E*TRADE Financial Corporation ETFC recently received a credit rating upgrade from Moody's Investors Service, the rating services arm of Moody's Corporation MCO. Notably, the agency raised E*TRADE’s issuer rating as well as senior unsecured bond rating to baa3 from ba2. This has effectively upgraded the company’s credit to investment grade status from its prior status of junk bond.
Additionally, the long-term bank deposit rating for E*TRADE Bank was upgraded to A3 from Baa2; while the agency affirmed its short-term bank deposit rating of Prime 2. Overall, E*TRADE’s rating outlook remains stable.
Moody’s started its review of E*TRADE’s rating for an upgrade after the latter announced aggressive restructuring measures to improve its debt position and loan profile in Sep 2015. These measures included elimination of its $4.4-billion high-cost wholesale funding obligations from its balance sheet, which was accomplished in the third quarter of 2015.
Moreover, the company has been replacing these funding sources by on-boarding low-cost customer deposits from third parties onto its own balance sheet. Notably, it intends to onboard $2 billion in customer deposits during the fourth quarter of 2015, and targets to achieve a balance-sheet size of $50 billion by early 2016. Also, the company has successfully managed to lower its total debt level to $1 billion.
As per Moody’s, these measures will substantially reduce the company’s annual operating interest expense by around $150 million, which, in turn, will improve profitability of E*TRADE Bank and benefit debt service capacity of E*TRADE Financial Corporation in the future.
Notably, E*TRADE now has a pro forma debt leverage ratio of 1.3x EBITDA (excluding debt extinguishment costs and interest on eliminated wholesale funding arrangements), and a pro forma 12-month trailing pre-tax margin of 36% (through Sep 2015). More importantly, Moody’s expects the company to maintain leverage at the current level, and remains optimistic about strong margin performance in the upcoming quarters.
Additionally, the rating agency anticipates E*TRADE’s competent management and active board to take a “credit positive” approach, while considering future expansionary and capital deployment measures.
Following the upgrade, adjusted baseline credit assessment (bca) for E*TRADE Bank stands at baa2, a notch higher than that of the above-mentioned issuer and senior unsecured bond rating of baa3. This reflects better credit quality of E*TRADE Bank compared with the company’s non-banking subsidiaries.
Going forward, we expect E*TRADE to adopt a credit-centric approach to diversify its cash generating capabilities through new and profitable revenue streams, as such effort is likely to win another rating upgrade from Moody’s.
E*TRADE currently sports a Zacks Rank #1 (Strong Buy).
Other favorably placed investment broker stocks are Arlington Asset Investment Corp. AI and Evercore Partners Inc. EVR. Both these stocks hold a Zacks Rank #2 (Buy).
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