What Key Factors Drove E-Trade’s Q1 Results?

ETFC: E*TRADE Financial logo
E*TRADE Financial

E-Trade (NASDAQ:ETFC) released its first quarter results on April 17, with net revenues and EPS of $755 million and $1.09 increasing by 6.7% and 24.5%, respectively, over the prior year quarter. Growth was driven by net interest income, fees and service charges, slightly offset by trading commissions.

The Trefis price estimate for E-Trade stands at $57 per share, which is above the market price. You can view our interactive dashboard on How Has E-Trade Fared In Recent Quarters? to observe the quarterly revenue trends and modify yearly earnings to gauge the impact on the stock price, and see more of our financial services company data here.

What Drove E-Trade’s Revenue Growth?  

  • Net Interest Income: E-Trade’s net interest income is earned largely through investment securities and margin receivables, which together contribute around 92% of interest-earning assets. For the quarter, net interest income came in at $492 million, growing by 10.5% over the prior year quarter and supported by an increase in average balances of investment securities and average yield. For margin trading accounts, the average yield has increased from 4.15% in 2017 to 4.71% in 2018, and 5.24% this quarter, supported by a series of rate hikes by the Fed last year.
  • Fee and Service Charges: The company charges for order flow, sweep deposits in money market accounts, advisor management, mutual funds, and foreign exchange services. The revenues for this segment increased by 12% over the prior year quarter to $118 million. In the past three years, growth has been driven by order flow revenue, advisor management fees, and mutual fund services.
  • Trading Commissions: Trading commissions have been consistently declining for the past three years, with average commission per trade dropping by 33% to $7.07 per trade in 2018. The trading revenues for the quarter came in at $122 million, decreasing by 11% over the prior year quarter and remaining the same sequentially. Commission revenues were driven by a moderate improvement in average commission per trade and almost flat DARTs.
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Improving Operating Margin

E-Trade’s total expenses as a percentage of total revenues declined from 53% in the first quarter of 2018 to 48% this quarter (provision for loan losses included in the metric), improving the operating margin 5% over the prior year quarter. The company’s advertising expenses declined by $6 million over the prior year quarter, and management guided for $200 million in advertising and marketing expenses for the full year. Marketing and advertising expenses have been increasing at a 20% growth rate for the past two years, and retaining the prior year figure of $200 million would bring a significant upside to operating profits.

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