E*Trade Financial (NASDAQ:ETFC) reported fourth quarter and full year-end results on January 25, posting a net loss of $6 million for the quarter after reporting profits for the first three quarters of the year.  Q4 results did improve compared to last year’s fourth quarter loss of $24 million. Reduced trading activity and low interest yields also ate into the firm’s revenues, which decreased by almost 8% from Q4 2010. Management did not seem uneasy with the reported loss as the company reported a full-year profit for the first time in five years. Plunging trading revenues also hurt the fourth quarter results of other online brokers such as Ameritrade (NYSE:AMTD) and Charles Schwab (NYSE:SCHW), which reported earnings the previous week.
We have revised our price estimate for E*Trade to $9, which is about 10% ahead of the current market price. Our updates reflect the company’s Q4 results, prevailing uncertainty in the markets and the Fed’s update that interest rates are likely to remain low through 2014.
Lower Volumes, Low Interest Rates Sting Revenues
Non-interest and interest income both declined in the quarter compared to the prior year. Heightened market volatility in the last months of 2011 inhibited trading activity thus reducing commissions and related revenues in Q4. Razor thin interest yields are hurting the company, for which net interest on assets makes up about 63% of the Trefis price estimate. With the recent update from the Fed that interest rates might remain unchanged at current low levels until 2014, we think that low interest income will continue to weigh on the company’s improvement in revenues and earnings.
Mixed Credit Performance
Mixed credit quality during the quarter was not well-received by investors as the company’s shares plunged by more than 10% after the earnings announcement. The company increased its provision for loan losses to $123 million, up 25% sequentially. Special mention delinquencies increased 2% sequentially but declined 21% from the year ago period.
Management attributed the increase in provisions primarily to the company’s transition to a new bank regulator, from the OTS to the OCC. It wrote down $15 million to accommodate loans in foreclosure and added $67 million to the qualitative component of the reserve. Expenses decreased 11% sequentially but was about on par with the prior year quarter. Our model for the company has been updated to take into account these results and the near-term impact of a persisting low-interest rate environment. We have also updated our discount rate for the firm to take into account the uncertainty in the markets and the volatility of its stock.
We expect the company to heighten its focus on growing its trading and investing business, expense management and reducing its balance sheet risks in order to remain profitable despite tough macroeconomic conditions. E*Trade is trying to attract long-term client assets from sources such as the investment retirement segment. It is also enhancing its online trading platform and revamping its marketing and advertising campaign to attract more investing, not just trading activity. We believe these efforts will likely help the company return to profitability, though provisions for losses and a reduction of its loan portfolio may be a burden on earnings in the next few quarters.Notes:
- E*TRADE Financial Corporation Announces Fourth Quarter and Full Year 2011 Results, E*TRADE Financial Press Release [↩]