E*Trade Earnings Preview: Growing Trade Volumes And Asset Base To Drive Performance

E*Trade Financial (NASDAQ:ETFC) is scheduled to report its Q1 2014 earnings on April 23. The company deleveraged its balance sheet significantly in 2013, which should combine with an increase in interest-earning assets to help improve net interest income. In addition to net interest revenue earned, trading volumes have been increasing for the past few quarters, which we expect to continue to increase in the coming years.

We have a price estimate of $16 for E*Trade’s stock, which is about 20% below the current market price.

See our full analysis for E*Trade Financial

Net Interest Revenue Likely To Pick Up

E*Trade’s interest earning assets were down to about $40 billion in 2013, an 8% decrease from 2012, mainly due to deleveraging to pay back debt of the parent company. Secondly, due to the low interest rate environment, yields on these assets have been low for most brokerages and financial institutions over the last few years. E*Trade’s net yield on interest-earning assets declined from 2.43% in 2012 to 2.37% last year. However, we expect the net yield to pick up this year since the Fed has started QE tapering initiatives. Additionally, we expect net interest-earning assets to grow at a CAGR of about 5% for the next few years as the company continues to attract more clients to its trading platform. By our estimates, revenues generated from net interest on assets are likely to grow for the first time since 2008.

Growing Trade Volumes And Commission Revenues

E*Trade added about 95,000 net new brokerage accounts during 2013, to take its total brokerage accounts to nearly 3 million. Although the 3.2% growth in the number of accounts in 2013 was less than that in 2012 (4.3%), a strong positive for the company was that it posted a record low attrition rate of 8.8%. We expect the number of brokerage accounts to continue to grow at a similar rate going forward. Moreover, the implied revenue per trade and the calculated trading activity per account increased in 2013. We expect both to continue to increase on a healthier trading environment and improving trader sentiment. Going forward, commission revenues could improve significantly as each multiplier – trading activity per account,  implied revenue per account and the number of accounts – is expected to grow.

Deleveraging Complete

From mid-June 2012 to December 2013, E*Trade worked to refinance the corporate debt of the parent company. During these months, E*Trade completed about $8.7 billion of deleveraging actions through sweep deposit transfers, directing cash to money funds and reducing wholesale funding. Additionally, the company undertook cost-cutting measures and effectively reduced its gross operating expenses by $110 million – most notably by exiting its non-core market making business by selling G1 Execution Services. ^[1] With those actions largely complete, E*Trade is positioned strongly for growth, driven by growing trade volumes and expected growth in net interest revenues.

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1. E*Trade Seeking Exit From Market Making Unit, Bloomberg, July 2013 [↩]