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Will No-Fee Trading Jeopardize TD Bank’s (TSX:TD) U.S. Growth?

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Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has long been Canada’s best-performing bank stock. With a 130% capital gain over the last 10 years and dividend growth averaging about 10% a year, it’s been a market beater when both gains and income are factored in.

The main driver of TD’s superior performance has been its U.S. business.

In the U.S., TD has two very lucrative assets: a wholly owned retail business and a 42% stake in the online brokerage TD Ameritrade (NASDAQ:AMTD). Both of these businesses are growing at a rate unheard of for domestic-focused Canadian banking, which has powered earnings growth far in excess of what the other Big Six banks are capable of.

For years, this has helped propel TD way past the competition. But now, faced with a rising threat, the bank’s crucial U.S. operations may be in jeopardy. No-fee trading is rapidly gaining popularity North of the border, with more brokerages adding free trades every day. To compete, TD Ameritrade will need to get on board, which may make it harder to profit off its service.

TD Ameritrade eliminating commissions

Early in October, a number of brokerages announced that they’d be switching to no-commission trading following pressure from no-fee trading apps.

TD Ameritrade was one of the brokers that made the switch.

As you might expect, the news was taken extremely poorly, with the stock falling 26% in a single day.

Since then, TD Ameritrade shares have recovered somewhat but are still down from before the date of the announcement.

How it could affect the business

A lack of trading commissions/fees will make it harder for TD Ameritrade to make money.

Trading commissions have long been the main source of revenue for trading firms. Without that lucrative revenue source, it’s not clear how brokerages like TD will make up the difference.

One early indication is that the elimination of trading fees may not apply to all classes of stocks. In its most recent quarterly press release, TD Ameritrade said that it would not charge fees on online U.S.-exchange listed stocks but would continue charging them for OTC and foreign purchases. That would seem to suggest that the lack of fees won’t totally cripple the company’s fee earnings.

However, there’s still the question of how the company will make up for the loss of U.S. online trading revenues. The company’s Q3 report does mention significant earnings from investment products and advisory services; perhaps those revenues could be increased. For now, though, it appears the company will take a hit in online trading revenue.

Foolish takeaway

TD Bank has long been the best-performing Canadian bank. Now, it’s facing its first major challenge in a long time. The bank’s TD Ameritrade investment is a major source of earnings, and it’s now in jeopardy. Most likely, over the long term, the brokerage will figure out a way to make up for lost trading revenues with advisory and research services. In the short run, headwinds abound.

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Fool contributor Andrew Button owns shares of TORONTO-DOMINION BANK.

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