Asset Base Continues To Grow For E*Trade, Trading Activity Slows Down

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ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

Brokerage firm E*Trade Financial (NASDAQ:ETFC) released its operating metrics for November, reporting a 7% sequential decline in trading activity after a surge in October. E*Trade’s daily average revenue trades (DARTs) were flat compared to the year-ago period. However, the brokerage had a positive month in terms of net client assets during the month.

E*Trade witnessed significant growth in its major revenue streams in Q3, with trading commission revenues rising by 5% year-on-year (y-o-y) to $108 million while its asset-based business grew by almost 12% over the prior year quarter to $269 million. The growth in these revenue streams was largely driven by an increase in trading activity and a gain in client assets complemented by a rise in yield rates. Continuing the trend from the previous quarter, E*Trade’s trading metrics and assets under management have improved in Q4 thus far. Below we take a look at some key metrics and our forecasts for E*Trade.

We have a $21 price estimate for E*Trade’s stock, which implies a 10% discount to the current market price. E*Trade’s stock price has risen by nearly 15% since its it released its Q3 earnings at the end of October.

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See our full analysis for E*Trade Financial

Interest Revenues To Get A Boost From Growing Asset Base

E*Trade earns interest income through holding credit balances, which include margin, real estate and consumer loans and by holding customer cash and deposits. E*Trade’s average client balances for brokerage accounts at the end of November were 4% higher than the year-ago period at $40.8 billion. In the most recent quarter, the net yield on these assets rose, due to which revenues generated by interest on these balances grew by 12% y-o-y to $269 million. The implied yield on these assets was almost 10 basis points higher than the prior year quarter at 2.7%. We currently forecast the average yield for the year to be around 2.6% and resulting revenues to be over 10% higher than the prior calendar year at nearly $1.1 billion.

Subdued Volumes Through November Only A Temporary Setback

October was a solid month for most brokerage firms, with a rise in trading activity due to the increased level of volatility in the market, especially derivatives trading. Global exchange operators such as CME Group (NASDAQ:CME) and NASDAQ OMX Group (NASDAQ:NDAQ) reported both sequential and annual increases in contracts traded during October, with interest rate and foreign exchange derivatives contributing significantly to the growth (see: Can CME Keep Up Trading Momentum?) In addition to derivatives, NASDAQ reported a 34% y-o-y increase in the number of shares traded on its U.S. platform in October. [1] Corresponding to these metrics, the average trades per day on E*Trade ‘s platform were up by over 9% sequentially and year-on-year to 175,000 trades per day in October.

However, trading activity subsided in November, due to which E*Trade’s DARTs declined by 7% over October to 163,000 trades per day for the month. Despite the sequential decline, November volumes were flat over the year ago period. According to the latest volume reports at leading exchanges, trading activity has picked up again in December thus far, which could be good news for online brokerages.

On the other hand, E*Trade successfully added about 9,000 net new brokerage accounts during the month, compared to about 2,000 net new accounts in October. As a result, the total number of brokerage accounts at E*Trade stood at over 3.1 million accounts at the end of November, about 5% higher than the year-ago period. ((E*Trade Monthly Metrics For November, E*Trade Investor Relations, December 2014)) The average number of trades per account in the quarter ended September was at just over 3 trades per account for the quarter. We currently forecast E*Trade’s annualized trades per account to be 12.7 trades per brokerage account for the full year.

Impact On Margins

E*Trade’s operating expenses in Q3 were nearly flat both sequentially and annually at $253 million. As a result of growth in net revenue, its operating income was up by over 40% y-o-y to $153 million. According to our estimates, E*Trade’s adjusted EBITDA margin has been over 40% through the calendar year thus far, significantly higher than the prior year levels of about 32-33%. E*Trade’s adjusted EBITDA Margin stood at about 40.2% in Q3. We have a conservative forecast for the company-wide EBITDA margin of around just under 40% in 2014, while we expect it to increase gradually through the end of our forecast period.

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Notes:
  1. NASDAQ OMX Monthly Trade Metrics For October, NASDAQ OMX  Investor Relations, November 2014 []