E*TRADE Reports In Line - Analyst Blog

E*TRADE Financial Corporation's (ETFC) third-quarter earnings of 3 cents per share was in line with the Zacks Consensus Estimate. The income for the reported quarter compared unfavorably with 12 cents in the prior quarter. However, the company reported loss of $6.74 per share in the prior-year quarter.

E*TRADE reported a third-quarter net earnings of $8 million, compared with a net income of $35 million in the prior quarter and a loss of $275.6 million in the prior-year quarter.

Though results were affected by a decline in trading business and revenue, lower provision for loan losses and lower operating expenses were the positives.

Quarter in Detail

Total revenue for the quarter decreased 8.4% sequentially and 15% year over year to $489 million. The decline in revenue was due to weak trading volume during the reported quarter. However, revenue reported substantially surpassed the Zacks Consensus Estimate of $323 million.

The total daily average revenue trades (DARTs) for the reported quarter was 127,000, down 26% sequentially and 30% year over year. Net new brokerage assets reported was $1.4 billion, down from $2.1 billion in the prior quarter, but up from $1.1 billion in the prior-year quarter.

At the end of the quarter, E*TRADE reported 4.2 million customer accounts, which included a record of 2.7 million brokerage accounts. In the third quarter of 2010, net new brokerage accounts were 7,000 compared with 18,000 in the prior quarter.

Net operating interest income was down 1% sequentially and 7% year over year to $299 million. The sequential decrease was due to $1.3 billion decline in average interest-earning assets, largely offset by a six basis point increase in the net interest spread. In the third quarter of 2010, net interest spread was 2.95%.

Total operating expense decreased 3% sequentially to $267 million, attributed to lower compensation, clearing, advertising and professional services costs.

Overall credit quality improvement was recorded in the quarter. E*TRADE's provision for loan losses for the reported quarter decreased 8.4% sequentially and 56% year over year to $152 million. Net charge-offs were $222 million, down from $225 million in the prior quarter, while allowance for loan losses declined by $70 million to $1.0 billion.

Balance Sheet

E*TRADE was continual in reducing balance sheet risk as its loan portfolio contracted by $1.0 billion from the last quarter, of which $0.8 billion was due to prepayments or scheduled principal reductions.

The company maintained Bank capital ratios well above the regulatory well-capitalized thresholds. As of September 30, 2010, E*TRADE reported Bank Tier 1 capital ratios of 7.41% to total adjusted assets and 13.75% to risk-weighted assets.

Performance by Peers

Last week, E*TRADE's closest competitor The Charles Schwab Corporation (SCHW) released its third quarter results reporting net earnings of 18 cents per share, substantially surpassing the Zacks Consensus Estimate of 9 cents.

Our Take

The competitive position in the market for brokerage business depends on trading customers, predominantly active traders. As the long-term investing customer group is less developed compared with the trading customers, there is an opportunity for future growth as and when the long-term customers expand.

Development of innovative online trading and long-term investing products and services, delivery of advanced customer service, creative and cost-effective marketing and sales, and expense discipline can be considered as key factors in executing E*TRADE's strategy to profitably grow trading and investing business.

Additionally, somewhat stabilization in the credit quality reflects that management can now focus more on the company's core business.

E*TRADE currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.