear of stringent capital requirements and achieve maximum financial flexibility. There are undoubtedly benefits in acting as an agent, and not as a principal when executing client transactions.

The maturity date of the IDA agreement is July 2018, but it can be canceled by July 2016 by either party with the submission of a written request. If no request to cancel is made by either party, the agreement will be renewed for another five years, remaining in effect until July 2023. While TD Bank could try to renegotiate its IDA agreement following the denial by the Fed of its request for an exemption from Regulation YY’s requirement to transfer its ownership in TD Ameritrade to its US intermediate holding company, which could effectively lead to higher capital charges at TD Bank, we do not anticipate any changes to the IDA agreement at this point.

Significant operating leverage could drive margins even higher We believe that TD Ameritrade will be able to expand its margins given its scalable business model and management’s focus on controlling costs

We would describe TD Ameritrade as an efficient operator, given its heavy usage of technology to interact with clients and the associated benefits of a lower cost basis. Putting this into perspective, the company disclosed recently that about 97% of all trading activity is done electronically. This business model, in our view, contributes to the high margins the firm was able to enjoy in the past. We expect margins to increase further from here on.

There is significant amount of operating leverage embedded into the business. Consider this: The company disclosed in its recent 10K filing that the trading platform can currently process approximately 1.5 million trades per day. The company also disclosed that the greatest number of trades clients have generated in any single day was about 895,000. Thus, the trading system is able to process significantly more transactions without a need to invest more.

While the firm’s trading platform can handle 1.5 million trades per day, the greatest number of trades clients have generated in any single day has not exceeded 900,000



Exhibit 5: Operating margins are the highest among its peers

Source

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2010 2011 2012 2013 2014

AMTD SCHW ETFC


Efficiencies are not limited to its trading platform. As for its wealth management, TD Ameritrade seems to be one of the more efficient operators, as well. The below chart shows expenses as a percentage of average client assets.

Exhibit 6: AMTD’s cost base appears to be one of the lower among peers

0.64%0.58%

0.55%

0.33%

0.18%

0.60%0.56%

0.41%

0.29%

0.17%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

MS BoA ETFC AMTD SCHW

2013 2014


While The Charles Schwab Corporation seems to be the leader in cost control, one should not ignore the fact that TD Ameritrade has client assets of only $672 billion. This compares to $2,464 billion of client assets at Schwab. We would expect this ratio to decline as TD Ameritrade continues to grow its advise-based business. The exhibit below shows the trend in expenses as a percentage of client assets.



Exhibit 7: Expenses as percentage of client assets have been declining and should continue to do so

0.52%0.49%

0.43%

0.39%

0.34%

0.30%0.28%

0.26%0.24%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Company filings; RBC Capital Markets estimates

We believe that TD Ameritrade should be able to continue to reduce expenses and expand its operating margin. However, given that the firm already has the highest margins among peers, we would expect earnings growth to be driven by a combination of margin expansion and market share growth. Put differently, while the company had margins in excess of 50% in the past, we would not expect margins to expand indefinitely. We would expect the company to consider its options, which could include reducing fee rates to gain market share. The firm could also increase expenditures in order to expand its product offerings or improve them.

Asset growth could continue to be strong We believe that TD Ameritrade can continue to grow its assets at an attractive rate as we see some favorable secular trends: We expect wirehouse departures to accelerate and think the wealth transfer opportunity could be a significant driver of balance sheet growth.

We believe that TD Ameritrade is nicely positioned to take advantage of growth of independent RIAs and the wealth transfer opportunity, i.e., the next generation inheriting significant amount of assets.

While TD Ameritrade has done a remarkable job growing its fee- and spread-based assets at a pace similar to Schwab, the company’s efforts to grow its RIA client base seem to have yielded excellent results. We estimate that the firm was able to grow client assets at an organic growth rate of 11 percent annually over a five-year period.

Client assets at TD Ameritrade have grown at an 11% CAGR over the past 5 years



Exhibit 8: AMTD’s five-year compound annual growth rate versus peers

5%

11%

5%

24%

20%

n/m

16% 17%

-2%-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

SCHW AMTD ETFC

Client assets organic growth Avg. fee based investment balances Avg. Interest rate sensitive assets


The firm’s stated target is to grow assets by 7% to 11%. However, we believe that the firm can continue to grow at the higher end of its target. Here is why: TD Ameritrade has significantly improved its rankings among independent RIAs. While it would not have made the top 10 list just a few years ago, today, TD Ameritrade is the number two custodian based on number of RIA accounts. The firm had about 4,000 RIAs in 2007, managing about $80 billion of the client assets. In 2014, the firm had relationships with about 4,500 RIAs managing about $300 billion based on data provided by InvestmentNews. Today, having extended its RIA relationships, TD Ameritrade works with about 5,000 RIAs who manage approximately $320 billion in custodial assets.

Exhibit 9: AMTD has moved up the rankings significantly, and is now a top 2 custodian based on number of RIA relationships (2013 rankings)

($ in billion)

# of RIA

clients

RIA Assets in

Custody

Schwab Advisor Services 7,000 $1,081.0

TD Ameritrade Institutional 4,500 $300.0

Fidelity Institutional Wealth Services 2,948 n/a

Trade-PMR Inc. 1,525 n/a

Interactive Brokers 1,388 $150.0

Shareholders Service Group 1,255 n/a

Scottrade Advisor Services 1,100 n/a

Pershing Advisors Solutions 562 $106.4

Folio Institutional 325 n/a

Raymond James Investment Advisors Division 285 $100.0

LPL Financial LLC 282 $78.0

Source: InvestmentNews; RBC Capital Markets

We believe that attracting RIAs could lead to meaningful revenue growth as discount brokers, such as TD Ameritrade, generate commission revenues, trading revenues, spread-based revenues (through margin balances and to some degree cash balances), and fee-based revenues. Independent RIAs, in turn, like the open architecture that discount brokers

While TD Ameritrade would not have made the top 10 list just a few years ago, the firm is the second largest custodian (by number of accounts) to independent RIAs



provide. They view having a variety of choices as necessary in order to fulfill their fiduciary duties.

We would expect revenues generated through RIA relationships to contribute progressively more to the total revenue mix over the coming years, as there are favorable secular trends.

TD Ameritrade is nicely positioned to take advantage of growth of independent RIAs A lucrative venue of growth for TD Ameritrade is serving independent RIAs. While others, such as Schwab, have been a custodian for decades, we have seen a meaningful effort by TD Ameritrade to appeal to RIAs. As mentioned earlier, the firm is serving close to 5,000 independent RIAs. The firm generates revenues in a number of ways: trading commissions; RIA-associated margin accounts; 12b-1 fee trailers from RIA-provided capital on IDA balances; and 15–20 basis point referral fees on client assets the firm refers to an RIA.

As we had outlined in detail in our industry note, we believe that wirehouse departures will not only continue, but that those departures could accelerate.

The RIA industry is growing very rapidly as more advisors are leaving the wirehouses either to retain more of the revenues they would otherwise have to share, because they like the open architecture firms such as TD Ameritrade can provide, or due to pressure by the wirehouses to eliminate less-profitable clients.

We believe that a record $64.3 billion of assets could move with these advisors and we believe that TD Ameritrade could stand to gain from these breakaway brokers. The exhibit below shows this.

Exhibit 10: Wirehouse departures could accelerate in 2015 ($ in billion)

$27.1

$35.7

$62.6 $58.7

$55.9

$64.3

0%

10%

20%

30%

40%

50%

60%

70%

80%

$0

$10

$20

$30

$40

$50

$60

$70

$80

2010 2011 2012 2013 2014 2015E

Amount of Total AUM Leaving Wirehouses As % of Total AUM Moving

Source: InvestmentNews; RBC Capital Markets estimates

In addition, existing RIAs are growing their practices faster and adding assets, which helps discount brokers. RIA assets grew by 19.2% in 2013, following an increase of 15.5% in 2012, according to InvestmentNews. A larger portion of the growth seems to be driven by either new assets that the RIAs did not manage before or an increase in the assets provided by their existing clients. About 45% of the new assets were from new clients and another 16% were from existing clients in 2013. As a comparison, about 39% of new assets were from new clients and 22% of assets were from existing clients in 2012.

Today, TD Ameritrade is the number 2 custodian serving RIAs—a significant accomplishment that bodes well for the future given that the firm was not even in the top 10 a few years ago



https://rbcnew.bluematrix.com/docs/pdf/3f171e31-d6a0-4231-859c-4c3683cb4cbb.pdf

We estimate that the assets managed by RIAs were about $2 trillion by the end of 2012. Assuming a 19.2% growth in 2013, assets would have been around $2.4 trillion. Using the same assumptions for 2014 and 2015, we would expect RIA assets under management to be around $3.4 trillion by the end of 2015.

Exhibit 11: Assets managed by RIAs could reach $3.4 trillion by 2015 ($ in trillion)

$2.0

$2.4

$2.8

$3.4

$-

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

2012 2013 2014E 2015E

Source: InvestmentNews; RBC Capital Markets estimates

This estimate could be somewhat conservative if we assume that the growth rate for all RIAs corresponds to what the top 50 RIAs have been able to achieve. Data collected by InvestmentNews show that assets under management grew at a CAGR of 23% over the past two years. While the top 50 fee-only RIAs had assets of $277.8 billion in 2012, that figure increased to nearly $416.9 billion by 2014.

