E-Trade Year In Review: Fed’s Rate Hike Compensates For Loss In Trading Commissions

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ETFC
E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) has fared well in 2016, with around 13% growth in revenue in the first 9 months of 2016 and 20% surge in its stock price since the beginning of the year. And we estimate EDITDA for the year to be $699 million, excluding the $370 million loss in Q3, 2015 related to the termination of wholesale funding obligations. The previous three years have witnessed a 5% decline in revenues for the company. The Fed’s long anticipated rate hike in December 2015 propelled the growth in interest earning assets for the company, which consequently promoted the revenue growth from this segment. The recent rate hike is likely to propel the revenue from this segment in the current quarter.

The year has not been without challenges. There has been an industry wide-decline in trading volumes, due to unfavorable macro conditions in the U.S. earlier this year.  And the company has been witnessing stiff competition from traditional and discount brokerages.  Still, the acquisition of OptionsHouse in the second half of the year offered some respite. Thus the trading commissions saw only marginal growth in the first three quarters of the year. We expect the increased volatility from the recently concluded U.S. presidential elections and improving macro conditions to boost the trading commission for the brokerage in the current quarter.

Fed’s Rate Hike Propelled Interest Earning Revenues 

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The company saw 5% growth in interest earning assets and 15% growth in revenues from these assets for the first three quarters of the year. We believe Fed’s rate hike by 25 basis points has possibly led to this surge in the assets. Additionally, the company has the highest yield on the assets (at 2.7% in comparison to its competitors), which has contributed to an impressive growth in the revenue. This segment has continued to be the major source of revenue for the company, with around 60% contribution in the overall revenue. With the recently announced rate hike, we expect a significant increase in revenues from the segment in the near term.

Trading Volumes Remained Marginally Low For Most Of The Year

The company saw 1% decline in trading commissions and a similar dip in volumes up to the third quarter. This can be possibly attributed to the industry wide decline in trading volume amid unfavorable financial conditions during the first half of the year. Additionally, newly formed brokerages offering discounted and free trades continue to pose a threat to the established brokerages and a stiff pricing war.

However, with marked improvement in GDP, employment rate, and the recently concluded US presidential election have contributed to increased volatility in the markets. Consequently we expect volume growth for the brokerage, thereby by propelling its trading revenues.

See Our Complete Analysis For E-Trade Here

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