How Is E-Trade Likely To Grow In The Next 2 Years?

by Trefis Team
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E*Trade Financial (NASDAQ:ETFC) has seen impressive growth in recent years. The company’s revenue grew by 29% annually and its stock price doubled between 2015-2017. With the expectation of rate hikes in the upcoming years, we expect significant growth in interest earning assets and related revenues going forward. Improvement in U.S. macro conditions should drive trading volumes, and consequently help it continue its strong growth in the near term.

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 is likely to boost its customer and asset base in the near term.

E-Trade generated $2.4 billion in revenues for 2017, and we expect its revenues to increase by around 11% annually over the next two years. We have created an interactive dashboard which shows our forecasts for the company’s revenues. You can modify the different revenue drivers to see how changes impact the company’s expected revenues.

E-Trade’s Segment Revenue Growth

E-Trade generates revenue from three primary streams – Net Interest Income, Trading Commissions and Other Revenues. The company had an interest-earning asset base of $53 billion in 2017, and we expect the figure to grow at nearly 12% annually. 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 2.9% in 2017, which is higher than competitors including Charles Schwab and Ameritrade. With the expectation of growth in yield by 5 basis points annually, we estimate Net Interest Income to grow by 14% annually going forward.

The brokerage saw around 214k daily average revenue trades (DARTs) in 2017, which we expect to grow by 7% annually. 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 impact the company’s near-term trading revenues. Despite a significant jump in trading volumes in the near-term owing to OptionsHouse acquisition, we expect 7% annual growth in trading commissions.

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