How E-Trade Has Thrived Despite Massive Cut In Trading Commissions
E-Trade (NASDAQ:ETFC) has seen its stock gain nearly 30% this year. The Fed’s rate hikes during this period, coupled with a higher net interest margin in comparison to its competitors, has led to a strong surge in interest earning assets and interest income for the brokerage. Interestingly, the company’s decision to slash its trading commissions did not have a severe impact on its top line, though this was largely due to the acquisition of OptionsHouse. The likelihood of further rate hikes going forward, coupled with the recent acquisition enhancing the company’s scaling, technological and customer servicing capabilities, suggests an improved growth outlook. However, as the company has to continuously incur marketing and technology expenses as well as remain acquisitive to boost its trading volumes and protect its market share, we expect the bottom line to remain under pressure in the near term.
We have a price estimate for E-Trade’s stock of about $43, which is slightly below the market price.
Decline In Trading Commissions Offset By Acquisition
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Transaction-based revenues account for around 15% of E-Trade’s overall revenue. The first three quarters saw a 4% 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. This was driven by the acquisition of OptionsHouse, which led to a 32% increase in trading volumes. 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.
With competitors such as Charles Schwab and Ameritrade ahead of E-Trade in terms of trading volumes, the company will likely remain acquisitive and improve its platform to further its volume growth.
Interest Income Grew Due To Rate Hikes
Interest earning assets account for over 65% of E-Trade’s revenue. Additionally, the company has the highest yield on these assets (at 2.75%) among its peers, which has contributed to impressive growth in revenues. These assets saw nearly 21% growth along with a 10 basis point increase in yield, resulting in more than 24% growth in the segment’s revenues for the first three quarters of 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. For the forecast period, we expect the rates to reach nearly 3.2%.
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