E*TRADE Plans to Restructure, Moody's Upgrade in the Cards

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E*TRADE Financial CorporationETFC is making headway with yet another restructuring move. The New York-based investment brokerage firm is set to eliminate its entire $4.4 billion of wholesale funding obligations from its bank balance sheet by Sep 30, 2015. The disclosure has prompted Moody's Investors Service - the rating services arm of Moody's Corporation MCO , for a possible upgrade in the company's ratings.

Following E*TRADE's announcement on Tuesday, the stock price reacted positively, shooting up over 7% in a day's trading. The company stated that the restructuring move will lead to significant improvement in the company's balance sheet composition with removal of high-cost funding and creating capacity to onboard low-cost deposits over several upcoming quarters.

Owing to the restructuring, E*TRADE mentioned that it will record a pre-tax charge of around $410 million in the current quarter. The company would offset the impact of this charge by decreasing its balance sheet size in line with reduction in liabilities, utilizing excess bank capital, and contributing $110 million of parent capital to the bank. Notably, the company expects to report net loss in the current quarter.

According to Paul Idzik, Chief Executive Officer, "As the company continues to deploy excess capital, this action provides us with very clear and immediate benefits in the form of accelerating the path to normalized earnings and creating opportunities for balance sheet growth funded by core customer deposits. E*TRADE is in a position of financial strength that it has not seen in many years, and we are eager to keep progressing down this path, unlocking value for our owners each step of the way."

Moody's Rating Action - Two Notches Upgrade?

E*TRADE's announcement has led Moody's to place several ratings on review for upgrade. These include ratings of E*TRADE Financial Corporation's Senior unsecured rating of Ba2, Issuer rating of Ba2 and E*TRADE Bank's Long-term bank deposit rating of Baa2. Also, the rating agency affirmed E*TRADE Bank's Prime-2 short-term deposit rating.

Moody's stated that E*TRADE Bank's exit from costly repurchase agreements and Federal Home Loan Bank advances, and its plans to replace these funding sources through on-boarding of low-cost deposits, will substantially reduce the company's annual operating interest expense by around $150 million, which will consequently improve future profitability of E*TRADE Bank and benefit debt service capacity of E*TRADE Financial Corporation.

Regarding the pretax charge of $410 million, Moody's mentioned it as a "prudent use of E*TRADE's regulatory capital," considering the long-term benefits of the restructuring move.

Moody's will also review a number of E*TRADE's credit challenges as these are important for the assessment of the overall credit strength of E*TRADE. However, the rating agency noted, "consideration of E*TRADE's positive developments and credit challenges could result in an upgrade of E*TRADE's senior unsecured and issuer ratings of up to two notches into investment grade status."


E*TRADE continues to streamline its balance sheet risk by reducing credit risk in its legacy loan portfolios. The company also exhibited successful efforts in achieving its target of reducing debt to $1 billion. The debt reduction goal was part of its capital plan set in 2012. As of Jun 30, 2015, corporate debt declined 25% year to date to $1.02 billion. Since 2012, debt service costs have been reduced significantly.

Further, in January 2015, the company obtained regulatory approval for moving its two U.S. broker-dealers - E*TRADE Clearing LLC and E*TRADE Securities LLC - from under E*TRADE Bank. E*TRADE Securities and E*TRADE Clearing were moved from under E*TRADE Bank in Feb 2015 and Jul 2015, respectively. The reorganized structure will aid in simplification of distribution of capital generated by those entities to the parent.

We remain encouraged by the brokerage firm's restructuring moves and several other efforts including revamping its brand, launching new products and services and improving its technology space to offer better digital experience to customers.

E*TRADE currently carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the finance space include Arlington Asset Investment Corp. AI and Piper Jaffray Companies PJC . Both stocks sport a Zacks Rank #1 (Strong Buy).

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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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