Exhibit 12: Fee-only RIAs are managing more assets than a few years ago ($ in millions)

$277,767

$310,579

$416,855

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

2012 2013 2014

Total AUM of the top 50 fee-only RIAs

Source: InvestmentNews; RBC Capital Markets

The increase in assets managed by RIAs could benefit the discount brokers, such as TD Ameritrade, as they act as custodians for them. This should lead to cross-selling opportunities.

RIAs, who charge fees on assets they manage, have benefited significantly from rising equity markets, and have been adding new clients



Focus on the “next generation” could be a profitable opportunity The wealth transfer opportunity could be meaningful. TD Ameritrade announced in late January of this year that TD Ameritrade Institutional and National Advisors Trust Company had formed a strategic alliance to offer trust services to RIAs.

The firm has created Advisors Private Wealth Trust with the goal of helping RIAs manage its clients’ trusts better. The idea seems simple. RIAs could lose the assets of their clients when one trustee dies and a new trustee takes over.

Certainly, this service will not have an immediate effect on asset growth. However, it shows that TD Ameritrade is trying to expand its products and services to appeal to independent advisors. How big is this wealth transfer market? According to Accenture, this could be a $30 trillion market over the coming decades.

Exhibit 13: US investable assets transferred by year

0%

2%

4%

6%

8%

10%

12%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011E-2015E

2016E-2020E

2021E-2025E

2026E-2030E

2031E-2035E

2036E-2040E

2041E-2045E

2046E-2050E

% o

f Total U

S Inv. A

ssets

Inve

stab

le A

sset

s ($

Tri

llio

ns)

Investable assets ($ in trillion % of total US investable assets

Source: Accenture; RBC Capital Markets

We believe that TD Ameritrade is well positioned to take advantage of this opportunity. As previously mentioned, it is offering independent advisors new services with the goal of helping them retain client assets as Baby Boomers start passing on their wealth.

Furthermore, we believe that the firm could benefit from the wealth transfer opportunity as it is targeting a segment of the market that most independent advisors find unprofitable to pursue—Generation X and the Millennials. This target group has less confidence in advisors and tends to be more self-directed. The exhibit below shows the results of a survey given by Aite Group to 187 investors with investable assets above $250,000.

As wealth transfer—a $30 trillion opportunity—becomes an increasingly important topic among RIAs, TD Ameritrade is sharpening its focus on trust services to help RIAs retain their clients’ assets

We believe TD Ameritrade’s business model allows the firm directly to target this “next generation” segment, which is less dependent on advisors, and not rely solely on RIAs to capitalize on this market



Exhibit 14: There is a big difference in how generations think about their advisors

78% 76% 78%

93% 91% 90%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Acts in my best interest whenselecting financial solutions

Proposes solutions customized tomy needs, preferences, and goals

Takes the time to listen to andunderstand me

GenX & Millennials Baby Boomers & Silent Generation

Source: Aite Group; RBC Capital Markets

But what about the wealthier investors? As for Generation X and Millennials that are millionaires, here too we find that they prefer to make their own decisions when it comes to investing. The exhibit below is from Fidelity’s 2013 Millionaire Outlook survey. This survey investigated the attitudes and behaviors of millionaire households, that is, of individuals with investable assets of at least $1 million.

Exhibit 15: About 49% of Gen X & Millennial (Gen Y) millionaires manage their own money

42%

49%

9%

66%

33%

1%

0%

10%

20%

30%

40%

50%

60%

70%

Managed by primary advisor Manged by self Managed by others

Gen X/Y Boomers

Source: Fidelity; RBC Capital Markets

There are implications for discount brokers such as TD Ameritrade that built their business model with a heavy focus on cutting-edge technology. Research published by InvestmentNews titled “The Future of Advice” found that 66% of investors under 45 want their advisors to offer more services online in the future. The method of distribution, e.g., usage of technology by discount brokers, could appeal to this group.

The exhibit below shows the result of a survey given to 1,000 readers of Crain’s Communications publication in 2014. Readers were asked about their usage of technology and how investors access their financial account information.

Self-directed investing remains popular among younger investors, irrespective of their wealth, with about 49% of Generation X and Millennial millionaires managing their own money compared to 33% for Boomers



Exhibit 16: Adoption rate of technology drops significantly at age 55 and above

83.5%

71.9%

56.4%

42.0%

35.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Under 35 35-44 45-54 55-64 65+

Source: Crain’s Communication; RBC Capital Markets

Due to the firm’s focus on technology and its low-cost product offering, we would expect TD Ameritrade to appeal to younger investors who are more inclined to invest independently. These individuals tend to be price sensitive, as well.

Given advisors’ focus on return on assets, which should be a focal point given their lack of scale, Millennials and Generation X might not be an attractive target market for most independent financial advisors. A survey given by Charles Schwab to 1,016 independent advisors in 2013 clearly revealed the attitude of independent advisors. The major reason as to why those advisors are reluctant to service Generation X and the Millennials was simply their net-worth. They are just not profitable enough for the advisors.

Exhibit 17: The biggest obstacle for RIAs to serving clients’ children is their wealth

0% 10% 20% 30% 40%

They do not have a high enough level of assets to beprofitable for my firm

They live in a different area

They want to choose their own advisor/firm

They do not want advice

They require a different service model that my firmdoes not offer

I do not have any barriers

Don't know

Source: The Charles Schwab Corporation; RBC Capital Markets

Could Generation X move up in the hierarchy and work with wirehouses instead as they exceed a certain wealth threshold? Maybe, but we think it is unlikely. Discount brokers are starting to offer advice through consultants and referral services, and some, such as Charles



Schwab and TD Ameritrade, provide a full-time money manager if the client needs more guidance. We believe that discount brokers offering a full range of services and products should be able to capitalize on the next generation opportunity. Full-service discount brokers can win over younger investors who need less guidance and prefer technology to face-to-face advice, and retain these clients as their wealth builds. We think that the way to win the hearts and minds of clients is by providing options.

Downside protection as there is value to TD Bank – think acquisition We think that TD Bank could unlock potential revenue synergies by acquiring TD Ameritrade. At a minimum, we believe that TD Ameritrade’s relationship with TD Bank provides downside protection.

There were a number of questions during recent earnings calls that have dealt with the question of share buybacks. The concern is that TD Ameritrade is limited in its ability to buy back shares, as this would increase TD Bank’s ownership of TD Ameritrade. This, in turn, would most likely trigger a decline in TD Ameritrade’s share buyback activity.

As mentioned earlier, TD Bank acquired a 32.5% ownership in TD Ameritrade when it sold TD Waterhouse in 2005. Under a 2013 modified agreement, TD Bank can own up to 45% of TD Ameritrade—unless it tenders for 100 % of TD Ameritrade’s shares.

We believe that investors in TD Ameritrade’s shares should view the glass as half-full and not as half-empty. We think that there could be a chance of TD Bank acquiring all of TD Ameritrade—at a premium. Certainly, we do not believe that TD Bank’s CEO, Bharat Masrani, would entertain the idea of a significant acquisition at this point, as it could be highly dilutive to the firm’s shareholders. There could potentially be some limiting factors from a capital and regulatory perspective to an acquisition. TD Bank would have to ensure that the capital charges would not be punitive. However, we believe there is a big opportunity here TD Bank could capitalize on.

Potential revenue synergies When a client enters a branch looking for investment advice today, TD Bank would generally refer clients with investable assets of less than $750,000 to TD Ameritrade. This is simply because the mass-affluent market is not the focal point of TD Bank in the US. It focuses on high net-worth clients instead. However, the current agreement is set up to be a one-way street. Call it Hotel California. TD Ameritrade would not refer this client back to TD Bank at a later stage of the client’s life cycle.

Certainly, TD Bank would benefit from the referred client to some degree. After all, TD Bank would get 25–35 basis points on the cash management services it provides. It also has an economic interest equal to its ownership, which is around 41% of shares outstanding, and there would be some referral fees for the TD Bank employee.

However, over time, we believe that acquiring TD Ameritrade could help TD Bank to expand its wealth management footprint significantly. While there is certainly some level of cross selling, we would expect its share of customers’ wallet to increase. Currently, there are fewer than 30 TD Ameritrade investment consultants sitting at a TD Bank branch office. There are about 1,300 TD Bank branches in the US. TD Bank would also acquire some of the better trading platforms designed for retail clients.

We believe that its relationship with TD Bank gives TD Ameritrade some downside protection whether or not TD Bank chooses to exercise its option to acquire all of TD Ameritrade’s common shares, which could be done at a premium

A Hotel California dilemma: The current system is a one-way street—once TD Bank refers a client to TD Ameritrade, it loses that client forever



To us, the economics of the agreement between TD Bank and TD Ameritrade seem to favor TD Ameritrade. TD Bank could significantly increase its presence here in the US, and AMTD would be able to sell its products and services in a more meaningful manner than it has so far.

Our understanding is that a merger can now be structured as a “short-form” merger if the buyer is able to purchase 90% or more of the target’s outstanding shares. In a “short-form” merger, a vote by the target’s shareholders is not required, eliminating costly and time-consuming proxy votes.

