E-Trade’s Q2 Revenue Driven By Rate Hike, Trading Commission Decline

by Trefis Team
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After a decent first quarter, E*Trade Financial (NASDAQ:ETFC) sustained its growth trend with quarterly revenue of $577 million, an increase of 22% 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. Trading commissions were in line with Q2 2016, though this is largely due to the acquisition of OptionsHouse offsetting the losses from the price cut in equity trading commissions. The adverse effect of the price cut on E-trade’s overall trading revenue is evidenced by the 17% sequential decline in revenue from this segment. Operating expenses grew nearly 21% in comparison to the prior year, due to higher advertising, 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 was at 55%, 10 percentage points above the previous year 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 62% 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 20% growth along with a 10 bp increase in yield, resulting in more than 25% growth in the segment’s revenues for the year.

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

Trading Revenues Suffer Due To Cut In Commissions  

Transaction-based revenues account for 18% of E-Trade’s overall revenue. The quarter saw a sequential decline in trading commissions due to 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 37%, primarily due to the acquisition of OptionsHouse.

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 revenues.

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