E*TRADE Disappoints - Analyst Blog

E*TRADE Financial Corporation's (ETFC) fourth-quarter net loss of 11 cents per share was significantly below the Zacks Consensus Estimate of earnings of 4 cents. The loss compares unfavorably with earnings of 3 cents in the prior quarter but favorably with loss of 36 cents per share in the prior-year quarter.

Results improved sequentially on the back of operating net revenue and strong brokerage business, but were affected by an increase in provision for loan losses and higher operating expenses. However, results were disappointing on the basis of year-over-year comparison due to lower operating revenue, offset partly by lower provision for loan losses and decreased operating expenses.

For fiscal 2010, E*TRADE narrowed loss on a year-over-year basis. The company reported net loss of 13 cents per share, below the Zacks Consensus Estimate income of 1 cent. However, this compares favorably with $11.85 loss per share reported in the prior year, which includes $773 million or $7.06 loss per share after-tax non-cash charge for corporate debt extinguished related to the company's $1.74 billion debt exchange.

E*TRADE reported fourth quarter net loss of $24 million, compared with a net income of $8 million in the prior quarter and a loss of $67 million in the prior-year quarter. For fiscal 2010, net loss was $28 million, down from the loss of $1.3 billion in the prior year.

Performance in Detail

In the fourth quarter of 2010, total net revenue increased 5.8% sequentially, but declined 1.0% year over year to $517.9 million. However, the revenue substantially surpassed the Zacks Consensus Estimate of $324.0 million. For full-year 2010, net revenue reported was $2.1 billion, down 4.5% year over year. However, revenue outpaced the Zacks Consensus Estimate of $1.3 billion.

The total daily average revenue trades (DARTs) for the reported quarter was 151,000, up 19% sequentially, but edged down 5% year over year. For fiscal 2010, DARTs were 151,000, down from 179,000 in the prior year, due to a decline in trading activity.

Net new brokerage assets reported were $2.4 billion in the quarter, up from $1.4 billion in the prior quarter and $1.5 billion in the prior-year quarter. For full year 2010, assets were $8.1 billion, up from $7.2 billion in the prior year.

At the end of the quarter, E*TRADE reported 4.2 million customer accounts, which included a record 2.7 million brokerage accounts. In the fourth quarter of 2010, net new brokerage accounts scaled up to 28,000 from 7,000 in the prior quarter. For full-year 2010, the company added 54,000 net new brokerage accounts.

Net operating interest income was up 2% sequentially, but down 5% year over year at $304.9 million in the quarter. The sequential increase was due to a $1.8 billion increase in average interest-earning assets, largely offset by a seven basis points decrease in the net interest spread.

For fiscal 2010, net operating interest income declined 7.7% year over year to $1.2 billion. In the fourth quarter of 2010, net interest spread was 2.88%, down from 2.95% in the prior quarter.

Total operating expense increased 14.2% sequentially, but fell 4.3% year over year to $304.7 million. The sequential increase was attributable to higher compensation, clearing, advertising, and professional services costs.

The year-over-year decline was due to lower compensation and clearing, offset by higher advertising and professional services costs. For full-year 2010, total operating expenses were $1.1 billion, down 8.3% year over year.

Overall credit quality metrics trends were mixed in the quarter. E*TRADE's provision for loan losses increased 27.6% sequentially to $194 million, including a $60 million rise in the qualitative component of the loan loss reserve. Net charge-offs were $195 million, down from $222 million in the prior quarter, while allowance for loan losses remained flat sequentially at $1.0 billion.

Balance Sheet

E*TRADE reduced its balance sheet risk further, with its loan portfolio contracting $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 threshold. As of December 31, 2010, E*TRADE reported Bank Tier 1 capital ratios of 7.29% to total adjusted assets and 13.71% to risk-weighted assets.

Performance by Peers

E*TRADE's closest competitor, Charles Schwab Corporation's (SCHW) reported earnings of 18 cents per share as of December 31, 2010, substantially ahead of the Zacks Consensus Estimate of 10 cents. The results benefited from improved revenue and an increase in interest-earnings assets. However, a rise in non-interest expenses and decline in trading revenue were the downside.

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 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, stabilization in the credit quality suggests that management can now focus more on the company's core business. The company reported an improvement in the brokerage business and the retail investors' environment is visible.

Initiatives to reduce balance sheet risk are encouraging but it will add near-term pressure on interest margin. Yet, the company's capital position and restructuring initiatives are encouraging, but an increase in operating expenses can have an adverse effect.

E*TRADEcurrently 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.

 
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