It is also noteworthy that while TD Ameritrade extended its shareholder agreement with TD Bank, allowing it to appoint five members to the board of directors, TD Ameritrade did not do so in respect to the Ricketts family. They will lose their right to designate up to three members to the board of directors in 2016.



Investment considerations

While the company has made significant progress in growing its business, the business model remains fairly narrow While TD Ameritrade has done a great job diversifying its business, the firm continues to be heavily dependent on trading volumes. More recently, we see efforts to appeal to independent RIAs and build out the wealth management business. However, we would expect the firm’s shares to be significantly affected by a decline in trading volumes.

Exhibit 18: AMTD lags Charles Schwab in terms of range of services and products offered

AMTD SCHW ETFC

Brokerage

Full range of investment products

Third-party research

In-house research

Mutual funds

Proprietary funds

Third-party funds

Exchange Traded Funds

Proprietary funds

Third-party funds

Advice - In-House

Investment advice

Tailored portfolio construction

Portfolio management

Separately managed accounts

Financial consultants ~700 1,200 300

RIA relationships ~5,000 7,000

Number of branches 105 325+ 30

Corporate services

Retirement plans (401k)

Equity compensation plans

Banking services

Full service bank

Trust services

Custody services

Administrative trustee services

Average retail client assets -estimate $100,000 $250,000 $65,000

Average age of retail client Mid 40s Mid 50s Mid 40s

Source: Company fillings; RBC Capital Markets

Despite accomplishing a lot, there is room for growth and expansion of services, and we believe that a full-service model—something where Schwab seems to have an edge—provides advantages



AMTD’s earnings are not as sensitive to rising interest rates as that of peers TD Ameritrade is not as asset sensitive as its main competitor, Charles Schwab. TD Ameritrade generates only about 19% of net revenues from spread-based products. While there will be benefits from higher interest rate, we believe that there could be more attractive opportunities to be had from higher rates.

The firm provided some perspective into its interest rate sensitivity in its recent 10Q filing. Accordingly, management expects pre-tax earnings to increase by $109 million to $182 million for a 100 basis point gradual increase in interest rates over a 12-month period. Likewise, a gradual decrease of 100 basis points would lower pre-tax income by about $21 million. As a reference, TD Ameritrade generated pre-tax earnings of $1,270 million in 2014. Assuming a 38% tax rate, a linear relationship between increases in rates and the effect on pre-tax earnings and a share count of 546 million shares (our 2015 estimate), we would expect EPS to increase by about 8 cents—based on the midpoint.

Even if we used the latest data provided during the company’s 1Q/15 earnings call, which assumes an 8 cent increase in EPS for a 25 basis point increase in federal funds rate, that figure would work out to about 16 cents for a 50 basis point increase in rates. This assumes fed funds increase results in a parallel shift to the ICE LIBOR/SWAP yield curve with no sharing with the client. Again, we assume a linear relationship, which might not hold true based on what the company has disclosed for a 100 basis point increase. We demonstrate this below.

The company disclosed during a presentation in February 2015 that a 100 basis point “shock increase” in rates, which is in essence a 100 basis point parallel shift from one day to another, would add 38 cents to earnings per share over a 12-month period. Were we to use this sensitivity model, we would expect earnings per share to increase by 19 cents for a 50 basis point movement. Thus, it is safe to assume that the effect of a 50 basis point increase would add approximately 16–19 cents per share to earnings. Were we to use similar assumptions as for its peers, with 75% of the incremental earnings from higher rates flowing through to investors, 2015E earnings would increase by 12–14 cents per share. As a reminder, we estimate that Schwab’s earnings could rise by 41 cents per share for a 50 basis point movement in rates and E*TRADE Financial’s earnings by $0.24 per share.

While the company had $101 billion of interest rate sensitive assets at the end of December 2014, only about half of the assets would benefit immediately from fed funds rate increases. About $57 billion of IDA would benefit over time from a rise in interest rates. This overall duration of interest-earning assets is 2.2 years.

We estimate that a 50 bps move in rates would lead to incremental earnings of $0.12 to $0.14 per diluted share (9% accretive based on 2014 EPS), compared to $0.31 for The Charles Schwab Corporation (33% accretive based on 2014 EPS), and $0.24 at E*TRADE Financial (21% accretive based on 2014 EPS)



Exhibit 19: Only about 44% of interest-earning assets would react immediately to rising interest rates

$74 $73 $72 $75

$57

$19

$18 $18 $19 $19 $19

$5 $5 $5 $6 $6

$-

$20

$40

$60

$80

$100

Dec '13 Mar '14 Jun '14 Sep '14 Dec '14

IDA Interest earning assets Money market mutual funds


Payment for order flow could affect revenues to the tune of $150 million In order to attract trades, exchanges pay brokers for routing a trade through them. This is called “payment for order flow”. According to current SEC rules, all that the brokers have to do now is disclose whether they receive payment for order flows and provide details of this arrangement.

The SEC is currently reviewing whether brokers act in their clients’ best interest when they “sell the orders” to a trading firm or an exchange for a fee. While we think that there is a low probability of this changing, the SEC could decide to eliminate this practice. The UK Financial Conduct Authority has already changed its policies in 2014 and prohibits brokers from taking payments for orders routed to other firms. Its view is that there is a “clear conflict” of interest caused by these payments.

So far, it does not seem likely that the SEC will follow suit. Mary Jo White, The SEC’s Chairwoman, said in her market structure reform speech that fees and payments for orders create a conflict of interest if these payments are not passed through to customers. However, she did not call for an end to such practices. There is a very high likelihood that the outcome of the SEC’s inquiry into this topic could simply be better disclosures instead of banning this practice.

However, if this practice were banned, it would affect TD Ameritrade more than its peers. The firm disclosed in its 10k that it generated $304 million of order routing revenues in 2014, which is an average of $2.84 per trade. This figure compares to about $100 million for both of its peers.

The firm disclosed that less than half of its order routing revenues are from equity transactions. As a note, the SEC is not reviewing transactions in other types of securities. Assuming half of the $304 million is from equity trades or approximately $150 million in order routing fees, a 100% margin on these revenues, and a 38% tax rate, 2014 earnings per share could have been affected to the tune of $0.17. This calculation is based on an average share count of 554 million shares. To put this figure into perspective, the firm earnings were $1.42 per share in 2014.

While “payment for order flow” is being reviewed by the SEC, we do not anticipate an elimination of these fees as much as additional disclosures around fees

Ban of “payment for order flow” practices could affect TD Ameritrade’s EPS to the tune of 17 cents, which would be significant



We believe that a ban is unlikely. However, if there should be one on payment for order flows, AMTD would stand out to be affected the most of its peer group. Over time, however, we would expect the firm and others to find ways to make up for the lost revenues through other fees and charges.

We are not certain whether trading volume can increase meaningfully from here on, driving revenues higher We would describe TD Ameritrade’s topline as highly dependent on trading volumes. This is despite the fact that the firm has tried to diversify its revenue mix. The exhibit below compares TD Ameritrade’s revenue mix versus its peers. Commission revenues comprise 43% of total net revenues at the firm. This compares to about 15% at Schwab and 25% at E*TRADE.

Exhibit 20: AMTD’s revenues continue to be highly dependent on trading volume (2014)

15%

43%

25%

38%

19% 60%

42%36%

10%

6% 2% 5%

0%

20%

40%

60%

80%

100%

120%

SCHW AMTD ETFC

Commission revenues Spread revenues Fee revenues Other


While there is the probability of trading volumes increasing, we are not certain whether they will increase. Thus, we recommend de-emphasizing increases in trading volume as criteria for stock selection.

We have analyzed various variables to determine whether trading volumes are permanently impaired or if volumes could increase from here on. Please refer to our industry piece for details.

We would summarize our work as follows: We were not able to find conclusive evidence that there are structural changes. This is good news. However, while consumer sentiment has been improving, we have not seen a meaningful improvement in trading volumes. Volatility remains the main factor driving trading volume, and we would not expect volatility to increase along with consumer confidence. Our take is this: Buying shares of discount brokers with the expectation that trading volumes will increase from here does not provide a strong foundation to make a stock call. While we like the optionality of higher trading volumes adding to earnings, we would stay away from basing our stock recommendation on increasing trading volumes. We simply do not have a strong conviction that trading volumes will increase.

TD Ameritrade remains highly dependent on trading volumes, which are uncertain to increase

There could be a positive surprise relative to our 2016 base case scenario, if trading volume improves



https://rbcnew.bluematrix.com/docs/pdf/3f171e31-d6a0-4231-859c-4c3683cb4cbb.pdf

Nonetheless, we have created the table below to show the sensitivity of earnings to changes in average daily client revenue trades, and commission and transaction rates. This exhibit shows the EPS sensitivity around our base case scenario for 2016. It assumes average client revenue trades of 484,500 trades at an average commission and transaction fee per trade of $12.50.

Exhibit 21: EPS could be affected significantly if trading volume exceeds our expectation for 2016

$12.00 $12.25 $12.50 $12.75 $13.00 $13.25 $13.50

400 (17.4%) (15.9%) (14.3%) (12.8%) (11.3%) (9.7%) (8.2%)484.5 (3.7%) (1.9%) 0.0% 1.9% 3.7% 5.6% 7.4%

500 (1.2%) 0.7% 2.6% 4.5% 6.5% 8.4% 10.3%550 6.9% 9.0% 11.1% 13.2% 15.3% 17.4% 19.5%600 15.0% 17.3% 19.6% 21.9% 24.2% 26.5% 28.8%650 23.1% 25.6% 28.1% 30.6% 33.1% 35.5% 38.0%700 31.2% 33.9% 36.6% 39.2% 41.9% 44.6% 47.3%750 39.3% 42.2% 45.0% 47.9% 50.8% 53.7% 56.5%

Avg. commission and transaction fee per trade

Avg

. clie

nt

reve

nu

e

trad

es (

'00

0)

Source: RBC Capital Markets estimates

As for the average commission and transaction fee per trade, this number will fluctuate based on the mix. While futures provide lower commissions, options generate higher commissions than non-derivative transactions. This could have been a reason why TD Ameritrade bought thinkorswim in 2009 for about $600 million. The firm wanted to add a more sophisticated options trading platform to its product offering to address investors’ interest in the options markets.

The exhibit below shows the increase in average daily options volumes at the Options Clearing Corporation, which is the world’s largest equity derivatives clearing organization. Pressure on commission fees could be offset, if trading in options continues to grow.

Exhibit 22: Option volumes have been picking up significantly over the past decade

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

20

06

20

09

20

12

20

15

Avg. Daily Options Volume ('000)

Source: Options Clearing Corporation; RBC Capital Markets

However, while there had been an increase in options volume at TD Ameritrade, recent data show a decline in volumes. The chart below shows trading volumes since the firm bought thinkorswim in 2009.



Exhibit 23: AMTD’s options trading volume has increased significantly since 2009 (% of total volume)

-20%

0%

20%

40%

60%

80%

100%

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

Options Futures Forex Other

Source: Company; RBC Capital Markets

Sharp increase in short-term interest rates could negatively affect the firm While a slow increase in rates would be a “tailwind”, a sharp increase in rates could affect the firm negatively. This would result in net interest spread compression as yields paid on interest-bearing client balances would rise faster than what the firm earns on interest-earning assets.

The consolidated duration of the firm’s assets were 2.2 years as of the end of fiscal year 2014—which ended September 2014. While the firm reduced its duration slightly from 2.3 years as of 3Q/13, it did not do so in a significant manner. While we assume a gradual increase in interest rates in our model, we also appreciate the fact that it is difficult to predict movements. Thus, while this is not a major issue from our perspective, we still think that investors ought to be cognizant of the risks of sharply increasing rates on earnings. We estimate that Charles Schwab’s duration is about 1.9 years while E*TRADE has disclosed that its balance sheet has a duration of approximately 3.0 years.

Investors in TD Ameritrade have limited voting rights As the company disclosed in its recent 10k, TD Bank and J. Joe Ricketts own about 52% of common shares outstanding. This gives them significant control over TD Ameritrade’s future. The outcome of any vote can be influenced by them, and some investors might not like this. TD Bank is allowed to increase its voting rights up to 45% before the shareholder agreement between TD Bank and TD Ameritrade terminates—which could be as late as 2021.

As for the Rickett family, they are limited to owning up to 29% of TD Ameritrade’s common shares. However, this agreement will end in 2016, allowing them to exceed the 29% limit at that point.

Consequently, votes submitted for shareholder approval might not result in an optimum outcome for all shareholders. As TD Ameritrade puts it, TD Bank and the Ricketts are significantly able to influence the outcome of all matters that come before its board.

AMTD’s interest-earning assets have a duration of 2.2 years vs. an estimate of 1.9 years for SCHW and 3.0 years for E*TRADE

TD Bank and the Ricketts family are in the driver’s seat



The stockholder agreement between TD Bank and TD Ameritrade also provides for TD Bank to designate five of the 12 members of the board of directors, and the Ricketts may hold three of the 12 members of the board. The Ricketts family has designated only one member at this point. They will lose the right to designate members to the board of directors starting in 2016, as the shareholder agreement between TD Ameritrade and the Ricketts family was not extended.



Valuation framework We value TD Ameritrade Holding Corporation using a forward-looking P/E multiple approach. We understand that there are biases to this approach as P/E multiples can be overly high during bull markets and depressed during bear markets. We are trying to compensate for this by taking an average P/E multiple over an extended period.

Our 12-month price target for TD Ameritrade is $43 per share. We arrive at our price target using a price-to-earnings multiple of 24.0x on our 2016 calendar year earnings estimate of $1.92 per diluted weighted average shares. We then discount the resulting valuation using a cost of equity of 8.9%. The discount rate is based on a beta of 1.24x, a risk-free rate of 4%, and a market premium of 4%. The discount period is 0.8 years. This leads us to our price target of $43.

Exhibit 24: Price target based on one-plus-a-half methodology

Valuation

CY 2016 EPS $1.92P/E Multiple 24.0x

Valuation $46

Price target - PV $43

Source: Company reports; RBC Capital Markets estimates

Our $43 base case scenario valuation is based on these assumptions for 2016: Net interest margins of 163 basis points by the year 2016; average spread-based balances of $110.5 billion; average market fee-based investment balances of $187.4 billion; daily average revenue trades of 457,873; average revenue per revenue trade of $12.50; and a pre-tax margin of 40.9%. We believe a 24x P/E multiple is justified given historical valuation.

Exhibit 25: While P/E multiples have declined post the financial crisis, we have seen an improvement over the past 2 years

Source: FactSet; RBC Capital Markets Priced as of market close ET, March 24, 2015.



We have looked at P/E multiples going back to April 2003. On average, shares of AMTD have traded at a 24.2x P/E multiple. The average P/E multiple prior to 2008 was 25.9x. As for the period post the financial crisis, our data show that AMTD has been trading at an average P/E multiple of 18.5x. We believe that the decline in the average P/E multiple post the financial crisis is due to the fact that the company’s revenues are significantly exposed to trading volume. With an improvement in consumer sentiment and trading volume, we have seen an uptick in the P/E multiple. Currently, the shares are trading at a 25.5x P/E multiple. Thus, we believe taking a longer-term view and using the historical average of 24x P/E multiple are appropriate.



Risks and price target impediments Drop in consumer confidence & commissions A decline in trading volume and commission rates could negatively affect commission revenues and earnings. Trading volume is to a high degree dependent on market volatility. Usually, higher volatility would contribute to higher trading volume. However, a prolonged period of market volatility in declining markets could lead to a decrease in consumer confidence and thus trading activity.

Prolonged period of low interest rates A prolonged low interest rate environment could compress net interest margins. We assume a gradual increase in interest rates over the coming years. A sharp increase in short-term interest rates could be detrimental to the firm, as the firm’s assets seem to have a longer duration than its liabilities. This could lead to a net interest margin compression and earnings below our estimate.

Unforeseen regulatory changes could impact profitability TD Ameritrade is “lightly” regulated compared to its peers, as it outsources its banking activities to TD Bank. TD Ameritrade is considered a non-bank subsidiary of TD Bank under the Bank Holding Company Act of 1956. Should the firm be subject to tighter regulation, we would expect it to change its stated capital return policy of 40 percent to 60 percent of its earnings to investors. This would result in a decline in dividends and share buybacks, negatively affecting valuation. Regulatory changes are difficult to predict and the outcome of any review is uncertain. The SEC is currently investigating the “payment for order flow” practice and whether broker–dealers provide best execution. An elimination of this practice could affect revenues. The firm received $304 million in payment for order flow in 2014.

Balance sheet growth below our expectation could lead to an earnings miss Changes in average balances, especially client margin, credit, insured deposit account, and mutual fund balances affect operating results. Revenues could fall short of our expectation were balance sheet growth to slow significantly or decline.

There are certain benefits that the firm derives from its relationship with TD Bank. Earnings could decline should TD Bank terminate/modify its relationship with TD Ameritrade. TD Ameritrade has entered an insured deposit account agreement with TD Bank, which allows the firm to generate revenues without having to hold a significant amount of capital against client deposits. Net revenues related to this agreement contributed about 26% of total revenues in 2014. TD Ameritrade would have to hold a significant amount of capital should this agreement be terminated. Revenues would decline, as TD Ameritrade would have to move the cash into segregated cash accounts. These tend to have much lower yields than what the firm can generate by using TD Bank as its sweep option.

Sharp decline in equity markets A sharp decline in equity markets could lead to loss of consumer confidence and a reduction in daily revenue trades, below our estimate. This could affect earnings negatively as trading revenues comprise about 43% of total net revenues.



Quick overview of TD Ameritrade Holding Corp. Founded in 1971 as a local investment bank, TD Ameritrade started operating as a retail discount securities brokerage firm in 1975. Headquartered at Omaha, Nebraska, the company operates as a provider of securities brokerage services and related technology-based financial services to retail investors, traders, and independent RIAs.

The company provides its platform to offer brokerage services to retail investors and institutions through the Internet, a national branch network, and relationships with RIAs. The company claims to be the first brokerage firm to offer the following products and services to retail clients: touch-tone trading, trading over the Internet, unlimited, streaming, free real-time quotes, extended trading hours, direct access to market destinations, and commitment on the speed of order execution. The company also has its own proprietary trade-processing platform.

