ETFC Reveals its Post Strategic Review Plan

December 1st, 2011 by Trefis Team
51.75
Trefis
ETFC: E*TRADE Financial logo
ETFC
E*TRADE Financial

E*Trade Financial (NASDAQ:ETFC) came out with details of its strategic review at the Keefe, Bruyette & Woods Securities Brokerage & Market Structure Conference, after announcing its plan to stay independent early last month. [1] The board remains confident that shareholders’ value will be maximized most by continuing with the current strategy, of the various options considered that included sale of the company. After taking account of the prevalent interest-rate, credit and the general macroeconomic environment, the uncertainty anticipated concerning sale of the company was not deemed beneficial for investors, resulting in unanimous decision of the board and the financial advisor, Goldman Sachs (NYSE:GS), to keep the company independent. Ameritrade (NYSE:AMTD) and Charles Schwab Corporation (NYSE:SCHW) were among the prospective buyers of the company, though there were hesitations due to the legacy loan portfolio sitting on firm’s balance sheet.

See our recent note on E*Trade’s decision to remain single in our article, E*Trade Shares Pummeled After Deciding to Remain Independent.

See complete analysis of E*Trade stock here

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Detailing the Strategy

The current plan involves strengthening the overall financial position of the company and expanding its market position and presence by improving its balance sheet and overall results while maintaining focus on customer experience and awareness. For better corporate governance, the company will elect a new Chairman, the post assumed by the CEO of the company since May this year. By keeping up the loan portfolio reduction efforts, the broker expects to increase its pretax income to more than a billion dollars in the long term, compared to $159 million pretax income earned over the last twelve months. This estimate is primarily driven by decrease in provision and servicing costs related to mortgage portfolio and efficient capital deployment.

The company has ramped up its efforts to increase its customer base – hiring more staff to expand its reach and presence, increasing product offerings, and improving client experience and education, and testing offers to attract more and better quality assets as highlighted in our previous articles. [2] [3] The broker also plans to build on existing corporate group and increase its share in the market making business.

We expect company’s resolution to further bring down the loan portfolio ailing the company’s balance sheet to be effective, taking into account the evident improvement in the loan balances, which have decreased by more than 50% since September 2007. Now, with some clarity regarding its future as an independent broker, we believe the company will charge ahead towards profitability, gaining more business and client assets with a focus to increase shareholders’ value.

Our price estimate for E*Trade is $13, which is around 45% above the current market price.

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Notes:
  1. E*Trade – KBW Securities Brokerage & Market Structure Conference (8-K), E*Trade SEC filings [↩]
  2. E*Trade Shares Pummeled After Deciding to Remain Independent, Trefis [↩]
  3. E*Trade Earnings Preview: What We are Watching, Trefis [↩]