E*TRADE (ETFC) Beats Earnings on High DARTs and Low Expenses

Driven by strong brokerage activity, E*TRADE Financial Corporation (ETFC) reported second-quarter 2014 earnings per share of 24 cents, beating the Zacks Consensus Estimate by a penny. In the prior-year quarter, the company recorded loss per share of 19 cents.

Higher net operating interest income, rise in total daily average revenue trades (DARTs), reduced delinquencies and lower expenses were the positives. In addition, increase in customer assets, reduced provision for loan losses and a strong capital position aided the impressive results. However, fall in non-interest income acted as a headwind during the quarter.

E*TRADE reported net income of $69.0 million versus net loss of $54.0 million in the prior-year quarter.

Quarter in Detail

Net revenue of $438.0 million outpaced the Zacks Consensus Estimate of $428.0 million. Further, the reported revenues edged down 0.5% year over year, owing to lower non-interest income, partially offset by higher net operating interest income.

Total DARTs increased 3.7% year over year to 155,194.

Net operating interest income increased 11.1% year over year to $270.0 million, reflecting higher interest income and lower interest expenses. Further, net interest spread was 2.55%, up from 2.35% in the last-year quarter.

Non-interest income decreased 14.7% year over year to $168.0 million. The decline was mainly due to no principal transactions revenues and fall in the net gains on loans and securities, partially offset by rise in fees and service charges.

Total operating expenses were $284.0 million, down 31.4% year over year. Notably, in the year-ago quarter, the company incurred expenses of around $142.0 million on impairment of goodwill. No such charges were incurred during the reported quarter.

Net new brokerage assets were $1.0 billion, down from $1.7 billion in the prior-year quarter. At the end of the reported quarter, E*TRADE reported 4.7 million customer accounts, including 3.1 million brokerage accounts, up 4.7% from the year-ago quarter. Moreover, number of net new brokerage accounts increased to 33,005 from 29,506 in the prior-year quarter.

The company’s total customer assets were $280.0 billion, up 27.6% year over year.

Credit Quality

Overall, credit quality improved. Net charge-offs were $14.0 million, down 72.0% year over year. Provision for loan losses decreased 74.0% year over year to $12.0 million. Allowance for loan losses decreased 11.1% year over year to $401.0 million.

Total special delinquencies (30 to 89 days delinquent) declined 42.4% year over year to $155.0 million in E*TRADE’s entire loan portfolio. Also, total delinquencies (30 to 179 days delinquent) declined 44.7% year over year to $215.0 million.

Balance Sheet and Capital Ratios

E*TRADE continued to reduce its balance-sheet risks. The company’s loan portfolio stood at $7.1 billion at the end of the reported quarter, down 26.0% year over year.

As of Jun 30, 2014, E*TRADE had total assets of $45.7 billion, up from $45.0 billion as of Jun 30, 2013.

Brokerage-related cash increased 12.4% year over year to $40.0 billion. Customers were net buyers of about $0.4 billion of securities, compared with $0.3 billion in the prior-year quarter.

The company’s capital ratios improved. As of Jun 30, 2014, E*TRADE reported Tier 1 common ratio of 15.8%, compared with 12.2% in the year-ago quarter. Total risk-based capital ratio was 19.5%, up from 15.8% in the prior-year quarter. Tier 1 leverage ratio was 7.5%, up from 6.4% in the year-ago quarter.

In Conclusion

The company’s strong capital position, increase in customer assets and significant improvement in DARTs are impressive. The company’s initiatives to reduce balance sheet risk keeps us encouraged, although it will put near-term pressure on the net interest margin. Moreover, E*TRADE’s decision to focus on core operations is expected to improve profitability.

However, a challenging economy, market volatility and new regulations could pressurize the company’s fundamentals.

E*TRADE currently carries a Zacks Rank #4 (Sell).

Performance of Other Investment Brokers

The Charles Schwab Corp.’s (SCHW) reported second-quarter earnings of 23 cents per share, surpassing the Zacks Consensus Estimate of 22 cents. This was also up 28% from 18 cents earned in the year-ago quarter. Better-than-expected results were attributable to strong revenue growth.

Interactive Brokers Group, Inc.’s (IBKR) second-quarter adjusted earnings per share of 26 cents missed the Zacks Consensus Estimate of 29 cents.

TD Ameritrade Holding Corporation’s (AMTD) fiscal third-quarter 2014 earnings of 34 cents per came in line with the Zacks Consensus Estimate.

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