Online brokerage and bank E*Trade Financial (ETFC: Charts, News, Offers) posted a narrower-than-expected loss this week, but its balance sheet has returned to the red after two previous quarters of profitability, due to provisions set aside for probable loan losses. With heavy exposure to both the loan and equity segments, E*Trade is heavily exposed to sector-wide losses, which have consistently been exacerbated by unclear federal legislation. In addition, the company has been losing market share to lower-priced competitors, which offer more attractive commission rates to both investors and active traders. Taking into account its reverse 10 for 1 split, the stock price is still a shadow of its towering prices of $200-$250 four years ago. Do the company’s current earnings reflect a turnaround not far down the road, or is ETFC destined to languish as the market hits new highs?
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Like other financial institutions, loan loss provisions have cast a long shadow over E*Trade’s profits. The bank has increased its quarterly loan loss provisions by 28% over the previous quarter, in anticipation of delinquent loans in its mortgage portfolio. This includes an increased, non-recurring quarterly provision of $60 million to its “qualitative reserve”, and brings the projected annual total up to $194 million to cover current and future loan losses. These heavy provisions have weighed on the bank’s earnings for the past eight quarters. In addition, the bank spent an additional $15 million in restructuring and severance costs. The bank’s mortgage portfolio has shown signs of improvement, with a 2% decrease in delinquencies from the previous quarter, and a 27% decrease from the same period last year. CEO Steven Freiberg has stated that the bank “would add reserves to accommodate” an uncertain macro-economic environment in regards to credit lines and mortgages. E*Trade posted a fourth quarter loss of $24.1 million, or 11 cents per share, a significant improvement over its loss of $67.1 million, or 36 cents per share. Revenue, however, fell to $517.9 million from $523.4 million the previous year. This considerably higher than the analysts’ average estimate of earnings of 4 cents per share on revenue of $322 million.
In the third quarter, the bank’s brokerage segment saw a 19% increase of daily average revenue trades (DARTs) as improving equity markets encouraged many self-guided investors to return to the market. In the fourth quarter, the increase was 23%, and the brokerage has stated that it would be “cautiously optimistic” regarding its 2011 new brokerage accounts. The company posted 28,000 additional accounts, compared to a loss of 9,000 accounts the previous year. Its total assets increased from $1.5 billion the previous year to $2.4 billion. E*Trade maintains a diverse customer base – with Mass Affluent investors, Main Street investors, Active Traders and Corporate Clients offered a variety of investment solutions. Mass Affluent investors must maintain a total asset balance of over $50,000 and are offered lower commission rates; Main Street investors are standard accounts under $50,000 which are charged the regular commission rate; Active Traders are granted low commission rates in exchange for high frequency trades; and Corporate Clients include the employee stock plans of over 2,500 firms in over 100 countries. The Corporate Clients segment has traditionally brought in a third of the bank’s profits.
Looking forward, E*Trade faces several powerful competitors. Recovering banking giants like Wells Fargo (WFC: Charts, News, Offers) and Bank of America (BAC: Charts, News, Offers) have begun offering commission-free trading for customers. This puts pressure on E*Trade and its peers to cut commissions further, which will ultimately dent their bottom lines. E*Trade also faces a cutthroat competitive environment with Charles Schwab (SCHW: Charts, News, Offers), TD Ameritrade (AMTD: Charts, News, Offers), Fidelity and Scottrade. E*Trade lacks the comprehensive professional investment advice that Charles Schwab does, but its commissions are still higher than its “no-frills” peers such as TD Ameritrade. This uncomfortable middle ground is made even less attractive by E*Trade brokerage’s low participation rate in hot IPOs such as 2008′s offering of Visa (V: Charts, News, Offers), which was offered to Ameritrade customers. In addition, E*Trade’s reliance on interest income, rather than commission fees, as a main revenue stream may become its Achilles’ heel, as any increase in interest rates may level its earnings.
The stock is still hard to read technically, as it is still in the red; it currently trades 31 times forward earnings. However, if the bank’s pattern of narrowing losses and increased brokerage accounts can continue, a long overdue turnaround may just be around the corner.
Other News About ETFC
E*TRADE Financial Corporation Announces Fourth Quarter and Full Year 2010 Results
A detailed look at E*Trade’s earnings.
E*TRADE Announces Plans to Advertise in Super Bowl XLV
E*Trade continues its tradition of large scale advertising.
Other Stocks in the News
Nokia Reports Weak Earnings, Reshuffles Board of Directors
Nokia continues to fight a losing battle.
Windows Phone 7: Rehashing the Zune’s Mistakes
Microsoft’s Windows 7 fails to impress.
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