We are maintaining our 'Neutral' recommendation on
E*TRADE Financial Corporation
) as we believe that the risk-reward profile for the company is
currently balanced. Our decision is primarily based on the
company's better-than-expected second quarter 2012 results.
However, the volatility in global markets remains a major concern.
TD AMERITRADE (AMTD): Free Stock Analysis
E TRADE FINL CP (ETFC): Free Stock Analysis
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E*TRADE's second-quarter 2012 earnings per share marginally
exceeded the Zacks Consensus Estimate. The upbeat performance
reflected an upturn in brokerage accounts, though total daily
average revenue trades (DARTs) declined. The decrease in operating
expenses also acted as a tailwind. Moreover, improved credit
quality and healthy capital position were the positives.
Yet, reduced revenue was a dampener. E*TRADE's initiatives to
reduce balance sheet risk look promising; however, it will put
near-term pressure on the net interest margin (NIM).
E*TRADE's competitive strategy is to attract and retain customers
by emphasizing its low-cost, easy to use and innovative products.
These initiatives and customer services are expected to further
bring down the attrition rate of the annual brokerage accounts. The
company is well-positioned to meet the needs of both traders and
investors in the near term as well as over the long-term. As a
result of decline in DART levels in the second quarter, the company
is concentrating on loss-mitigation strategies like short sales,
loan modifications and transfers to better services.
The company's international restructuring strategies, which were
initiated in 2008, have improved its operating leverage to some
extent. Further, it continues to streamline the balance sheet risk
by reducing credit risks in loan portfolios. These initiatives are
expected to significantly improve E*TRADE's financial strength.
On the flip side, the low interest rate environment has pressurized
the spread as well as net interest income. Additionally, the global
macroeconomic uncertainty refrained many retail investors from the
market and continued to stress the real estate sector. Until and
unless the economy gains stability, we will be concerned on the
company's buoyancy factor. Moreover, the stringent regulatory
environment remains a headwind.
Although the company is taking initiatives to strengthen its
client-advisor relationship, it is likely to experience a pressure
on DARTs due to a disengagement of retail traders. Sluggish
economic recovery, strict regulatory environment and investors'
reluctance to invest in the equity markets can further put pressure
on the DARTs.
Shares of E*TRADE currently retain a Zacks #3 Rank, which
translates into a short-term Hold rating. One of its peers -
TD Ameritrade Holding Corporation
) also retains a Zacks #3 Rank.