Key Takeaways From E-Trade’s Q3 Earnings

51.75
Trefis
ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

After a decent performance in the first half of the year, E*Trade Financial (NASDAQ:ETFC) sustained its growth trend in Q3 with quarterly revenue of $599 million, an increase of 23% 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 interest rate hikes. Despite the price cut in equity trading commissions, trading commissions were only 6% lower than Q3 2016, though this is largely due to the acquisition of OptionsHouse boosting trading volumes. Operating expenses grew nearly 25% 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 adjusted operating margin was at 42%, 8 percentage points above the previous year quarter. However, the costs incurred due to the OptionsHouse acquisition and declines in trading commission will likely lead to a dip in operating margins through the year.

E-Trade announced that it has entered into a definitive agreement to acquire Trust Company of America (TCA), a leading provider of technology solutions and custody services to the independent Registered Investment Adviser (RIA) market, for $275 million in cash. The deal is expected to close by February,2018.

Relevant Articles
  1. Coronavirus Recovery Watch: Capital Market Portfolio: 15% 5D Return vs. (-25%) YTD Return – [BlackRock, E*TRADE, Schwab & TD Ameritrade]
  2. Why Isn’t Charles Schwab’s Stock Benefiting From The Spike In Trading Volumes?
  3. E*TRADE: Will Lower Trading Commissions Cause Revenues To Be Short Of Consensus Estimates For FY 2019
  4. Is E*TRADE Stock Fairly Priced?
  5. Net Interest Revenue Will Form 40%, 60% or 80% Of E-Trade’s Stock In 2020?
  6. Changing Business Environment Likely To Be A Boon For Schwab and Ameritrade Despite Zero Commissions

Interest Earning Revenues Grew Due to Fed’s Actions

Interest earning assets account for over 65% of E-Trade’s revenue. Additionally, the company has the highest yield on these assets (at 2.85%) among its peers, which has contributed to impressive growth in revenues. These assets saw nearly 6% growth along with a 11 bp increase in yield, resulting in more than 36% growth in the segment’s revenues for the quarter.

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 17% of E-Trade’s overall revenue. The quarter saw a 5% 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.

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 growth in interest revenues.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research