E*TRADE Earnings Wiped Out On Unexpected Bankruptcy Data

by Trefis Team
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A substantial fall in revenue earning trades and an increase in provisions for loan losses took its toll on E*TRADE Financial (NASDAQ:ETFC) as the online brokerage reported a net loss of $29 million for the third fiscal quarter of 2012. [1] Daily Average Revenue Trades (DARTs) were down 22% from the third quarter of 2011 as uncertain economic conditions deterred investors. Despite this slump in investor confidence, the company was able to build some foundations for future growth, by adding 18,000 new brokerage accounts in the three months ending September. The total brokerage accounts added so far in 2012 is 110,000, already ahead of the net total of 99,000 that the company acquired in the whole year of 2011.

Our price estimate for E*TRADE is $8, 10% below the current market price for the stock. We will shortly update our model to accommodate the latest earnings reported by the company.

See Our Full Analysis for : E*TRADE Financial|Charles Schwab|Ameritrade

So Why Was There A Loss

In addition to the $13 million compensation expense related to the departure of former CEO Steven Freiberg, who was replaced by interim CEO Frank Petrilli in August, E*TRADE also reported a 43% increase in provision for losses. The management attributed this increase to an unexpected increase in bankruptcies reported by an unnamed third-party provider which handled the data related to the brokerage’s loan portfolio. The service provider had defaulted on reporting approximately $90 million of loans for which the respective borrowers had filled bankruptcies. E*TRADE writes down loans at a collateral value when a borrower files for bankruptcy. The sudden increase in loans that were written down in the last quarter led to a $50 million increase in provision for losses, which had a deleterious effect on the bottom line.

Mobile Trades Might Help The Company Recover

A change in product mix, which included a higher percentage (25%) of options trades that are quite popular in the capricious market environment, allowed an increase in average commission earned per trade from $10.76 in the third quarter of 2011 to $11.24. This helped offset the effect of the massive fall in DARTs on net revenues earned, which were down 3% from the prior year at $490 million. The revenues from principal transactions were down 18% while the revenues from fees and service charges increased by 5%.

Mobile trades seem to be gaining popularity, accounting for almost 7% of the total trades executed by E*TRADE. Last year, mobile trades accounted for 5% of the total trades. E*TRADE is focused on developing this branch as mobile phones offer great flexibility to users looking to make trades on-the-go. The company recently launched its sixth mobile application, designed or Windows phone users. (See E*TRADE Launches Mobile Application For Windows Phone for more details)

In addition to adding acquiring new brokerage accounts, E*TRADE was also successful in retaining most of its existing customers. The last quarter was the brokerage’s second best ever, in terms of low attrition rate. By accumulating brokerage accounts, E*TRADE is establishing a base to grow on. Increased brokerage accounts will eventually lead to higher business in terms of trades as global macro-economic conditions improve in the long-term. By establishing a foothold in the mobile services domain, E*TRADE seems to be on the right path for future growth.

Assets Set To Grow

Client assets managed by E*TRADE grew by 7% over the last year as the company ended the quarter with customer assets of $204 billion. Around a third of these assets are acquired through financial consultants who generally acquire larger accounts than traditional channels. The company has recognized this fact and is aggressively growing its team of consultants. The number of financial consultants currently employed by E*TRADE stands at 270, a growth of 40% over the last two years.

The company is also launching new products and services like the recently launched one-stop rollover platform that allows individual investors to 401(k) savings from an employer to a E*TRADE managed account. We forecast a steady increase in E*TRADEs assets under management.

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Notes:
  1. E*TRADE Financial Management Discusses Q3 2012 Results – Earnings Call Transcript, Seeking Alpha, 18th October, 2012 []
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