Exhibit 26: Average client trades per day net new client assets ($B)

372

399

360

374

427

320

340

360

380

400

420

440

2010 2011 2012 2013 2014

34

41 41

5053

$0

$10

$20

$30

$40

$50

$60

2010 2011 2012 2013 2014

Source: Company fillings

In 2014, clients placed 427,000 trades per day, on average, a 6.9% activity rate. Options, futures, and foreign exchange accounted for ~41% of those trades. ~13% of the trades came from the mobile platform, up 61% from last year.

The company gathered $53 billion in net new client assets in 2014 due to strong sales efforts in retail and institutional channels.

Ameritrade products and services, and client offerings are listed below:

Products and services including common and preferred stock, ETFs, options & futures, foreign exchange, mutual funds, margin lending, cash management services, new and secondary issue securities, and fixed income.

Trading and investing platforms include tdameritrade.com Web Platform, a core offering for self-directed retail investors; Trade Architect, a powerful and intuitive web-based platform for active investors and traders; thinkorswim, a downloadable desktop platform designed for advanced traders; and TD Ameritrade Institutional, comprehensive brokerage and custody services for independent RIAs and their clients.

Other offerings includes Investools, a comprehensive suite of investor education products and services for stock, option, foreign exchange, futures & mutual fund; Amerivest, an advisory service that develops portfolios of ETFs or mutual funds, along with cash and cash alternatives; and AdvisorDirect, a national referral service for investors who wish to engage the services of an independent RIA.



Exhibit 27: AMTD snapshot

Snapshot

Founded 1975

Headquarters Omaha, Nebraska, USA

President and CEO Fredric J. Tomczyk

Employees 5,771 (as of September 30, 2014)

Total Revenue US$3.123 Billion (as of September 30, 2014)

Total Client Assets US$672 Billion (as of December 31, 2014) ; Funded client accounts US$6.4 Million

Source: Company fillings

Relationship with TD In June 2004, Ameritrade announced that it had entered into a definitive agreement to acquire TD Bank’s US brokerage business, TD Waterhouse USA. In exchange, TD Bank would receive approximately 32% of ownership of the combined entity. In addition, TD Bank agreed to limit its ownership to a maximum of 39.9% for three years and 45% from years four through 10. Beginning January 24, 2016, if stock repurchases cause TD Bank’s stake to exceed 45%, it is required to bring down its stake to 45%. Also beginning January 24, 2016, TD Bank’s stake cannot exceed 47%. In essence, TD Bank’s stake is capped at 45% ownership of AMTD. This stockholder agreement was revised in January 2014 and extended to January 2021.

This relationship allows AMTD to provide deposit-banking products to its clients without having the capital requirements or the risks of a traditional bank, thereby resulting in low capital intensity and high return on equity. Management has indicated that ~100% of earnings are free cash flow. The mechanics of this are as follows: out of the $90 billion of client cash, some of it is placed in money market mutual funds (~$5 billion), ~$10 billion is on AMTD’s balance sheet, while the remaining $75 billion is sitting on insured deposit account at TD Bank. This allows AMTD the economics of deposit banking without having the capital requirements of deposit banking. This model also has a low credit risk and interest rate risk, because of sophisticated asset liability management techniques used by Ameritrade in association with TD Bank. In addition, TD Bank’s 1,300 US branches provide the opportunity to cross-sell wealth management under its umbrella.



Revenue breakdown

Sources of revenue The company’s major sources of revenues are transaction-based revenues (commissions and transaction fees) and asset-based revenues

Transaction-based revenues This includes commissions and transaction fees on client trades in common and preferred stock, ETFs, closed-end funds, options, futures, foreign exchange, mutual funds, and fixed-income securities. Total client trades, average commissions, and transaction fees per trade mainly drive transaction-based revenue. Order routing revenue, which is also a part of commissions and transaction fees, results from arrangements with many execution agents to receive cash payments in exchange for routing trade orders to these firms for execution. The company expects its revenues from commissions and transaction fees to range from $1.26 billion to $1.49 billion for fiscal 2015.

Asset-based revenues Asset-based revenue is composed of net interest revenue, insured deposit account fees, and investment product fees. Average balances and rates drive the asset-based revenues. Average balances consist primarily of average client margin balances, segregated cash balances, client credit balances, client insured deposit account balances, fee-based investment balances, and securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances.

Asset-based revenues consist of:

1) Net interest revenue Net interest revenue is essentially interest revenue less brokerage interest rate expense. Interest revenues are charges to clients on margin balances maintained in margin accounts, the investment of cash from operations, and segregated cash.

Brokerage interest expense consists of amounts paid to clients based on credit balances in brokerage accounts and interest incurred on securities borrowing and securities lending. Net interest revenue also includes revenue from securities borrowed and securities loaned transaction.

2) Insured deposit account fees Under the agreement with TD depository institutions, TD Bank provides its clients FDIC-insured money market deposit accounts either as sweep vehicles (approximately $6 billion as of December 2014) or as insured deposit accounts (approximately $76 billion). AMTD provides services such as marketing, recordkeeping, and support services for the TD depository institutions with respect to the deposit accounts.

Based on the agreement, AMTD pays a 25 basis point servicing fees to the TD depository institutions. In return, the depository institutions pay AMTD a fee based on weighted average yield earned on the client IDA assets, less the actual interest paid to clients. In essence, AMTD earns fees on the insured deposit accounts and money market mutual funds less interest paid to clients and the 25 basis point contractual fee.

The IDA portfolio comprises of approximately 75% fixed-rate notional investments and 25% floating-rate investments. The company’s recently amended agreement provides downside protection to AMTD in the current low interest rate environment. Under the new agreement,



TD Bank’s servicing fee on floating rate balances is reduced when fed funds less FDIC fees are below 50 basis points.

Under the old agreement, the fee earned was calculated based on two components: (1) the yield on fixed-rate notional investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market and (2) the yield on floating-rate investments, based on the monthly average rate for 30-day ICE LIBOR. For example, if $100 million of deposits should be invested in five-year fixed-rate investments, and on the day the prevailing fixed yield for the applicable five-year US dollar ICE LIBOR-based swaps was 1.00%, then the company would earn a gross fixed yield of 1.00% on that portion of the portfolio. (This would be before any deductions for interest paid to clients, the flat 25 basis point servicing fee to the depository institutions, and the cost of FDIC insurance premiums.) The interest rates paid to clients were set by the depository institutions and were not linked to any index.

The company amended its agreement on January 17, 2013, and the terms now state that the company may designate amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio. In the event that (1) the federal funds effective rate is established at 0.75% or greater, and (2) the rate on five-year US dollar interest rate swaps is equal to or greater than 1.50% for 20 consecutive business days, then the rate earned by the company on new fixed-rate notional investments would be reduced by 20% of the excess of the five-year US dollar swap rate over 1.50%, up to a maximum of 0.10%.

Under the new agreement, the yield on floating-rate investments is calculated daily based on the greater of the following rates published by the Federal Reserve: (1) the interest rate paid by Federal Reserve Banks on balances held in excess of required reserve balances and contractual clearing balances, and (2) the daily effective federal funds rate. In addition, for floating-rate and short-term fixed-rate investments, the servicing fee is equal to the difference of the interest rate earned on the investments less the FDIC premiums paid (in basis points), divided by two. The servicing fee has a floor of 3 basis points and a maximum of 25 basis points.



Exhibit 28: IDA net revenue and average balance trends

54

59 58 5961

64

6769

72 73 73 7274

75

200205 209 206 207 205

200 199 201208

202 202208 207

$0

$25

$50

$75

$100

$125

$150

$175

$200

$225

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

Sep Q' 11 Dec Q'11 Mar Q'12 Jun Q'12 Sep Q'12 Dec Q'12 Mar Q'13 Jun Q'13 Sep Q'13 Dec Q'13 Mar Q'14 Jun Q'14 Sep Q'14 Dec Q'14

Average IDA Balance (billion) IDA Revenue (Million)

Net Yield 1.45% 1.37% 1.42% 1.38% 1.32% 1.25% 1.19% 1.15% 1.09% 1.12% 1.10% 1.10% 1.11% 1.08%

Avg. Fed

funds 0.08% 0.08% 0.11% 0.16% 0.15% 0.16% 0.15% 0.12% 0.09% 0.09% 0.07% 0.09% 0.09% 0.10%

5YR Swap

Rates 1.44% 1.32% 1.17% 1.08% 0.86% 0.81% 0.96% 1.08% 1.67% 1.54% 1.69% 1.74% 1.82% 1.74%

Source: Company reports

Exhibit 29: Interest sensitive assets (in $ billion)

74 $73 $72 $75 $76

$18 $18 $19 $19 $19

$5 $5 $5$6 $6

$97 $96 $96$100 $101

$0

$20

$40

$60

$80

$100

$120

Dec Q'13 Mar Q'14 Jun Q'14 Sep Q'14 Dec Q'14

IDA Interest Earning Assets Money Market Mutual Funds




3) Investment product fees Investment product fee revenue consists of revenues earned on client assets invested in money market mutual funds, other mutual funds, and certain company-sponsored investment programs such as AdvisorDirect and Amerivest. Investment product fees have grown at a compound annual growth rate of 24% since 2010 and now account for 10% of net revenues. Average balances in the quarter ended December 2014 stood at $151 billion compared to $78 billion in December 2011. The company is targeting a growth of 10%–25% in fiscal 2015 with client assets to be in the range of $156–$168 billion.

