We have reaffirmed our Neutral recommendation on E*Trade Financial Corporation (ETFC). The reiteration follows the detailed analysis of the company’s fundamentals in light of the current economic environment and its continuous efforts to streamline the risks related to the balance sheet.
For E*TRADE, Daily Average Revenue Trades (DARTs) surged in the first two months of 2012, just like at one of its peers – Charles Schwab Corp. (SCHW). In 2011, the DARTs climbed by 5% as E*TRADE continues to increase accounts and assets. Moreover, the company is aggressively focusing on loss-mitigation strategies, including short sales, loan modifications and transfers to better servicers.
E*TRADE continues to streamline its balance sheet risk by reducing the credit risk in its loan portfolios. It lowered the risks related to its balance sheet as its legacy loan portfolio declined by $3 billion in 2011, while delinquencies improved in double digits.
Moreover, the company continues to maintain a modest cash position, and its bank capital ratios are substantially in excess of the regulatory requirements. The successful completion of the balance sheet modification will considerably improve the company’s financial strength in the medium to long term.
E*TRADE reported fourth-quarter 2011 net loss of 2 cents per share, significantly worse than the Zacks Consensus Estimate of an earnings of 20 cents. Quarterly results deteriorated, driven by a downturn in brokerage business in the course of considerable market volatility. Yet a decrease in operating expenses was positive for the quarter.
Though the company is taking initiatives to strengthen its client-advisor relationship, it could experience a pressure on DARTs as a result of disengagement of retail traders. Recent regulatory issues also remain a headwind to the company.
We believe that the risk-reward profile for E*TRADE is currently balanced, and hence, we have reiterated our Neutral recommendation on the shares. E*TRADE currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
E TRADE FINL CP (ETFC): Free Stock Analysis Report
SCHWAB(CHAS) (SCHW): Free Stock Analysis Report
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