How Slower Economic Recovery Could Affect E-Trade

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E-Trade ( ETFC ) is a financial services company that provides online brokerage and related services to individual retail investors under the E*TRADE Financial brand. The company also provides investor-focused banking products to retail investors. It competes with firms like Charles Schwab Corporation ( SCHW ), Ameritrade ( AMTD ), Wells Fargo ( WFC ) and Bank of America ( BAC ).

We have a $16.88 price estimate for E-Trade stock , roughly in line with market price.

Understanding E-Trade's Biggest Source of Value

Contrary to popular belief, revenues earned by online brokerage firms per trade carried out by their customers is not their biggest source of value. These firms earn a bulk of their revenues in the form of interest on the assets they hold - which include mortgage-backed securities, investment securities and even loans. Our estimates show that the net interest earned on assets contributes to almost two-thirds of E-Trade's value.

Below we highlight scenarios for our E-Trade price estimate under a scenario of sluggish global economic recovery.

10% Downside: E-Trade's Interest Earning Assets Grow at a Slower Pace

Loans, mortgage-backed securities and investment securities constitute the majority of E-Trade's interest earning assets. These assets were at their peak in 2007, and were worth more than $56 billion. However, this total value dropped to $40 billion in 2010 because of the global economic downturn.

We currently forecast a 5% annual growth in these assets for the years to come. However, if growth instead hits a more moderate annual pace of 2%, these assets would reach $46 billion by the end of our forecast period - representing a downside of 10% to our $16.88 price estimate.

8% Downside: E-Trade's Net Interest Yield on Loans, Deposits & Securities Improves

This yield has typically been around 3% for E-Trade, with the value being 2.97% in 2010. We currently forecast the interest rates to improve to allow E-Trade net yields of 4% over the next 5 years.

If interest rates do not improve quickly enough, the yield may only reach 3.5% by the end of the same period. This represents a downside of 8% to our $16.88 price estimate.

See our full analysis and $16.88 price estimate for E-Trade



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 , Investing Ideas , Stocks , US Markets

Referenced Stocks: AMTD , BAC , ETFC , SCHW , WFC

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