What Are E-Trade’s Key Sources Of Revenue?

E*Trade Financial (NASDAQ:ETFC) has seen its revenue grow at a CAGR of 29% and its stock price double between 2015 and 2017. The company has seen significant growth in its interest earning assets, supported by the Fed’s interest rate hikes over the last few years. Trading revenues have witnessed some pressure due to declines in revenue per trade amid rising competition from traditional and discount brokerages. The U.S. brokerage incumbents have been facing headwinds in recent years, amid reduced trading volumes and intense competition between full-service brokerages and discount brokerages. With low margins, acquisitions seem to have become a go-to strategy for large brokerages. E-Trade’s acquisition of Optionshouse in 2016 led to a significant increase in its customer and asset base.

Our price estimate for E-Trade’s stock stands at $53, which is slightly below the market price. We expect the company’s overall revenues to grow by nearly 13% in 2018. Our interactive dashboard shows the historical trends and our expectations for the company’s FY’18 top line; you can modify the key value drivers to see how they impact the company’s results.

Interest Earning Assets Drove Revenues

E-Trade’s Interest Earning Assets are largely comprised of loans, mortgage-backed securities and investment securities. The improvement in the U.S. economy led to the interest rate hikes, which in turn contributed to growth in the company’s interest earning asset base. Additionally, E-Trade’s net interest yield has been around 2.65% in recent years, which is higher than competitors including Charles Schwab and Ameritrade.

OptionsHouse Has Helped To Offset Losses From Cut In Trading Commissions

Had it not been for the acquisition of OptionsHouse in late 2016, E-Trade’s decision to cut its commissions per trade by nearly 40% would have led to substantial declines in trading revenues in 2017. Improving macro conditions did lead to a surge in trading volumes, helping the company to offset the impact of its commission cuts. While the fee cuts make sense strategically given the competitive pressure, they will still adversely impact the company’s near-term trading revenues.