Moody's affirms Scottrade
Global rating agency Moody's affirmed the Baa3 long-term issuer rating of Scottrade Financial Services, Inc. The outlook has been changed to negative from stable.
Scottrade's Baa3 rating recognizes its historically profitable online brokerage franchise, simple balance-sheet, and management's conservative financial policy. Until fiscal year ending 2012, Scottrade's business model has produced stable long-term growth through changing market environments.
Global rating agency Moody's said that the change in Scottrade's outlook to negative reflects recent weak operating performance trends. These trends may signal a weakening in the firm's core business, and this could lead management to increase risks in other areas to generate returns.
Scottrade has been negatively affected by a challenging operating environment for retail brokers that has been characterized by reduced trading commissions and lower trading volumes. Scottrade's pre-tax income for fiscal year end 2012 was 70% below the comparable period for 2011. This weak performance resulted from reduced trading activity and commissions as well as significantly higher expenses - - principally related to personnel, advertising, and interest costs. While reduced trading activity has negatively affected all retail brokers, Moody's believes that Scottrade may be facing greater challenges than its peers in adding new customers to help offset these trends.
Scottrade has positioned itself as a lower price provider of self-directed trading compared to the peer group (as measured by average commissions per trade). This makes the company more reliant on net interest income from its bank to generate revenues and income. However, in today's low interest rate environment, net interest margin compression has made this a more challenging strategy.