Key Takeaways From E-Trade’s Earnings

by Trefis Team
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E*Trade Financial‘s (NASDAQ:ETFC) stock price rose nearly 4% during after-hours trading after the brokerage announced its Q1 earnings. After an impressive 2016, the company continued to perform well with quarterly revenue of $553 million, implying growth of 17% over the same period last year. In line with our expectations, interest earning assets continued to be the primary growth driver, aided by the Fed’s two interest rate hikes in the last 4 months. Additionally, the price cut in equity trading commissions did not impact E-trade’s overall trading revenue as the announcement came into effect only after the first week of March, and any adverse impact was more than offset by the increase in trading volumes from the acquisition of OptionsHouse in September 2016. Operating expenses grew nearly 12% in comparison to the prior year, due to higher compensation and infrastructure spending to cater to the expanding customer base, and we expect them to remain around same level for the year. Despite that, the company’s pre-tax margin remained at 41%, same as Q1 2016 and 100 basis points above the previous quarter. However, the costs incurred due to the OptionsHouse acquisition and decline in trading commission will likely lead to a dip in operating margins through the year.


Interest Earning Revenues Grew Due to Fed’s Actions

Interest earning assets account for nearly 57% of E-Trade’s revenue. Additionally, the company has the highest yield on these assets (at 2.7%) among its peers, which has contributed to impressive growth in revenues. These assets saw nearly 19% growth along with a 10 bp increase in yield, resulting in over 11% growth in the segment’s revenues for the year.

We expect another 10 basis points of improvement in the yield and similar growth in assets for the entire year, due to the likelihood of another hike.


Trading Revenue Grew Despite Cut In Commissions  

Transaction-based revenues account for 23% of E-Trade’s overall revenue. The quarter saw around 18% growth in trading commissions despite the company’s decision to slash its commissions from $9.99 to $6.95 per trade and $4.95 for frequent traders. Trading volumes grew by over 25%, primarily due to the acquisition of OptionsHouse. Moreover, the company’s decision to slash its commissions came at the end of February, thereby affecting only a third of the trading volume for the quarter. E-Trade expects a decline in its operating margin of up to 200 basis points for the full year due to the price cut, but expects the loss to be offset by the growth in interest earning revenues.

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