Exhibit 30: Investment product fee and average balance

$72$75

$79$83 $83

$130

$134

$139

$144

$151

$125

$130

$135

$140

$145

$150

$155

$30

$40

$50

$60

$70

$80

$90


Investment Product Fees ($M) Average Balance ($B)


Asset-based revenue is generated through investing in interest-earning assets and obligates AMTD to pay on interest-bearing liabilities, thereby exposing AMTD to interest rate risk. The current low interest rate environment has led to compression in net interest spread and negatively affected the spread-based revenues. This has also resulted in AMTD voluntarily waiving fees on certain money market mutual funds in order to prevent clients’ yields on funds from becoming negative. An empirical evidence of this trend is witnessed in net interest margin. Net interest margin is defined as a measure of yield on spread-based assets. Net interest margin is calculated for a given period by dividing the annualized sum of net interest revenue and insured deposit account fees by average spread-based assets. Net interest margin stood at 1.69% for fiscal 2012 and has compressed to 1.51% in fiscal 2014. The main culprit of this is a drop of 6 basis points and 20 basis points in FY 2014 and FY 2013, respectively, in the average yield earned on IDA assets. Average yield on IDA assets stood at 1.37% in FY 2012, 1.17% in FY 2013, and 1.11% in FY 2014.



Exhibit 31: Investment product fee and average balance

$72$75

$79$83 $83

$130

$134

$139

$144

$151

$125

$130

$135

$140

$145

$150

$155

$30

$40

$50

$60

$70

$80

$90


Investment Product Fees ($M) Average Balance ($B)


Exhibit 32: Spread based revenue

$335

$348$351

$367 $368

$310

$320

$330

$340

$350

$360

$370

$380


Spread Based Revenue ($M)


However, with the Fed’s commentary suggesting rising interest rates, AMTD stands in good stead to benefit from this change in stance. AMTD expects that a 25 basis point increase in interest rate in FY 2015 will correspond to a positive change of $0.08 in FY 2015 EPS. However, if the Fed increases the interest rates by 100 basis points, the positive effect is expected to be of $0.38 in EPS in Year 1, $0.44 in Year 2, and $0.51 in Year 3. The company has approximately $100 billion in interest rate sensitive assets, and 45% of its revenue is sensitive to interest rates.



Exhibit 33: Spread-based balance & NIM

$90 $91 $91 $93 $94

1.45%1.52% 1.52% 1.55% 1.53%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

$45

$55

$65

$75

$85

$95

$105

$115


Spread-Based Balance ($B) NIM


Exhibit 34: Revenue break-down FY ‘14 vs. FY ’10 ($M)

1,351, 43%

581, 19%

820, 26%

309, 10%

62, 2%

FY '14 Revenues (in $M)

1194, 47%

422, 16%

682, 27%

129, 5%

133, 5%

FY '10 Revenues(in $M)

Commissions and transaction fees Net interest revenue

Insured deposit account fees Investment product fees

Other revenues


Transaction-based revenue, which accounts for ~43% of net revenues, is generated in the form of commissions and fee for trades executed for clients is the biggest source of revenue for the company. The company’s trading platform has the capability to process approximately 1.5 million trades per day and 33,000 client logins per second. With ~43% trading revenue exposure, AMTD positions itself between SCHW (~15% of revenue from trading) and ETFC (~70% revenue from trading) on this metric. Derivatives trading (options, futures, and foreign exchange done on the thinkorswim platform) accounts for nearly 41% of daily trades. Management believes that option trading, due to its nature (i.e., option expiry), is more resilient with a high percentage of repeat trades.



Exhibit 35: Trading trends

414

492

401 403457

41%

39%

42%

41% 41%

38%

38%

39%

39%

40%

40%

41%

41%

42%

42%

43%

0

100

200

300

400

500

600


Avg. Client Trades Per Day (K) % Derivatives of Total Trades per Day


Business segments The company primarily operates in the securities brokerage industry and has no other reportable segments. Substantially, all of the company’s revenues from external clients for the fiscal years ended September 30, 2014, 2013, and 2012 were derived from its operations in the US.



Products Exhibit 36: Products

Common and

preferred stock

Common and preferred stocks, American Depository Receipts, closed-end funds traded on any

U.S. exchange or quotation system.

Exchange-Traded

Funds

Trades in more than 100 commission-free ETFs, provided the funds are held for 30 days or

longer. The Company website includes an ETF screener, along with independent research and

commentary to assist investors in their decision-making.

Options Full range of option trades, including complex, multi-leg option strategies. In 2013, the company

started offering trades in Mini-option contracts which are 1/10 the size of a standard option

contract.

Futures Futures trades, as well as options on futures, in a wide variety of commodities, stock indices and

currencies.

Foreign exchange Trading in over 100 different currency pairs

Mutual funds Portfolio of over 13,000 mutual funds from leading fund families, including a broad range of no-

transaction-fee (“NTF”) funds. Clients can also exchange funds within the same mutual fund

family.

Fixed income Variety of Treasury, corporate, government agency and municipal bonds, as well as certificates

of deposit.

New and secondary

issue securities

Primary and secondary offerings of fixed income securities, closed-end funds, common stock

and preferred stock.

Margin lending Credit to clients that maintain margin accounts. Portfolio margin, which bases margin

requirements on the net exposure of all positions in an account rather than just on individual

positions, is also available for accounts with net liquidating values of at least $125,000.

Cash management

services

Offers FDIC-insured deposit accounts and money market mutual funds to clients as cash sweep

alternatives. Also offers free standard checking, free online bill pay and ATM services with

unlimited ATM fee reimbursements at any machine nationwide.

Annuities Range of competitively priced fixed and variable annuities provided by highly-rated insurance

carriers.

Source: Company report

The company delivers products and services aimed at providing a comprehensive, personalized experience for active traders, long-term investors, and independent RIAs. AMTD offers the following trading and investing platforms:

tdameritrade.com web platform, is an offering for self-directed retail investors that

includes sophisticated tools and services, including alerts, screeners, conditional orders, free fundamental third-party research, and a customizable workspace.

It also provides free planning tools such as Portfolio Planner for efficient creation of a bundle of securities to trade, invest, and rebalance and WealthRuler for realistic assessment of client’s retirement needs.

Trade Architect, is an intuitive web-based platform that helps active investors identify

opportunities and stay informed. The platform includes advanced features such as complex options, Level II equity and option quotes, streaming news from CNBC and Dow Jones, free reports from S&P Capital IQ and Morningstar, and visual position profit/loss analysis.

thinkorswim, is a downloadable desktop platform designed for advanced traders. It

features elite-level trading and analytical tools, and fast and efficient order execution for



complex trading strategies. Through this platform, investors can trade products including stock and stock options, index options, futures and futures options, foreign exchange, and ETFs.

TD Ameritrade Mobile allows on-the-go investors and traders to trade and monitor

accounts from web-enabled mobile devices with features such as alerts, research, and streaming market commentary. This can be done through the TD Ameritrade Mobile app, the more advanced TD Ameritrade Mobile Trader app, or via a mobile browser at the TD Ameritrade Mobile site.

TD Ameritrade Institutional offers comprehensive brokerage and custody services for

independent RIAs and their clients. Advanced technology platform, coupled with personal support from dedicated service teams, allows RIAs to grow and manage their practices more effectively and efficiently.

Other offerings include

Investools Operating as a subsidiary of AMTD, Investools, Inc. offers a suite of investor education products and services for stock, option, foreign exchange, futures, mutual fund, and fixed-income investors. The tools include investing methods designed to teach investors about the selection process of investment securities and active management of their investment portfolios. Course offerings are combined with web-based tools, personalized instruction techniques, and ongoing service and support.

Amerivest Amerivest is an advisory service that helps long-term investors pursue their financial goals. The aim of this service is to develop portfolios of ETFs or mutual funds, along with cash and cash alternatives. Amerivest Investment Management, LLC, a subsidiary of AMTD recommends an investment portfolio based on an investor’s objective, time horizon, and risk tolerance.

AdvisorDirect Advisor Direct is a national referral service for investors who wish to engage the services of an independent RIA. AdvisorDirect refers interested investors to one or more independent RIAs that are unaffiliated with TD Ameritrade and that offer investment management and/or financial planning services to investors served by TD Ameritrade’s branch offices.

TD Ameritrade Corporate Services TD Ameritrade Corporate Services is brokerage services to employees of corporations, either directly in partnership with the employer or through joint marketing relationships with third-party administrators like 401(k) providers and employee benefit consultants. AMTD also offers trust and custody services to a wide range of plan types through TD Ameritrade Trust Company subsidiary.



Distribution TD Ameritrade provides services predominantly through the Internet, a national branch network, and relationships with RIAs.

All services are offered through a nationwide network of over 100 retail branches, located primarily in large metropolitan areas. The company always encourages its clients to use e-mail to contact client service representatives.

The company uses a virtual investment consultant “Ted”. “Ted” is a web tool that allows retail clients to interact with a virtual representative to ask questions regarding products, tools, and services.

