E*Trade Financial (NASDAQ:ETFC) will hold a conference call on April 18 to discuss its Q1 2013 performance and other related matters. The firm appointed a new CEO, Paul Thomas Idzik, in January just three days before its Q4 earnings call and this will be the first time when we will hear from him about the company’s planned course of action.
The call also follows a major rejig in E-Trade’s board of directors which was initiated by Citadel’s decision to sell its stake in the company. Citadel, a large hedge fund, was the largest shareholder in E*Trade and was pushing the company to consider selling itself to a competitor. We believe that with Citadel’s exit that pressure is gone and the company’s management can now focus solely on turning around the company. The new CEO has already announced a massive cost reduction initiative and this earnings call will be crucial in providing more details about the company’s strategy going forward.
We expect the brokerage to continue adding accounts and client assets as in the past, but we remain concerned about the overall performance of the brokerage business because of the persisting weak trading environment. The performance of the firm’s mortgage loan portfolio, which has suffered massive losses since the mortgage crisis, also adds to the risk profile.
Our current price estimate for E*Trade is around $9, which is almost in line with the current market price.
Asset Gathering Should Remain Strong
Charles Schwab (NYSE:SCHW) recently announced that its Q1 revenues are up 8% on strong asset gathering activity during the quarter, and there is no reason why we should not expect a similar performance from E*Trade. E*Trade attracted nearly $1 billion in net new brokerage assets during each of the first two months of 2013 and expecting a similar performance in March does not seem unreasonable. The fact that the last few months have witnessed a strong market rally should also supplement E*Trade’s total client asset figures by boosting the valuation of the client assets already under its custody.
Net New Accounts Are Also Likely To Stay Up
E*Trade has done a good job in attracting net new accounts over the last year, and we expect more of the same as the firm continues to offer attractive discounts and bonuses to prospective customers. The company reported 120,000 net new brokerage accounts in 2012, well above 99,000 accounts it added in 2011.
Trading Volumes Remain A Pain Point
E*Trade earns about 20% of its net revenues through commissions on trade. Unfortunately, this business has suffered tremendously due to an industry-wide decline in volumes and E*Trade’s daily average revenue trades (DARTs) for the fiscal year 2012 were 12% below the 2011 levels.
The situation is likely to persist as the trading activity was already fizzling out in February after showing some signs of recovery in January. February DARTs for E*Trade were 152,154, down 10% from the same period last year.  We expect a gradual recovery in trading volumes in the coming years as macro-economic conditions improve.
Loan Delinquencies Should Decline But Risks Persist
One of the major reasons why E*Trade’s stock has been battered in the past several years is its loan delinquency data, which originates from the risky mortgage loan portfolio on its balance sheet. The company had heavily bet on such loans before the mortgage crisis and was almost pushed to bankruptcy when the crisis hit.
E*Trade is currently in the process of “de-risking” its balance sheet and recently reported that the total delinquent loans had declined by 6% since the end of 2012 to reach $780 million in February 2013.  We believe this is a positive news and expect the portfolio to shrink even further as the economy improves. However, there are significant risks involved in the process and the firm could face severe losses if the economy worsens.Notes: