E*TRADE Financial (NASDAQ:ETFC) appears to be trying to make up for lost time from last year when it was considering a sale during its strategic review by Goldman Sachs (NYSE:GS). The company is revamping its website in an effort to offer a better experience and more capabilities to its customers, and has also unveiled its new online Bond Resource Center yesterday, after launching a forex trading and education platform for its retail investors last week.   The company also reported a 20% monthly increase in its daily average revenue trades (DARTs) in January.  E*TRADE ranked first in the American Customer Satisfaction Index rating for online brokerages, sharing the top position with Charles Schwab (NYSE:SCHW) and Fidelity. The winners scored 79 in the index, with Ameritrade (NYSE:AMTD) following closely at 78. 
We believe these attempts at focusing on the customer experience will help the company attract a greater customer base and attain its goal of pretax income exceeding a billion in the long term.
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Low interest rates will likely burden revenue growth
E*TRADE derives most of its value, over 60%, from net interest on assets according to Trefis estimates. Shrinking interest yields hurt the company’s results in the fourth quarter, although non-interest income declined as well. With the Federal Reserve’s guidance of interest rates possibly remaining at current levels until 2014, any near-term respite seems unlikely. We believe that the company needs to focus more on asset gathering to soften this blow. It is already trying to grow its asset base in long term investing, focusing on the retirement planning segment. Total customer assets as of January 2012 increased to $185.4 billion, up 7.5% from the previous month and 2.3% on a year-over-year basis.
Trading volumes may provide much-needed support
Market volatility led to an increase in trading activity in mid-2011, boosting the trading revenues of online brokerages. But the fourth quarter witnessed a seasonal decline in trading in December, exacerbated by the European debt situation. DARTs for January 2012 showed sequential improvements though they were down 20% year-over-year at 145,390. The company believes that that the new online experience could increase customer engagement given its better user interface, content and investment planning resources.  Additionally, with debt plans appearing to take shape in Europe and some encouraging economic data in the U.S., retail investors’ confidence in the market could improve and lead to greater trading activity.
E*TRADE’s provisions for losses and the tough task of cleaning up its legacy loan portfolio, which overshadowed growth in revenues and scared potential buyers last year, may burden earnings in the short-term. However the company does seem to be on track to deliver better returns with its plan to strengthen its market presence, maintain focus on customers and improve its overall financial position.
Our price estimate for E*TRADE is $9, which is about in-line with the current market price for the stock.Notes:
- E*TRADE Launches New Online Bond Resource Center, Market Watch [↩]
- E*TRADE Launches Retail Forex Trading, E*TRADE Financial Press Release [↩]
- E*TRADE Financial Corporation Reports Monthly Activity for January 2012, E*TRADE Financial Press Release [↩]
- Best Online Brokers for Customer Satisfaction, investorplace.com [↩]
- E*TRADE Launches New Online Investing Experience, E*TRADE Press Releases [↩]