The company also uses Twitter as a distribution channel of material information. Financial and other important information regarding the company is routinely accessible through and posted on the company’s website and its Twitter account @TDAmeritradePR. Other potential customers can visit and subscribe to newsfeeds including the most up-to-date corporate financial information, presentation announcements, transcripts, and archives.

The company has embraced and focuses on trades done on mobile phones, with ~13% of daily average revenue trades done on mobile. The company also has a toll-free number for clients who would like to call for their queries. On these calls, the company provides automated answering and directing of calls to the proper department.

In addition, AMTD encourages clients to use e-mail to contact client service representatives. AMTD is then required to respond within 24 hours of the receipt of the email; however, it strives to respond within four hours of receiving the email.



Competitors TD Ameritrade’s competitors include other brokerage firms, many of which provide online brokerage services. These competitors include Financial Corp., The Charles Schwab Corp., Fidelity Investments, and Scottrade, Inc.

The company also encounters competition from established full-commission brokerage firms such as Merrill Lynch and Morgan Stanley Smith Barney, as well as financial institutions, mutual fund sponsors, and other organizations. In terms of DARTs, AMTD claims that it is a market leader in trading, with the company recording 457,000 average trades per day in the quarter ended December 2014.

Exhibit 37: Growth in client assets ($ in billion)

$2,498

$2,025

$672

$290

$2,464

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14Bank of America Merrill Lynch Morgan Stanley

Ameritrade E*Trade

Charles Schwab

Note: TD Ameritrade assets as of December 31, 2014

Source: Publicly available company reports for each period



History Exhibit 38: AMTD history

Year Highlights

1975 Joe Ricketts and three partners open First Omaha Securities in Omaha, Neb as the SEC bans the practice of fixed

brokerage commissions

1983 Ameritrade Clearing, Inc. is established to provide clearing services for broker dealers and registered investment

advisors

1988 Becomes the first company to offer automated trades via touch-tone phone

1995 Acquires K. Aufhauser & Co, the first company to be credited with offering online trading in 1994

1997 Listed in NYSE under the symbol AMTD

1998 Launches its first national advertising campaign, touting a flat-rate commission offering of $8/trade

1999 Offers trading via mobile device with the SprintPCSSM Wireless Web

Acquires National Discount Brokers Corporation, kicking off a decade of industry consolidation

Hired Joe Moglia as Ameritrade’s Chief Executive Officer. Founder Joe Ricketts continues to serve as Chairman of

the Board

2002 Merges with Datek Online Holdings to become the largest brokerage firm in average trades per day

2003 Offers the industry’s first trade execution guarantee of 10 seconds

Launches Amerivest, an online investment advisor that provides portfolio asset allocation recommendations based

on a client’s financial goals and investment risk tolerance

Launches QuoteScope, a unique, visual approach to viewing market data that helped make technical analysis easier

to understand for individual investors

Launches a redesigned client web site, including features like SnapTicketTM and Trailing Stops

2006 Acquired TD Waterhouse USA from TD Bank Financial Group and becomes TD Ameritrade, strategic transition from

focusing primarily on trading to focusing on trading and asset gathering

Launches new tools designed to help investors with their long-term investing strategies, including Bond Wizard,

WealthRuler and Portfolio Planner

Joe Ricketts named as Chairman of the Board and Fred Tomczyk becomes the new President and Chief Executive

Officer of TD Ameritrade

2009Acquires thinkorswim Group Inc., which includes the industry’s fastest-growing broker, thinkorswim, and the

premium investor education business, Investools

TD Ameritrade breaks ground on a 12-story office tower and pavilion in Omaha’s Old Mill neighborhood that will

anchor its new corporate campus

Starts offering complex options, futures and foreign exchange trading to its clients as a product of its ongoing

integration with thinkorswim

2011Launches Trade Architect, a web-based streaming platform which provides technical and fundamental analysis to

intermediate investors

Mobile trades reach 10% of the company’s daily trading volume

With four consecutive years of double-digit net new client asset growth, the client assets reach $500 billion for the

first time

2014 Monthly average client trades per day eclipse 500,000

2013

2001

2004

2008

2010




Management team Exhibit 39: Management team

Name Title Background

Fredric J. Tomczyk President and Chief Executive Officer

Mr. Fredric J. Tomczyk is President, Chief Executive Officer & Director at TD Ameritrade Holding Corp. He is on the Board of Directors at Liberty Property Trust, Knight Capital Group, Inc., TD Ameritrade Holding Corp., Symcor, Inc., Primmum Insurance Co., Security National Insurance Co., Inc., Truscan Properties Ltd., Truscan Property Corp., and Robarts Robarts Research Institute. Mr. Tomczyk was previously employed as Vice Chairman-Operations by TD Bank USA, Inc., President-Wealth Management by TD Canada Trust Co., President & Chief Executive Officer by London Life Ltd., and Vice Chairman by The Toronto-Dominion Bank. He received his undergraduate degree from Cornell University.

William J. Gerber Executive Vice President, Chief Financial Officer

Mr. William J. Gerber, CPA, is Chief Financial Officer & Executive Vice President at TD Ameritrade Holding Corp. He is on the Board of Directors at Bailey Lauerman & Associates, Inc., Clinical Trials Management Group, Inc., and Creighton Preparatory School. Mr. Gerber was previously employed as Audit Manager by Coopers & Lybrand LLP and Vice President by Acceptance Insurance Companies, Inc. He received his undergraduate degree from the University of Michigan.

Marvin W. Adams Executive Vice President , Chief Operating Officer

Mr. Marvin W. Adams is Chief Operating Officer & Executive Vice President at TD Ameritrade Holding Corp. Mr. Adams was previously employed as EVP-Shared Services & Overseeing Operations by TIAA-CREF Life Insurance Co., Chief Information Officer by Ford Motor Co., Chief Information Officer by Bank One Corp., Chief Information Officer by Citigroup, Inc., Head-Worldwide Engineering Systems by Xerox Corp., a Member-Advisory Board by StarVest Management, Inc., President-Fidelity Shared Services by FMR LLC, and a Principal by International Business Machines Corp. He received his undergraduate degree from Michigan State University.

Karen Ganzlin Executive Vice President, Chief Human Resources Officer

Ms. Karen Ganzlin is Chief Human Resources Officer & Executive VP at TD Ameritrade Holding Corp. Ms. Ganzlin was previously employed as Senior Vice President-Human Resources by The Toronto-Dominion Bank. She received her undergraduate degree from the University of Calgary.

David R. Kimm Executive Vice President, Chief Risk Officer

Mr. David R. Kimm is Chief Risk Officer & Executive Vice President at TD Ameritrade Holding Corp. Mr. Kimm was previously employed as Chief Financial Officer & Executive Director by LPL Financial Holdings, Inc., Chief Operating Officer-Private Client Group by Cowen & Co., Chief Risk Officer & Senior Vice President by Wachovia Securities LLC, a Principal by PaineWebber, Inc., and SVP, EVP, Chief Operating & Financial Officer by FMR LLC. He received his MBA from The Leonard N Stern School of Business.

J. Thomas Bradley President, Retail Distribution

Mr. Tom Bradley Jr. is President at TD Ameritrade, Inc. Prior to joining TD Ameritrade, Mr. Bradley was employed as Financial Advisor by Robert W. Baird & Co and by The Northwestern Mutual Life Insurance Co. Mr. Bradley received a BS in Business Administration, with a concentration in Finance from the University of Richmond-Robins School of Business. He earned a Certified Fund Specialist designation and holds Series 4, 7, 8, 24, 53, 63, and 65 securities licenses.

Thomas A. Nally President, TD Ameritrade Institutional

Mr. Thomas A. Nally is President-TD Ameritrade Institutional at TD Ameritrade Holding Corp. He is on the Board of Directors at Foundation for Financial Planning. Mr. Nally was previously employed as a Principal by TD Waterhouse Group, Inc. and Senior Vice President by TD Waterhouse Institutional Services. He received his undergraduate degree from Rider University.

Steven Quirk Senior Vice President, Trader Group

Mr. Steven M. Quirk is Senior Vice President-Trader Group at TD Ameritrade Holding Corp. Mr. Quirk was previously employed as a Principal by Chicago Board Options Exchange, Inc. and Partner by SCMS LLC. He received his undergraduate degree from the University of Wisconsin.




