E*TRADE Financial Corporation
) reported third-quarter 2012 net loss of 10 cents per share,
well below the Zacks Consensus Earnings Estimate of 13 cents.
Moreover, results compared unfavorably with net income of 14
cents per share reported in the prior quarter.
E TRADE FINL CP (ETFC): Free Stock Analysis
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Lower-than-expected results were affected by reduced new
brokerage accounts with slump in total daily average revenue
trades (DARTs). In addition, increase in operating expenses acted
as a headwind for the company in the ongoing challenging
macro-economic environment. Yet, improved revenue with total loan
portfolio contractions were the positives for the quarter.
E*TRADE reported third-quarter net loss of $28.6 million against
net income of $39.5 million in the prior quarter.
Performance in Detail
Net revenue surged 8.3% sequentially to $490.0 million in the
quarter, driven by overall higher non-interest income, though
partially offset by reduced net operating interest income.
However, the reported revenues outpaced the Zacks Consensus
Estimate of $442.0 million.
The DARTs for the reported quarter decreased 7% sequentially to
129,000. Net new brokerage assets reported were $1.9 billion,
significantly down from $2.2 billion in the prior quarter.
At the end of the quarter, E*TRADE reported 4.4 million customer
accounts, including 2.9 million brokerage accounts. Net new
brokerage accounts of 18,000 dipped considerably from the prior
quarter's level of 46,000.
Net operating interest income plummeted 6.5% sequentially to
$260.9 million in the quarter under review. The decline was due
to lower interest income, though partially offset by reduced
interest expenses. Net interest spread in the quarter was 2.28%,
down from 2.44% in the last quarter.
However, non-interest income improved to $229.2 million, up 32.3%
sequentially. The elevation compared to the prior quarter was due
to increased net gains on loans and securities and high fees and
service charges, though partially offset by decreased
Total operating expense moved up 2.7% sequentially to $289.0
million. The upsurge was primarily attributable to higher
professional services, increased compensation and benefits
expenses and elevated other operating expenses. These expenses
were partially offset by lower advertising and market development
Overall credit quality was mixed during the quarter, affected by
newly identified bankruptcy filings. E*TRADE's provision for loan
losses more than doubled to $141.0 million on a sequential basis.
Net charge-offs also surged 31.3% sequentially to $158.5 million.
However, allowance for loan losses decreased 3.3% sequentially to
For E*TRADE's entire loan portfolio, special mention
delinquencies dipped 6% sequentially, and total at-risk
delinquencies slumped 7% sequentially.
E*TRADE reduced its balance sheet risk further. The company's
loan portfolio was $11.1 billion at the end of the reported
quarter, down by $616 million from the prior quarter, mainly
related to $458 million of paydowns.
The company maintained bank capital ratios well above the
regulatory well-capitalized threshold. As of September 30, 2012,
E*TRADE reported Tier 1 common ratio of 10.9%, up from 10.2% in
the prior quarter and 9.3% in the year-ago quarter.
Total risk-based capital ratio was 19.3%, up from 18.0% in the
prior quarter and 17.2% in the prior-year quarter. Tier 1
leverage ratio was 7.9%, in line with the last quarter though
down from 8.1% in the prior-year quarter.
Performance by Peer
Among E*TRADE's peers,
Charles Schwab Corporation
) third-quarter 2012 earnings of 19 cents per share were
marginally ahead of the Zacks Consensus Estimate of 17 cents.
Also, this compares favorably with the year-ago quarter's
earnings of 18 cents. The results in the reported quarter also
included a non-recurring state tax benefit of about $20 million.
Improved asset management and administration fees as well as
balance sheet restructuring actions were the positives for the
quarter. Yet, higher operating expenses and provision for loan
losses as well as a fall in net interest income and trading
revenue partially dented the results.
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 the key factors in executing
E*TRADE's strategy to profitably expand trading and investing
Further, E*TRADE's initiatives to reduce balance sheet risk
appear to be promising, although, it will put near-term pressure
on the net interest margin. The company's capital position and
improving delinquency trends are impressive. Yet, amid
challenging economy, reducing DARTs and new brokerage accounts
remain a matter of concern.
E*TRADE currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating. Considering the fundamentals, we also
maintain our long-term 'Neutral' recommendation on the stock.