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E*TRADE (ETFC) Beats Q2 Earnings Estimates, DARTs Increase

E*TRADE Financial Corporation ETFC reported second-quarter 2017 adjusted earnings of 52 cents per share, which easily surpassed the Zacks Consensus Estimate of 48 cents.

Better-than-expected results reflected increased net revenue and a benefit to provision for loan losses. Daily average revenue trades (DARTs) increased year over year. Further, the quarter witnessed rise in customer accounts and reduced delinquencies. However, higher operating expenses were on the downside.

E*TRADE’s net income for the quarter was $193 million compared with $133 million in the prior-year quarter. The reported net income includes an income tax benefit related to the release of valuation allowances, partially offset by one-time market data expenses. It also includes OptionsHouse integration related expenses and crossing the $50 billion regulatory threshold.

Rise in Revenues Offset by Higher Expenses
 
Net revenue for the reported quarter came in at $577 million, surpassing the Zacks Consensus Estimate of $554.3 million. Revenues were up 21.7% from the year-ago quarter.

Net interest income climbed 24.5% on a year-over-year basis to $356 million, primarily due to higher interest income. Net interest margin was 2.74%, up from 2.64% in the prior-year quarter.

Non-interest income of $221 million jumped 17.6% from the year-ago quarter. The reported quarter recorded higher fees and service charges.

Total non-interest expenses jumped 21.7% year over year to $359 million. The increase was due to rise in almost all the expense components except depreciation and amortization costs.

Improved Trading Performance

Total DARTs increased 37% year over year to 208,205 in the reported quarter.

At the end of the quarter, E*TRADE had 5.3 million customer accounts (including 3.6 million brokerage accounts), up 6% from the year-ago quarter.

Further, the company’s total customer assets were $348.2 billion, up 22% year over year. Brokerage-related cash grew 20% year over year to $51.7 billion.

Notably, customers were net buyers of about $4 billion of securities compared with $1.4 billion in the prior-year quarter. Net new brokerage assets totaled $2.6 billion, up from $1.6 billion in the year-ago quarter.  

Credit Quality Improves

Overall, credit quality improved at E*TRADE. Net recoveries were $2 million in the reported quarter. Further, the company witnessed a provision benefit of $99 million compared with $35 million in the year-ago quarter.

Allowance for loan losses declined 60.4% year over year to $116 million.

Additionally, total special delinquencies (30–89 days delinquent) dropped 14.2% year over year to $103 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans slumped 19.4% year over year to $270 million.

Balance Sheet and Capital Ratios

E*TRADE’s loan portfolio totaled $3.1 million at the end of the reported quarter, down 7.1% sequentially.

As of Jun 30, 2017, E*TRADE had total assets of $58.8 billion compared with $55.9 billion as of Mar 31, 2017.

The company’s capital ratios remained strong. As of Jun 30, 2017, E*TRADE reported Tier 1 risk-based capital ratio of 37.5% compared with 35.6% in the year-ago quarter. Total risk-based capital ratio was 42.4%, up from 41.2% in the prior-year quarter. Tier 1 leverage ratio was 7.5%, flat compared with year-ago quarter.

Our Viewpoint

E*TRADE’s trading performance and credit quality have shown consistent improvement. We anticipate the company’s focus on core operations and strategic initiatives to lead to an improved profitability. However, we remain cautious, given the competitive pressure and macro headwinds.

E*TRADE Financial Corporation Price and EPS Surprise

E*TRADE Financial Corporation Price and EPS Surprise | E*TRADE Financial Corporation Quote

E*TRADE currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Investment Brokers

Continued strength in equity trading drove Morgan Stanley’s MS second-quarter 2017 earnings of 87 cents per share, which easily surpassed the Zacks Consensus Estimate of 76 cents. The reported figure was 16% above the prior-year quarter.

The Charles Schwab Corp.’s SCHW second-quarter 2017 earnings of 39 cents per share were in line with the Zacks Consensus Estimate. It increased 30% from the prior-year quarter.

Interactive Brokers Group IBKR reported second-quarter 2017 adjusted earnings of 32 cents per share, which lagged the Zacks Consensus Estimate by a penny. Also, earnings were 20% below the prior-year quarter figure of 40 cents.

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