E*TRADE (ETFC) Down 1.7% Since Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for E*TRADE Financial Corporation ETFC. Shares have lost about 1.7% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
E*TRADE Beats on Q1 Earnings, DARTs Increase
E*TRADE reported first-quarter 2017 earnings of $0.48 per share, which easily surpassed the Zacks Consensus Estimate of $0.39.
Better-than-expected results reflected increased net revenue and a benefit to provision for loan losses. DARTs increased year over year. Further, the quarter witnessed increased customer accounts and reduced delinquencies. However, higher operating expenses were on the downside.
E*TRADE’s net income for the quarter was $145 million compared with $153 million in the prior-year quarter, which included an income tax benefit related to the release of valuation allowances.
Revenues Rise
Net revenue for the reported quarter came in at $553 million, surpassing the Zacks Consensus Estimate of $531.9 million. Revenues were up 17.2% from the year-ago quarter.
Net interest income climbed 11.1% on a year-over-year basis to $319 million, primarily due to higher interest income. Net interest margin was 2.63%, down from 2.81% in the prior-year quarter.
Non-interest income of $234 million jumped 26.5% from the year-ago quarter. The reported quarter recorded higher fees and service charges, as well as commissions.
Total non-interest expenses jumped 9.6% year over year to $342 million. The increase was due to rise in almost all the expense components except professional services, advertising and other expenses.
Improved Trading Performance
Total DARTs increased 25.5% year over year to 207,221 in the reported quarter.
At the end of the reported quarter, E*TRADE had 5.3 million customer accounts (including 3.5 million brokerage accounts), up 5.6% from the year-ago quarter.
Further, the company’s total customer assets came in at $335.7 billion, up 18% year over year. Brokerage-related cash grew 25.6% year over year to $53.5 billion.
Notably, customers were net buyers of about $1.6 billion of securities compared with $1.2 billion in the prior-year quarter. Net new brokerage assets totaled $4.2 billion, up from $2.9 billion in the year-ago quarter.
Credit Quality
Overall, credit quality improved at E*TRADE. Net recoveries were $6 million in the reported quarter. Further, the company witnessed a provision benefit of $14 million compared with a loss $34 million in the year-ago quarter.
Allowance for loan losses dropped 3.6% year over year to $213 million.
Additionally, total special delinquencies (30–89 days delinquent) was flat year over year at $131 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans declined 11.4% year over year to $311 million.
Balance Sheet and Capital Ratios
E*TRADE continued to lower its balance-sheet risk in the quarter. The company’s loan portfolio totaled $3.3 million at the end of the reported quarter, down 24.6% year over year.
As of Mar 31, 2017, E*TRADE had total assets of $56 billion compared with $48 billion as of Mar 31, 2016.
The company’s capital ratios remained strong. As of Mar 31, 2017, E*TRADE reported Tier 1 risk-based capital ratio of 35.4% compared with 34.5% in the year-ago quarter. Total risk-based capital ratio was 40.7% up from 40.0% in the prior-year quarter. Tier 1 leverage ratio was 7.2% compared with 7.8% in the year-ago quarter.
Outlook
Second Quarter 2017
Management expects operating margin to trend down sequentially due to the commission price reduction, elevated expenses related to the OptionsHouse integration, and the costs of crossing $50 billion.
Further, consolidated assets are anticipated to be $58 billion by the end of second-quarter 2017.
Full-year 2017
The company expects operating margin to be around 38% in 2017, assuming an improved interest-rate environment.
Further, consolidated assets are expected to be $63 billion by the end of 2017.
Management believes net interest margin (NIM) to be in the low-260s in 2017, with assumption of no change in the rate environment and margin receivables to be constant.
However, with an assumption of an increase in Fed Funds in June and a corresponding increase in term rates, further 0.1% improvement in NIM is expected.
The yield on off-balance sheet deposits is expected to average approximately 90 basis points.
Full year tax rate is expected to approximate 38%, assuming no further one-time items.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to one lower.
E*TRADE Financial Corporation Price and Consensus
E*TRADE Financial Corporation Price and Consensus | E*TRADE Financial Corporation Quote
VGM Scores
At this time, E*TRADE's stock has a subpar score of 'D' on both growth and momentum front. However, the stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for value investors than momentum investors.
Outlook
Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. The stock has a Zacks Rank #3 (Hold). We expect an in-line return from the stock n the next few months.
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