E*TRADE's February DARTs Perk Up - Analyst Blog


On Wednesday, E*TRADE Financial Corporation ( ETFC ), an online brokerage firm,released its Activity Reportfor the month of February 2012, recording a sequential rise in average U.S. trade as investors turned positive due to the improvement in equity markets. However, the trades dropped from the year-ago period.

For the reported month, Daily Average Revenue Trades (DARTs) were 168,973, up 16% sequentially. However, on a year-over-year (y/y) basis, it went down 9%. Broker performance is generally measured through DARTs. These represent the number of trades from which, brokers can expect commissions or fees.

At the end of the month, total number of accounts came in at approximately 4.4 million, of which, about 2.8 million were brokerage accounts, 1.1 million were stock plan accounts and 0.5 million were banking accounts.

For the month, total brokerage accounts of E*TRADE included gross new brokerage accounts of 39,023 and net new brokerage accounts of 18,120. In February, net new brokerage assets were $1.9 billion, rising from $0.7 billion in the prior month. Total brokerage accounts and net new brokerage accounts indicate the company's ability to attract and retain trading and investing customers.

During the month, E*TRADE's customer security holdings were $133.7 billion, up 6% sequentially. Further, brokerage-related cash climbed 5.5% sequentially to $30.6 billion, while customers were net sellers of approximately $30 million in securities. Bank-related cash and deposits surged to $7.9 billion in the reported month from $7.8 billion in January 2012.

Total special delinquencies (30 to 89 days delinquent) decreased 12% from December 2011 and 9% from the prior month to $412 million in E*TRADE's entire loan portfolio. Total delinquencies (30 to 179 days delinquent) dropped 8% from December 2011 and 6% from the prior month to $652 million.

Quarterly Performance

As of December 31, 2011, DARTs were 140,000, down 15% sequentially and 7% y/y. Net new brokerage assets reported were $1.7 billion in the quarter, significantly down from $2.6 billion in the prior quarter and $2.4 billion in the prior-year quarter.

E*TRADE's provision for loan losses jumped 25% sequentially to $123 million. Net charge-offs were $120.3 million, down from $157.0 million in the prior quarter, while allowance for loan losses increased sequentially to $823 million from $820 million. Overall, credit quality was mixed during the quarter

For E*TRADE's entire loan portfolio, special mention delinquencies inched up 2% sequentially, but declined 21% y/y; while the total at-risk delinquencies edged down 1% sequentially and fell 27% y/y.

E*TRADE further reduced the risks related to its balance sheet. The company's loan portfolio ended the quarter at $13.2 billion, down by $664 million from the prior quarter and $3.0 billion from the year-ago quarter, mainly due to $544 million and $2.3 billion of paydowns , respectively.

Peer Performance

Among E*TRADE's peers, Charles Schwab Corp. ( SCHW ) also released its Monthly Activity Report for February 2012, recording a sequential rise of 7% and a year-over-year growth of 5% in DARTs. The company's DARTs were 500,100 during the month under review.

Last week, another peer, TD Ameritrade Holding Corporation ( AMTD ) also recorded a sequential rise, but the company's average U.S. trades for February 2012 declined on a year-over-year basis. The company's DARTs were 409,000, up 9% sequentially but down 10% y/y.

Our Take

The competitive position of brokerage business in the market depends on trading customers, predominantly active traders. As the long-term investing customer group is less developed against the trading customers, there is an opportunity for future growth whenever long-term customers increase.

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

Furthermore, E*TRADE's initiatives to reduce balance sheet risk are encouraging, although it may add near-term pressure to the interest margin. Though the company's capital position and improving delinquency trends are positive, volatility in global markets remains a cause of concern.

Yet, improvement in new brokerage accounts suggests that management is focusing more on the company's core business and the decreasing operating expenses reflect better expense management.

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

TD AMERITRADE ( AMTD ): Free Stock Analysis Report
E TRADE FINL CP ( ETFC ): Free Stock Analysis Report

SCHWAB(CHAS) ( SCHW ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AMTD , ETFC , SCHW



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