Interest Earning Assets Propelled Revenue Growth For E-Trade in Q3

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

E*Trade Financial (NASDAQ:ETFC) reported better than expected Q3 earnings, supported by an increase in revenue from interest earning assets. The Fed’s interest rate hike in the end of 2015 and indications of another hike under improving macro-economic conditions in the U.S. has led to an impressive growth in the company’s top line through the year so far.

The company reported a net revenue of $486 million and EPS of $0.51. Excluding the $370 million loss in Q3, 2015 related to the termination of wholesale funding obligations, the revenue grew by 10% year over year.  Trading commissions, which contribute about 25% to the revenue, have declined slightly year over year. The recent acquisition of OptionsHouse did bring about an increase in trading volumes, which otherwise would have seen 6% decline and negatively affected the trading commissions. The company has indicated that its top priority is to completely integrate OptionsHouse, which would likely boost their trading volumes and elevate their position against other brokerages. Further, the company is focusing on increasing its customer base, mainly by extensive marketing of its products and services and consequently enhancing the growth of its assets and accounts. With the recent entry into digital advisory, we expect E-Trade’s Adaptive Portfolio to boost the company’s assets under management in future.

Our price estimate for E-Trade stands at $24.07, implying nearly 15% discount to the market. We are currently reviewing our estimates in the light of recent earnings, and will have an update ready soon.

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See Our Complete Analysis For E-Trade Here

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Fed’s Decision Is Boosting Interest Earning Assets
Interest earning assets generate about 60% of the brokerage’s revenue. We believe a 25 bps hike in December 2015 influenced the growth in these assets during the first half of 2016. Additionally, the expectation of another hike in early 2017 has encouraged investors to infuse money. A net interest yield on these assets is 2.6%, which is higher than that of competing brokerages. This is a significant advantage as for instance, a $1 billion gain in interest earning assets could result in approximately $26 million rise in E*Trade’s interest earning revenue in comparison to around $15-18 million rise for brokerages like Charles Schwab and Ameritrade.

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Trading Volumes Decline Under Unfavorable Market Conditions; Likely To Rise Due To Recent Acquisition

E-trade’s trading revenues have been declining since the beginning of the year, apart from a slight increase in June due to Brexit. With less volatile market conditions, we believe that investors have opted for safer avenues. In addition, increased competition from other brokerages is weighing on trading revenues as well. Excluding the impact of the acquisition of OptionHouse, daily trading volumes declined 4% sequentially and 6% year-over-year.

With a continuous increase in brokerage accounts and improving macro conditions in the U.S., daily trading volumes are likely to show a steady improvement. We expect this to boost the brokerage’s trading commissions.

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