Scenario shown: Base caseSource: Company filings; RBC Capital Markets estimates($ in million) Fiscal Year

1QA 2QA 3QA 4QA 1QA 2QE 3QE 4QE 2013A 2014A 2015E 2016E 2017EIncome Statement Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Transaction-based revenues:Commissions and transaction fees $328 $374 $317 $332 $359 $378 $335 $339 1,171 1,351 1,411 1,497 1,595

Asset-based revenues:Interest revenue $128 $148 $150 $161 $163 $160 $165 $169 476 587 658 728 791 Brokerage interest expense (1) (2) (1) (2) (2) (2) (2) (2) (7) (6) (8) (8) (8) Net interest revenue $127 $146 $149 $159 $161 $158 $163 $167 $469 $581 $650 $720 $783

Insured deposit account fees $208 $202 $202 $208 $207 $220 $231 $243 805 820 901 1,049 1,092 Investment product fees 72 75 79 83 83 86 90 95 250 309 353 452 595

Total asset-based revenues $407 $423 $430 $450 $451 $464 $484 $505 $1,524 $1,710 $1,903 $2,221 $2,470

Other revenues 17 15 16 13 9 9 9 10 69 61 37 40 43

Net revenues $752 $812 $763 $795 $819 $851 $828 $853 $2,764 $3,122 $3,352 $3,759 $4,109

Operating expenses:Employee compensation and benefits $183 $193 $189 $195 $199 $208 $204 $211 692 760 822 880 950 Clearing and execution costs 30 34 35 36 35 43 38 38 110 135 155 173 186 Communications 28 28 29 31 31 32 32 33 112 116 128 138 150 Occupancy and equipment costs 37 40 39 41 41 42 43 44 161 157 169 183 198 Depreciation and amortization 24 24 24 23 23 24 24 24 85 95 95 100 104 Amortization of acquired intangbile assets 23 22 22 23 23 24 24 24 91 90 95 100 104 Professional services 38 37 42 38 37 40 45 41 144 155 163 176 191 Advertising 63 94 48 45 64 98 50 47 239 250 258 266 276 Other 19 17 19 25 22 18 21 27 75 80 88 95 103

Total operating expenses $445 $489 $447 $457 $475 $529 $481 $488 $1,709 $1,838 $1,973 $2,110 $2,261

Operating income $307 $323 $316 $338 $344 $322 $347 $365 $1,055 $1,284 $1,378 $1,649 $1,848

Other expense (income) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Interest on borrowings $6 $6 $6 $6 $9 $8 $8 $8 24 24 33 32 32 Gain/loss on investments, net & Other - - - (10) 1 - - - (57) (10) 1 - -

Total other expense (income) $6 $6 $6 ($4) $10 $8 $8 $8 ($33) $14 $34 $32 $32

Pre-tax income $301 $317 $310 $342 $334 $314 $339 $357 $1,088 $1,270 $1,344 $1,617 $1,816

Provision for income taxes 109 123 120 131 123 119 129 136 413 483 507 614 690 Net income $192 $194 $190 $211 $211 $195 $210 $221 $675 $787 $837 $1,002 $1,126

EBITDA $354 $369 $362 $394 $389 $370 $395 $413 $1,288 $1,479 $1,567 $1,849 $2,056

Earnings per share - basic $0.35 $0.35 $0.34 $0.39 $0.39 $0.36 $0.39 $0.41 $1.23 $1.43 $1.54 $1.86 $2.120 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Earnings per share - diluted $0.35 $0.35 $0.34 $0.38 $0.39 $0.36 $0.39 $0.41 $1.22 $1.42 $1.53 $1.85 $2.10

Dividends declared per share - diluted $0.62 $0.12 $0.12 $0.15 $0.15 $0.15 $0.15 $0.15 $0.86 $1.01 $0.60 $0.88 $1.04Dividend pay-out ratio 177.9% 34.1% 34.8% 38.9% 38.7% 41.8% 38.6% 36.7% 70.6% 71.1% 39.1% 47.5% 49.5%

Weighted average share count - basic (million shares) 551 551 551 547 544 543 542 541 549 550 542 538 532 Dilution (million shares) 4 5 4 4 4 4 4 4 5 4 4 4 4 Weighted average share count - diluted (million shares) 555 556 555 551 548 547 546 545 554 554 546 542 536

Profitability metricsOperating margin 40.8% 39.8% 41.4% 42.5% 42.0% 37.9% 41.9% 42.8% 38.2% 41.1% 41.1% 43.9% 45.0%Net interest margin (basis points) 145bps 152bps 152bps 155bps 153bps 155bps 154bps 153bps 152bps 153bps 154bps 162bps 164bpsPre-tax margin 40.0% 39.0% 40.6% 43.0% 40.8% 36.9% 41.0% 41.8% 39.4% 40.7% 40.1% 43.0% 44.2%Return on average stockholders' equity (annualized) 16.6% 17.1% 16.3% 17.7% 17.6% 16.4% 17.1% 17.3% 14.8% 16.7% 16.9% 18.5% 18.9%ROTE 58.3% 59.4% 53.3% 56.0% 53.5% 48.7% 48.4% 46.7% 56.4% 54.3% 48.2% 45.3% 40.7%EBITDA as a percentage of revenues 47.1% 45.4% 47.4% 49.6% 47.5% 43.5% 47.7% 48.4% 46.6% 47.4% 46.8% 49.2% 50.0%

Fiscal Year

Balance Sheet 1QA 2QA 3QA 4QA 1QA 2QE 3QE 4QE 2013A 2014A 2015E 2016E 2017ECash and cash equivalents $1,309 $933 $1,260 $1,460 $1,877 $1,990 $2,120 $2,260 $1,062 $1,460 $2,260 $3,329 $4,436Segregated cash and investments 5,339 5,216 5,258 5,116 4,531 4,531 4,531 4,531 5,894 5,116 4,531 4,531 4,531 Broker/dealer receivables 1,202 1,114 1,315 1,108 1,196 1,196 1,196 1,196 1,348 1,108 1,196 1,196 1,196 Client receivables, net 9,834 11,250 11,231 11,639 11,646 11,646 11,646 11,646 8,984 11,639 11,646 11,646 11,646 Goodwill and intangible assets 3,285 3,263 3,240 3,218 3,195 3,195 3,195 3,195 3,308 3,218 3,195 3,195 3,195 Other 1,267 1,311 1,275 1,290 1,370 1,370 1,370 1,370 1,240 1,290 1,370 1,370 1,370 Total Assets $22,236 $23,087 $23,579 $23,831 $23,815 $23,928 $24,058 $24,198 $21,836 $23,831 $24,198 $25,267 $26,374

Broker/dealer payables $2,239 $3,032 $2,537 $2,421 $2,079 $2,079 $2,079 $2,079 $1,973 $2,421 $2,079 $2,079 $2,079Client payables 13,379 13,215 14,265 14,497 14,861 14,861 14,861 14,861 13,183 14,497 14,861 14,861 14,861 Notes payables 155 115 150 150 113 113 113 113 - 150 113 113 114 Long-term debt 1,041 1,040 1,041 1,101 1,112 1,112 1,112 1,112 1,052 1,101 1,112 1,112 1,112 Other 894 1,018 888 914 890 890 890 890 952 914 890 1,429 1,964 Total Liabilities $17,708 $18,420 $18,881 $19,083 $19,055 $19,055 $19,055 $19,055 $17,160 $19,083 $19,055 $19,595 $20,130

Stockholders' equity 4,528 4,667 4,698 4,748 4,760 4,873 5,003 5,143 4,676 4,748 5,143 5,672 6,244 Total Liabilities & Stockholders' Equity $22,236 $23,087 $23,579 $23,831 $23,815 $23,928 $24,058 $24,198 $21,836 $23,831 $24,198 $25,267 $26,374

Balance sheet and debt ratiosInterest coverage ratio 59.0x 61.5x 60.3x 65.7x 43.2x 46.3x 49.4x 51.6x 53.7x 61.6x 47.5x 57.8x 64.2xDebt to EBITDA 1.4x 1.4x 1.3x 1.3x 1.3x 1.3x 1.3x 1.2x 1.6x 1.4x 1.3x 1.4x 1.5xLong-term debt to capitalization ratio 18.7% 18.2% 18.1% 18.8% 18.9% 18.6% 18.2% 17.8% 18.4% 18.8% 17.8% 16.4% 15.1%Book value per share - basic weighted average $8.22 $8.47 $8.53 $8.68 $8.75 $8.98 $9.23 $9.51 $8.50 $8.68 $9.51 $10.59 $11.78Tangible equity per share $2.26 $2.55 $2.65 $2.80 $2.88 $3.09 $3.34 $3.60 $2.49 $2.80 $3.60 $4.62 $5.75

FY 2015

FY 2015FY 2014

FY 2014



Required disclosuresConflicts disclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,29th Floor, South Tower, Toronto, Ontario M5J 2W7.

RBC Capital Markets, LLC makes a market in the securities of TD Ameritrade Holding Corporation.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from TD Ameritrade Holding Corporation during the past 12 months. During this time, a membercompany of RBC Capital Markets or one of its affiliates provided non-securities services to TD Ameritrade Holding Corporation.

RBC Capital Markets has provided TD Ameritrade Holding Corporation with non-securities services in the past 12 months.

Explanation of RBC Capital Markets Equity rating systemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative tothe analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), andUnderperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same becauseour ratings are determined on a relative basis.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 monthswith a favorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflectsa security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limitedoperating history that result in a higher expectation of financial and/or stock price volatility.

Distribution of ratingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described below).

Distribution of ratings

RBC Capital Markets, Equity Research

As of 31-Dec-2014

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 897 52.92 290 32.33

HOLD [Sector Perform] 686 40.47 137 19.97

SELL [Underperform] 112 6.61 6 5.36



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References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists includethe Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Dividend Growth (RL 8),the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: Global Equity (U.S.) (RL 11).RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios.The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the datea security was removed from a Recommended List.

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'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressurein the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptibleto a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, andthe firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term tradeideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, andinvestors should make their own independent decisions regarding any securities or strategies discussed herein. Please contactyour investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research.

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