Low Yields, Fall In Trade Volumes Hinder E*Trade’s Q2 Performance

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

E*Trade Financial (NASDAQ:ETFC) announced its Q2 2015 earnings on Thursday, July 23, reporting a modest 1% year-on-year (y-o-y) rise in net revenues to $445 million. E*Trade’s interest revenues stayed flat over the prior year quarter at $267 million, while low trading volumes led trading commissions to decline by 2% over the prior year quarter to $103 million. On the other hand, the account maintenance fees and services charged by the brokerage rose by 12% to $55 million during the quarter. ((E*TRADE Financial Corporation Announces Second Quarter 2015 Results, E*Trade Press Release, July 2015))

E*Trade’s cash operating expenses in Q2 were about 10% higher than the prior year quarter at $270 million, while total operating expenses rose by 9% y-o-y to $309 million. As a result, operating income was  about 6% lower than the comparable prior year period at $133 million. According to our estimates, E*Trade’s adjusted EBITDA margin declined by over 3 percentage points from 42.2% in Q2’14 to 38.9% in Q2’15. EBITDA margins were lower in the recent quarter because trading revenues declined and employee compensation expenses rose through the quarter. The company paid about $15 million in severance and other expenses related to G1X contract amendment (G1X was the market making business of E*Trade which is sold in late 2013). Excluding these costs, E*Trade’s operating expenses were roughly flat over the prior year quarter. Going forward, 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. [1]

See our full analysis for E*Trade Financial

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Growth In Asset Base But Yields Stay Low

E*Trade added about 146,000 net new brokerage accounts in 2014, ending the year with over 3.1 million accounts. The brokerage has successfully added about 60,000 net new accounts in 2015 thus far, ending the June quarter with 3.2 million brokerage accounts. As a result of consistently adding new accounts, the brokerage’s client assets increased by 5% y-o-y to $42 billion by the end of June. We currently forecast E*Trade’s brokerage related cash to increase to about $60 billion through the end of our forecast period. Moreover, E*Trade’s total client assets (customer assets in brokerage accounts and banking accounts combined) stood at $302.4 billion at the end of Q2, up from $280.9 at the end of Q2 last year. [2]

The implied annualized yield on these assets for the quarter stood at about 2.54% – slightly lower than the 2014 average. As a result, net-interest revenues generated by E*Trade was flat over year-ago period at $267 million. The yield could pick up in the latter half of the year if interest rates rise. We currently forecast the average yield for the year to be slightly higher than 2014 levels at over 2.8%. Subsequently, we forecast the yield to grow to over 3.4% by the end of our forecast period.

Unimpressive Trade Volumes

E*Trade’s daily average revenue trades (DARTs) for the quarter fell both sequentially (-12%) and annually (-4%) to just under 150,000 trades per day. As a result, transaction-based revenue generated by the brokerage for the quarter was down by 2% over Q2’14 to $103 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 $10.96 during the quarter, compared to $10.72 in the year ago period. An increasing mix of stock plan and options traded helped improve the average commission per trade for the brokerage during the June quarter.

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Notes:
  1. E*Trade Q2 2015 Earnings Call Transcript, Seeking Alpha, July 2015 []
  2. E*Trade Monthly Metrics For May, E*Trade Investor Relations, June 2015 []