Solid Start To 2015 Continues Through February With High Trade Volumes For E*Trade

Brokerage firm E*Trade Financial (NASDAQ:ETFC) released its operating metrics for February, reporting a 4% sequential rise in trade volumes to 179,000 daily average revenue trades (DARTs). However, E*Trade’s daily average revenue trades (DARTs) were about 11% lower than the comparable prior year period. On the other hand, the brokerage had a positive month in terms of average client asset balances, which rose by 5% both sequentially and annually to $42.1 billion.

In its most recent earnings, E*Trade reported a 3% year-on-year increase in net revenues to $461 million.The brokerage’s asset-based business grew by 10% year on year  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 important metrics and our forecasts for E*Trade.

We have a $21 price estimate for E*Trade’s stock, which is significantly lower than the current market price. E*Trade’s market price has risen by over 20% since the company reported its Q4 results in late January.

See our full analysis for E*Trade Financial

Trading Activity Continues To Be High

Continuing the trend from January, trading activity stayed high through February due to the increased level of volatility in the market, especially derivatives trading. The average trades per day on E*Trade’s platform in Q1 thus far (176,000 trades per day) have been 5% higher than the Q4’14 average of 168,000 trades per day. However, the average trades per day were about 10% lower than the comparable prior year period, mainly because of high trading activity in the year-ago period. ^[2] As a result, most brokerage firms including Ameritrade, E*Trade and Charles Schwab witnessed a year-over-year decline in trade volumes in January and February.

On the other hand, E*Trade successfully added over 20,000 net new brokerage accounts during the month. The total number of brokerage accounts at E*Trade stood at nearly 3.2 million accounts at the end of February, about 4% higher than the year-ago period. ((E*Trade Monthly Metrics For February, E*Trade Investor Relations, March 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.

With 3.2 million accounts at the brokerage, 176,000 trades per day roughly translates to about 3.5 average trades per account for the quarter. If the number of trades per day stay at current levels, it could lead the average annualized trades per account to rise to over 14 trades per account for the full year.

Growing Client Assets Could Lead To Higher Interest Revenues

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 February were 6% higher than the year-ago period at $41.2 billion. The net yield on these assets rose last year, due to which revenues generated by interest on these balances grew by 11% year over year  to $1.1 billion. The implied yield on these assets was 22 basis points higher than the prior year period 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% year over year 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 [↩]
2. Discount brokers’ volumes rise as small investors pile into stocks, Reuters, March 2014 [↩]