Trade Volumes Rise In August For E*Trade After A Slow Q2

51.75
Trefis
ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

Brokerage firm E*Trade Financial Corporation (NASDAQ:ETFC) reported a surge in trade volumes in August after witnessing a sustained period of low trading activity on its platforms through the first half of the year. E*Trade’s daily average revenue trades (DARTs) stood at nearly 180,000 through August, which was about 23% higher than prior year levels. [1] A similar hike in trade volumes was reported by competing brokerage firms including Charles Schwab (NYSE:SCHW) and TD Ameritrade (NYSE:AMTD). [2] [3] Below we take a look at some key metrics for August and our full year forecasts for E*Trade.

We have a $24 price estimate for E*Trade’s stock, which is slightly lower than the current market price. E*Trade’s market price rose from over $22 in January to about $31 in June before trading at around $26 currently.

See our full analysis for E*Trade Financial

Relevant Articles
  1. Coronavirus Recovery Watch: Capital Market Portfolio: 15% 5D Return vs. (-25%) YTD Return – [BlackRock, E*TRADE, Schwab & TD Ameritrade]
  2. Why Isn’t Charles Schwab’s Stock Benefiting From The Spike In Trading Volumes?
  3. E*TRADE: Will Lower Trading Commissions Cause Revenues To Be Short Of Consensus Estimates For FY 2019
  4. Is E*TRADE Stock Fairly Priced?
  5. Net Interest Revenue Will Form 40%, 60% or 80% Of E-Trade’s Stock In 2020?
  6. Changing Business Environment Likely To Be A Boon For Schwab and Ameritrade Despite Zero Commissions

Trade Volumes Surge In August

E*Trade has continually added new brokerage accounts through the year. However, the company reported a decline of over 11,000 accounts to the total active brokerage accounts through July on account of shutting down its global trading platform. [4] After losing net active brokerage accounts in July, the company reported a net gain of 14,000 accounts in August. As a result, the total number of brokerage accounts at E-Trade stood at just over 3.2 million accounts at the end of August. E*Trade has added about 60,000 net new accounts through 2015 thus far. ((E*Trade Monthly Metrics For August, E*Trade Investor Relations, September 2015)) We currently forecast the total number of brokerage accounts at E*Trade to increase to 3.26 million by the end of 2015, and to over 4 million through the end of our forecast period.

E*Trade’s DARTs stood at about 170,000 trades per day in Q1, which fell to just under just under 150,000 trades per day in the June quarter. Complementing the rise in brokerage accounts, E*Trade witnessed a 21% sequential rise in trade volumes to just under 180,000 trades per day in August. In the most recent quarter, E*trade realized a slightly higher revenue per trade compared to 2014 levels. As a result, the transaction-based revenue generated by the brokerage for the quarter was down by only 2% over Q2 2014 to $103 million (compared to the 11% decline in trade volume). 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. [5] The unimpressive streak continued in July, with DARTs staying 3% lower than previous year levels at 149,000 trades per day. This, however, seemed to pick up in August.

Net Client Assets Higher Than 2014 Levels

E*Trade earns interest income by holding customer cash and deposits in addition to credit balances, which include margin, real estate and consumer loans. The company’s average client balances for brokerage accounts through July were 2% higher than the year-ago period at $46.7 billion. However, the average balance fell by 1% to $46.3 billion in August. [1] E*Trade’s full year average client balance for 2014 stood at $41.4 billion. We currently forecast E*Trade’s average client balance for the full year to be 2% higher than 2014 levels at about $42.2 billion. Subsequently, we forecast the average balances to rise to over $55 billion through the end of our forecast period.

Last year, the net yield on these assets rose for the first time in over five years, due to which net interest revenues increased by 11% on an annual basis to $1.1 billion. The implied yield on these assets in 2014 was 23 basis points higher than 2013 at 2.63%. However, the yield on these assets stood at 2.54% in the most recent quarter. As a result, net interest revenues were flat over the previous year period at $267 million. Similarly net interest revenue for the first half of the year stood at $538 million, which was about 2% higher on a y-o-y basis. We currently forecast the average yield for the current year to be around 2.71%; as a result, net interest revenues could be around 5% higher than the prior calendar year.

Impact Of Revenue Growth On Margins

In its most recent earnings, E*Trade reported a modest 1% year-on-year rise in net revenues to $445 million. Comparatively, the brokerage reported a 4% annual decline in revenues through the March quarter. Low trade volumes since the beginning of the year led to limited growth in trading commission-based revenues in the first half of 2015. Similarly, flat yields on assets in Q2 resulted in E*Trade’s interest revenues remaining flat over the prior year period at $267 million despite a mild increase in interest-earning assets. ((E*Trade Financial Corporation Announces Second Quarter 2015 Results, E*Trade Press Release, July 2015))

According to our estimates, E*Trade’s adjusted EBITDA margin stood at just over 40% through 2014, significantly higher than 2013 levels of about 32.5%. 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 in 2014 led to healthier margins. Subsequently, low trade volumes and resulting revenues in the first half of 2015 has led E*Trade’s adjusted EBITDA margin to compress. Its adjusted EBITDA margin fell by about 5 percentage points to 38.6% in Q1’15 and over 3 percentage points to 38.9% in Q2. Two key factors that can contribute to healthier margins are improved yields on client assets and a rise in trading activity in the second half of the year. With high trade volumes in Q3 thus far, we are currently optimistic in our forecast for the company-wide EBITDA margin. We currently forecast the figure to rise to about 42% in 2015, while we expect it to increase more gradually through the end of our forecast period.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. E*Trade Monthly Metrics For August, E*Trade Investor Relations, September 2015 [] []
  2. Ameritrade Monthly Metrics, Ameritrade Investor Relations, September 2015 []
  3. Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, September 2015 []
  4. E*Trade Financial Corporation Reports Monthly Activity for July 2015, Market Watch, August 2015 []
  5. E*Trade Q2 2015 Earnings Call Transcript, Seeking Alpha, July 2015 []