E*Trade Earnings Preview: Growing Client Assets To Drive Q2 Earnings

July 22nd, 2014 by Trefis Team
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ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) is scheduled to report its Q2 2014 earnings on July 23. The company reported a 13% year-over-year increase in its net revenues to $475 million in the previous quarter and a net income of $97 million – E*Trade’s highest quarterly net income in seven years. [1] The company attributed much of the growth in revenues to the rise in trading activity in the March quarter. E*Trade’s 198,000 Daily Average Revenue Trades (DARTs) in Q1 were its highest since 2009.

Although E*Trade’s DARTs grew in April compared to the year-ago period, they declined in May. [2] A similar trend was observed in the May volume figures of competing brokerages such as Charles Schwab (NYSE:SCHW) and TD Ameritrade (NYSE:AMTD). Moreover, Schwab’s DARTS were down on a year-on-year (y-o-y) basis for the month of June as well. 

See our full analysis for E*Trade Financial

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Customer Base Increasing Despite Low Trading Activity

E*Trade added about 95,000 net new brokerage accounts in 2013, ending the year with nearly 3 million accounts. Comparatively, the company added 98,000 net new accounts in just the first five months of 2014 (through May) to take its total brokerage accounts to nearly 3.1 million. Furthermore, the implied revenue per trade (calculated by dividing the net revenue generated by trading commissions by the total number of trades conducted) fell from $11.13 per trade in 2013 to $10.64 in Q1. The company attributed this decline to a higher mix of equity trading compared to options trading.

However, major exchange operators in the U.S. such as NASDAQ OMX Group (NASDAQ:NDAQ) reported a slight decline in equity trading volumes during the quarter. [3] A higher mix of derivatives traded in Q2 could imply improved revenue per trade for the company. The company is likely to provide more color on the mix of derivatives and equity trades in its earnings report. Despite lower DARTs in the June quarter, the company continued to add new accounts at a rate similar to Q1. We forecast E*Trade to reach a customer base of 4 million customers through the end of our forecast period.

Net Interest Revenue To Gradually 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. The yields on these assets have been low for most brokerages and financial institutions over the last few years due to the low interest rate environment. However, net interest-earning assets grew by 4% y-o-y to around $42 billion and the yield on these assets improved by 14 basis points to 3.05% in Q1 over the prior year quarter, which led to a 10% annual growth in net interest revenues to $266 million. 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.

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Notes:
  1. E*Trade Q1 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
  2. E*Trade Monthly Metrics For May, E*Trade Investor Relations, June 2014 [↩]
  3. NASDAQ OMX Monthly Volumes, NASDAQ OMX Investor Relations, June 2014 [↩]