How Much Will Net Interest Income Contribute To E-Trade’s Top-Line Growth In The Next Two Years?

by Trefis Team
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E*Trade Financial (NASDAQ: ETFC) has seen massive growth in recent years. The company’s revenue grew by 29% annually and its stock price doubled between 2015-2017. We attribute this growth primarily to revenues from interest earning assets. This revenue stream continued its strong performance between 2015-2017, largely due to the Fed’s rate hikes and the expectation of further interest rate hikes in the near term. However, its shares have fallen nearly 13% of late, from the high of $61 earlier in July to $53 on September 17, at least partly as a result of JP Morgan’s proposed plan to offer free trading. Below we take a look at what to expect from E-Trade’s interest earning assets in the next two years.

E-Trade’s interest earning assets generated around $1.5 billion in revenues for 2017, and we expect its revenues to increase by about 22% annually over the next two years. We have summarized our expectations for E-Trade’s interest earning assets and net interest income growth through FY’18 and FY’19 on an interactive dashboard on E-Trade’s Net Interest Revenue. Below we take a look at the key drivers for this revenue stream.

Interest Earning Assets Growth

E-Trade’s interest earning assets are largely comprised of loans, mortgage-backed securities, and investment securities. This segment has been the fastest growing business of late, with revenues witnessing 17% annual growth between 2015-2017, reaching just under $1.5 billion in 2017. The company had an interest-earning asset base of $53 billion in 2017, and we expect the figure to grow at nearly 17% annually. The improvement in the U.S. economy led to interest rate hikes, which in turn contributed to growth in the company’s interest earning asset base. Additionally, E-Trade’s net interest yield touched 2.8% in 2017, which is higher than most competitors, including Charles Schwab and Ameritrade. With the expectation of growth in yield by 10 basis points annually, due to the interest rate hikes and an increase in demand for loans, we estimate the company’s Net Interest Income to grow by 22% annually going forward.

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