E*Trade’s Results Highlight The Industry’s Difficult Recovery

E*Trade Financial (NASDAQ:ETFC) reported total revenues of around $420 million for Q1, down almost 14% from the year-ago quarter. The decline was primarily due to a 15% y-o-y decrease in net operating interest income and a 6% y-o-y decrease in commission-based revenues. ^[1]

Operating expenses for the quarter were about $296 million, including severance and restructuring-related charges of $12 million. These expenses were down 3.5% from the year ago quarter, primarily due to lower advertising and market development expenses.

Regarding its cost-cutting initiative, the company has implemented almost 85% of its targeted $110 million in cost savings and is investing $10 million annually in its enterprise risk management (ERM) function. The full impact of this initiative will be seen beginning in 2014.

Our current price estimate for E*Trade is almost $9 per share, and we will soon update our model to reflect the Q1 earnings.

See our full analysis for E*Trade

Net Interest Revenue Down

Net operating interest income accounts for over half of the company’s total revenue and was down from $284.8 million in Q112 to $241.3 million in 1Q13. The major reasons for this decline were a 19 basis-point compression in interest spreads and a $3.7 billion reduction in the average balance sheet size over the same period. The spread compression was primarily due to a runoff in the firm’s loan portfolio and reinvestment into lower yield securities. The company expects its average net interest spread for 2013 to remain almost 10 basis points below its 2012 average. ^[2]

Trading Volumes Remain Low

Low trading volumes continue to be a pain point for the whole brokerage industry and E*Trade is no exception. The company’s trading commission revenues at around $100 million for Q113, were down by almost 6% year-over-year as the number of daily average revenue trades on its platform declined by 5% over the same period.

Going forward, we expect the average trading activity to under pressure over the short term and then improve gradually as investors gain more faith in the macroeconomic conditions.

Asset Gathering Met Our Expectations

We mentioned in our pre-earnings article that “E*Trade attracted nearly $1 billion in net new brokerage assets during each of the first two months of 2013 and expecting a similar performance in March does not seem unreasonable.” In line with those expectations, the company ended Q1 with a total of $3.1 billion in net new brokerage assets.

Going forward, we believe that E*Trade will be able to maintain this pace of asset gathering as it continues to focus on its financial consultant network, which is currently responsible for about 35% of its net new assets. This proportion is likely to grow as the company equips its financial consultants with better tools. According to the firm’s CEO, the accounts brought in through the company’s financial consultants are five times larger than those acquired through other channels, and we believe that growth in this channel could land E*Trade with larger and better quality customers over time. ^[2]

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1. Press Release, E*Trade, April 18, 2013 [↩]
2. Earnings Call Transcript, SeekingAlpha, April 18, 2013 [↩] [↩]