Low Volumes, Yields Weigh On E-Trade’s Q4 Results

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

E*Trade Financial (NASDAQ:ETFC) announced its Q4 fiscal 2015 earnings on Thursday, January 21, reporting a slight fall in net revenues to $454 million. In line with our expectations, daily average revenue trades (DARTs) fell 13% year on year (y-o-y) to 147,000 in the quarter, causing transaction-based revenues to decline. ((E-Trade Q4 2015 Results, E*Trade Investor Relations, January 2016)) Moreover, the average client balances on the company’s balance sheet grew only marginally to $47.2 billion, resulting in lukewarm growth in net interest revenues. Similar trends were seen in full year revenues, which decreased over 20% y-o-y to $1.4 billion in 2015, owing to a decline in commission fees to $424 million.

We have a $24 price estimate for E*Trade’s stock, which is in line with the current market price.

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See our full analysis for E*Trade Financial

Subdued Trade Volumes

Daily average revenue trades (DARTs) in Q4 were 13% lower at 47,000 as compared to the same period last year. In addition, the average commission per trade also decreased to $10.66 from $10.84 in Q4 2014. ((Earnings Call Transcript for Q4 2015, Seeking Alpha, January 2016)) As a result, transaction-based revenues declined 14% y-o-y to just $99 million. The company said that it expects the DART levels to pick up going forward due to the volatility in the financial markets. However, we expect the average revenue realized per trade to remain flat in the coming years as E-Trade faces intensifying competition in the brokerage industry.

E-Trade added just 10,000 net new brokerage accounts through the last quarter of fiscal 2015. The number was considerably lower than that in prior year period, primarily because of the brokerage’s decision to shut down its operations in Hong Kong and Singapore. Consequently, the end of the period brokerage accounts stood at 3.21 million at the close of the year 2015, up 2% y-o-y. We currently forecast E-Trade to continue attracting new accounts through 2016.

Marginal Growth in Client Assets

E*Trade earns interest income on client assets through holding credit balances, which include margin, real estate and consumer loans and by holding customer cash and deposits. Average client assets on the brokerage’s balance sheet improved slightly on a year on year basis in Q4 to $47.2 billion. However, sequentially they were largely stagnant over the past few months. ((E-Trade Q4 2015 Results, E*Trade Investor Relations, January 2016)) We expect E-Trade to grow its asset base with greater momentum going forward as a result of the Fed’s interest rate hike.

According to our estimates, 64% of E-Trade’s value is attributable to the interest income it earns on credit balances. The net yield it earns on interest earning assets was stagnant for the full year 2015 at around 2.63%. However, in the December quarter, the yields rose by 19 basis points to 2.88% as compared to the year ago period. The company said that it expects the average yield to rise to 2.70% – 2.75% in 2016. ((Earnings Call Transcript for Q4 2015, Seeking Alpha, January 2016)) Consequently, net interest revenues could also get a considerable boost in the future.

Margins Decline Considerably In 2015

Low trading activity in 2015 led to a 7% y-o-y decline in trading commission revenues. Moreover, stagnant yield levels resulted in no meaningful rise in E-Trade’s interest revenues. Although, E-Trade restricted the rise in its expenses to 4% y-o-y to $305 million in Q4, the full year expenses were somewhat higher at $1.2 billion, mainly due the company’s decision to add headcount and thus, spend more on compensation. ((Earnings Call Transcript for Q4 2015, Seeking Alpha, January 2016)) As a result of the notable fall in the top line, the company’s adjusted EBITDA margins for the full year fell by a massive 15 percentage points to 25.3%, compared to 40.4% in 2014. However, with the interest rate hike and other aforementioned factors, we expect EBITDA margins to improve in the coming years and reach 45% by the end of the decade.

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