Low Trade Volumes, Flat Yields Limit E*Trade’s Top Line Growth

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

E*Trade Financial (NASDAQ:ETFC) announced its Q1 2015 earnings on Thursday, April 23, reporting a 4 % year-on-year (y-o-y) decline in net revenues to $456 million. E*Trade’s asset-based business grew by 3% y-o-y to $271 million, and low trading volumes led trading commissions to decline by 10% over the prior year quarter to $114 million. Additionally, the account maintenance fees and services charged by the brokerage also rose by 4% to $52 million during the quarter. [1]

See our full analysis for E*Trade Financial

Asset Base Grows With Increase In Trading Accounts

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E*Trade added about 95,000 net new brokerage accounts in 2013, ending the year with just under 3 million accounts. Comparatively, the brokerage has already added nearly 146,000 net new brokerage accounts in 2014 to take its total active brokerage accounts to 3.14 million. The brokerage successfully added about 38,000 net new accounts in Q1’15, ending the quarter with 3.18 million brokerage accounts. [2] As a result of consistently adding new accounts, the brokerage’s client assets increased by 4% y-o-y to $41.6 billion by the end of March. Moreover, E*Trade’s total client assets (customer assets in brokerage accounts and banking accounts combined) stood at over $299 billion at the end of Q1, up from $290 billion at the end of 2014 and $269 billion at the end of Q1 last year. We currently forecast E*Trade’s brokerage related cash to increase to about $60 billion through the end of our forecast period.

The implied annualized yield on these assets for the quarter stood at about 2.61%- roughly flat over the 2014 average. As a result, net-interest revenues generated by E*Trade were about 3% higher than the year-ago period at $271 million. We currently forecast the average yield for the year to be around 2.90% and to grow to over 3.4% by the end of our forecast period.

Low Trading Activity And Impact On Margins

Although E*Trade’s daily average revenue trades (DARTs) for the quarter sequentially rose to almost 170,000 trades per day up from 168,000 trades per day in Q4 2014, it was an 11% y-o-y decline in trade volume. Transaction-based revenue generated by the brokerage for the quarter was down by 10% over Q1’14 to $114 million, with the company realizing a slightly higher revenue per trade during the quarter compared to the year ago period. The implied revenue per trade – calculated by dividing the net trading commission revenue by the total number of trades  – was $10.94 during the quarter, compared to $10.64 in the year ago period. An increasing mix of derivatives traded helped improve the average commission per trade for the brokerage during the March quarter.

E*Trade’s cash operating expenses in Q1 were about 4% higher than the prior year quarter at $275 million, while total operating expenses rose by over 3% y-o-y to $300 million. As a result, operating income was  about 16% lower than the comparable prior year period at $151 million. According to our estimates, E*Trade’s adjusted EBITDA margin declined by about 5 percentage points from 43.6% in Q1’14 to 38.6% in Q1’15. EBITDA margins were lower in the recent quarter because trading revenues declined and employee compensation expenses rose through the quarter. The company expects expenses to rise in the mid single-digits through 2015 owing to the anticipated increase in headcount due to an expected rise in trading activity. However, margins are likely to expand if trading metrics improve through the year, leading to higher   revenues from trading commissions.

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Notes:
  1. E*Trade Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []
  2. E*Trade Q1 Press Release, E*Trade Investor Relations, April 2015 []