E*Trade’s Trade Volumes Improve In January After Strong End To 2014

E*Trade Financial (NASDAQ:ETFC) released its operating metrics for January, reporting a 12% year-on-year decline in trading activity after a surge in trade volumes in Q4. However, E*Trade’s daily average revenue trades (DARTs) rose by 4% over December levels to 173,000 trades per day. Furthermore, the brokerage had a positive month in terms of average client asset balances, compared to the prior year period. In its most recent earnings, E*Trade reported a 3% year-on-year (y-o-y) increase in net revenues to $461 million.The brokerage’s asset-based business grew by 10% year-on-year (y-o-y) to $283 million, and high trading volumes led trading commissions to rise by 5% over the prior year quarter to $105 million. Additionally, the account maintenance fees and services charged by the brokerage also rose by 14% to $48 million during the quarter. ^[1] Continuing the trend from the previous quarter, E*Trade’s trading metrics and assets under management have improved in Q1’15 thus far. Below we take a look at some key metrics and our forecasts for E*Trade.

See our full analysis for E*Trade Financial

Volumes Rise From December Levels

Most brokerage firms including E*Trade, Schwab and TD Ameritrade witnessed a y-o-y decline in trade volumes in January. This can be partially attributed to the surge in trade volumes in January 2014 leading to a tougher year-over-year comparison. Moreover, trading activity for E*Trade improved on a sequential basis. Correspondingly, the average trades per day on E*Trade ‘s platform were up by almost 5% sequentially to 173,000 trades per day in January. Comparatively, E*Trades daily average revenue trades (DARTs) for Q4 stood at 168,000 trades per day, which was roughly the same as the full year average. With over 3.1 million accounts at the brokerage firm by the year-end, this translated to about 13.4 average number of trades per account for the full year. We currently forecast E*Trade’s annualized trades per account to rise to over 14.5 trades per brokerage account for the full year.

On the other hand, E*Trade successfully added over 7,000 net new brokerage accounts during the month. As a result, the total number of brokerage accounts at E*Trade stood at over 3.15 million accounts at the end of January, about 5% higher than the year-ago period. ((E*Trade Monthly Metrics For January, E*Trade Investor Relations, February 2015)) We currently forecast the total number of brokerage accounts at E*Trade to increase 3.3 million by the end of 2015, and to over 4 million through the end of our forecast period.

Interest Revenues To Get A Lift From Growing Client Assets

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 January were 3% higher than the year-ago period at $40.0 billion. In 2014, the net yield on these assets rose, due to which revenues generated by interest on these balances grew by 11% y-o-y to $1.1 billion. The implied yield on these assets was 22 basis points higher than the prior year quarter at 2.63%. We currently forecast the average yield for the year to be around 2.95% and resulting revenues to be 20% higher than the prior calendar year at $1.3 billion.

Impact On Margins

E*Trade’s operating expenses in 2014 were slightly lower than the previous year at $1.1 billion, while its operating income was up by over 100% y-o-y to $633 million. Since most expenses incurred by brokerages are fixed in nature, growth in net revenues directly impacts margins. According to our estimates, E*Trade’s adjusted EBITDA margin was over 40% through the year, significantly higher than the prior year levels of about 32.5%. We forecast for the company-wide EBITDA margin to rise to over 43% in 2015, while we expect it to increase more gradually through the end of our forecast period.

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1. E*Trade Q4 2014 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]