Key Takeaways From E-Trade’s Q4 Earnings
After a decent performance in the first three quarters, E*Trade Financial (NASDAQ:ETFC) sustained its growth trend in Q4 with quarterly revenue of $637 million, an increase of 25% 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 and a strong net interest yield. Despite the price cut in equity trading commissions, trading commissions were only 10% lower than Q4 2016, though this is largely due to the acquisition of OptionsHouse boosting trading volumes. Operating expenses grew nearly 13% 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 levels this year. Despite that, the company’s adjusted operating margin came in at 47%, 7 percentage points above the prior year quarter. However, the costs incurred due to the OptionsHouse acquisition and declines in trading commissions will likely lead to a dip in operating margins through this year.
We have a price estimate for E-Trade’s stock of about $43, which is slightly below the market price. We have summarized E-Trade’s Q4 earnings from the announcement in our interactive dashboard for the company, the key parts of which are captured in the charts below.
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E-Trade announced that it has entered into a definitive agreement to acquire more than one million retail brokerage accounts with $18 billion in customer assets from Capital One Financial for $170 million. The deal is expected to close in Q3. This follows the company’s decision to acquire Trust Company of America (TCA) in Q3 2017. TCA is a leading provider of technology solutions and custody services to the independent Registered Investment Adviser (RIA) market.
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 2.92%) among its peers, which has contributed to impressive growth in revenues. These assets saw nearly 30% growth along with a 32 basis point increase in yield, resulting in more than 45% growth in the segment’s revenues for the quarter. With our interactive dashboard, you can modify the asset base and yield to see the change on revenue.
Growth In Trading Volumes Reduced Losses Due To Commission Cut
Transaction-based revenues account for 17% of E-Trade’s overall revenue. The quarter saw a 10% decline in trading commissions despite to the company’s decision to slash its commissions by over 35%, earlier in 2017. The 25% growth in trading volumes managed offset some of the losses. The improvement in U.S. macro conditions led to significant surge in trading volumes.
With the expectations of a rate hike in March, the company expects the full-year operating margin to be between 43.5-44.5%.
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