We have upgraded our recommendation on E*Trade Financial Corporation(ETFC) to Outperform from Neutral based on improved first-quarter 2011 results.
In April, E*TRADE reported first-quarter 2011 earnings of 16 cents per share, substantially better than the Zacks Consensus Estimate of 12 cents. This also compared favorably with a loss of 11 cents in the prior quarter and 25 cents in the prior-year quarter. Better-than-expected results were backed by higher operating net revenue, strong brokerage business, decrease in provision for loan losses and improved expense management.
E*TRADE returned to profitability in the first quarter of 2011, driven by significantly improved metrics in brokerage business, an increase in interest and non-interest revenue and positive trends in loan portfolio. We expect the company’s positive trend to continue in the upcoming quarters owing to a significant increase in high-quality net new brokerage accounts that are utilizing E*TRADE's broad range of trading and investment products and services.
E*TRADE implements a growth strategy through a valuable active trader franchise, deep penetration into the long-term investor segment, enhancement of the customer accounts quality and sustainable growth in brokerage accounts. These strategic operations have enhanced the credit trends with declining charge-offs, improved delinquencies within the home equity loan portfolio, and lowered the provision for loan losses. We believe that E*TRADE’s strategic efforts have the potential to drive organic growth in the long term.
E*TRADE continues to streamline its balance sheet risk by reducing credit risk in its loan portfolios. The company continued to make progress during the first quarter of 2011 by reducing balance sheet risks as its legacy loan portfolio contracted by $0.9 billion from the prior quarter, including $0.7 billion related to prepayments or scheduled principal reductions. The successful completion of the balance sheet modification will significantly improve the company’s financial strength in the medium to long term.
Although E*TRADE is reducing the size of its balance sheet, this is reflecting a decrease in savings and other bank-related customer deposits and net new customer assets, along with a reduction in total assets, thereby creating a weak liquidity and a rickety scenario for the future. We expect net interest margin to remain pressured as well.
Recent regulatory issues also remain a headwind for the company. It is difficult to predict at this moment the specific impact the Dodd-Frank Act issued in July 2010 and the yet-to-be-written rules and regulations will have on the company. E*TRADE expects its compliance costs to be up slightly given the legislation materially changes the regulatory environment for the financial services industry in which it operates. Further, the Federal Reserve Bank announced that it expects to issue a notice of proposed rule-making in 2011 that will outline how the Basel III Accords will be implemented in case of the U.S. institutions.
E*TRADE currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, its closest competitor – Jefferies Group Inc. (JEF) retains a Zacks #4 Rank (a short-term “Sell” rating).
E TRADE FINL CP (ETFC): Free Stock Analysis Report
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