E*TRADE (ETFC) Q3 Earnings & Revenues Beat, Costs Flare Up

E*TRADE Financial CorporationETFC reported third-quarter 2017 adjusted earnings of 55 cents per share, which easily surpassed the Zacks Consensus Estimate of 51 cents.

Better-than-expected results reflected increased net revenues and a benefit to provision for loan losses. Daily average revenue trades (DARTs) increased year over year. Further, the quarter witnessed rise in customer accounts and reduced delinquencies. However, elevated operating expenses were on the downside.

E*TRADE's net income for the quarter was $147 million or 49 cents per share compared with $139 million or 51 cents in the prior-year quarter. Reported results include net expense of $16 million or 6 cents per share associated with losses on early extinguishment of debt and other items.

Revenues Escalate, Expenses Flare Up

Net revenues for the reported quarter came in at $599 million, surpassing the Zacks Consensus Estimate of $598.8 million. Revenues were up 23.3% from the year-ago quarter.

Net interest income climbed 36.2% on a year-over-year basis to $391 million, primarily due to higher interest income. Net interest margin was 2.85%, up from 2.59% in the prior-year quarter.

Non-interest income of $208 million jumped 4.5% from the year-ago quarter. The reported quarter recorded higher fees and service charges.

Total non-interest expenses flared up 25.4% year over year to $405 million. The increase was due to rise in almost all the expense components except depreciation and amortization costs.

Improved Trading Performance

Total DARTs increased 35% year over year to 206,000 in the reported quarter, including 32% in derivatives. At the end of the quarter, E*TRADE had 5.4 million customer accounts (including 3.6 million brokerage accounts), up 3% from the year-ago quarter.

Further, the company's total customer assets were $365.3 billion, up 19% year over year. Brokerage-related cash grew 8% year over year to $52.3 billion.

Notably, customers were net buyers of about $1.3 billion of securities compared with net sellers of $2.4 billion in the prior-year quarter. Net new brokerage assets totaled $2.2 billion, down from $5.4 billion in the year-ago quarter.

Credit Quality Marks Significant Improvement

Overall, credit quality improved at E*TRADE. Net recoveries were $7 million in the reported quarter compared with $4 million in the prior-year quarter. Also, the company witnessed a provision benefit of $29 million compared with $62 million in the year-ago quarter.

Allowance for loan losses plummeted 60% year over year to $94 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 5% year over year to $102 million in E*TRADE's entire loan portfolio. Notably, total delinquent loans slumped 34% year over year to $268 million.

Balance Sheet and Capital Ratios

E*TRADE's loan portfolio totaled $2.8 billion at the end of the reported quarter, down from $3.6 billion as of Dec 31, 2016.

As of Sep 30, 2017, E*TRADE had total assets of $60.4 billion compared with $49 billion as of Dec 31, 2016.

The company's capital ratios remained strong. As of Sep 30, 2017, E*TRADE reported Tier 1 risk-based capital ratio of 37.8% compared with 35.1% in the year-ago quarter. Total risk-based capital ratio was 42.4%, up from 40.7% in the prior-year quarter. Tier 1 leverage ratio was 7.2% compared with 7.3% in the year-ago quarter.

During the reported quarter, the company repurchased 4.6 million shares at an average price of $40.64 for a total cost of $187 million.

Other Development

Concurrent with earnings release, E*TRADE also announced the acquisition of a Denver, CO-based technology solutions and custody services provider to the independent Registered Investment Adviser (RIA) market, Trust Company of America (TCA). The cash deal is worth $275 million.

The deal is expected to be neutral to earnings in 2018 and accretive in 2019 on achievement of full run-rate synergies. Proceeds from issuance of non-cumulative perpetual preferred stock are likely to fund the transaction. The acquisition, which awaits certain customary closing conditions and regulatory approvals, is anticipated to end in second-quarter 2018.

Our Viewpoint

E*TRADE's trading performance and credit quality have shown consistent improvement. We anticipate the company's focus on core operations and strategic initiatives to lead to an improved profitability. However, we remain cautious, given the competitive pressure and macro headwinds.

E*TRADE Financial Corporation Price, Consensus and EPS Surprise

E*TRADE Financial Corporation Price, Consensus and EPS Surprise | E*TRADE Financial Corporation Quote

E*TRADE currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Reflecting top-line strength, The Goldman Sachs Group, Inc. 's GS third-quarter 2017 results recorded a positive earnings surprise of 16.5%. The company reported earnings per share of $5.02, comfortably beating the Zacks Consensus Estimate of $4.31. Furthermore, the bottom line witnessed 3% year-over-year improvement.

Impressive performance of wealth management division and higher investment banking fees drove Morgan Stanley 's MS third-quarter 2017 earnings of 93 cents per share, which handily outpaced the Zacks Consensus Estimate of 81 cents. The reported figure was 15% above the prior-year quarter.

The Charles Schwab Corp. 's SCHW third-quarter 2017 earnings of 42 cents per share came in a penny above the Zacks Consensus Estimate. Also, the figure increased 20% from the year-ago quarter. Revenue growth (driven by a rise in interest income), lower level of fee waivers and no provisions were among the positives. In addition, there was an impressive rise in total client assets and new brokerage accounts. Nevertheless, higher expenses and a decrease in trading revenues remained headwinds.

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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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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