E*TRADE Q3 Profit Jumps 83% on Solid Trading Activity - Analyst Blog

Driven by strong trading activity, E*TRADE Financial Corporation (ETFC) delivered a positive earnings surprise of 31.8% in third-quarter 2014, marking the third straight quarter of earnings beat. Earnings per share of 29 cents outpaced the Zacks Consensus Estimate of 22 cents. Also, this compared favorably with the prior-year quarter earnings of 16 cents per share.

Impressive results were driven by higher net operating interest income and reduced provision for loan losses. Results reflect rise in total daily average revenue trades (DARTs), increased customer accounts and reduced delinquencies. However, fall in non-interest income and rise in expenses were on the downside.

E*TRADE reported net income of $86 million, rising a significant 83% from $47 million in the prior-year quarter.

Quarter in Detail

Net revenue of $440 million outpaced the Zacks Consensus Estimate of $424 million. Further, the reported revenue figure increased 6% year over year, owing to higher net operating interest income, partially offset by lower non-interest income.

Net operating interest income increased 12% year over year to $269 million, reflecting higher interest income and lower interest expenses. Further, net interest spread was 2.54%, up from 2.30% in the last-year quarter.

Non-interest income decreased 3% year over year to $171 million. The decline was mainly due to no principal transaction revenues and fall in the net gains on loans and securities, partially offset by a rise in commissions and fees and service charges.

Total operating expenses were $277 million, up 2% year over year.

Total DARTs increased 6% year over year to 153,494. At the end of the reported quarter, E*TRADE reported 4.8 million customer accounts, including 3.1 million brokerage accounts, up 4% from the year-ago quarter. Moreover, number of net new brokerage accounts increased to 33,376 from 24,820 in the prior-year quarter.

The company's total customer assets were $281.7 billion, up 17% year over year. Brokerage-related cash increased 6% year over year to $40.4 billion. Customers were net buyers of about $2.2 billion of securities, compared with $0.7 billion in the prior-year quarter. However, net new brokerage assets were $2.3 billion, down from $2.4 billion in the prior-year quarter.

Credit Quality

Overall, credit quality improved at E*TRADE. Net charge-offs were $10 million, down 66% year over year. Provision for loan losses decreased 73% year over year to $10 million. Allowance for loan losses decreased 13% year over year to $401 million.

Further, total special delinquencies (30 to 89 days delinquent) declined 43% year over year to $159 million in E*TRADE's entire loan portfolio. Also, total delinquencies (30 to 179 days delinquent) declined 46% year over year to $210 million.

Balance Sheet and Capital Ratios

E*TRADE continued to reduce its balance-sheet risks. The company's net ending loans receivable stood at $6.3 billion at the end of the reported quarter, down 26% year over year.

As of Sep 30, 2014, E*TRADE had total assets of $45.8 billion, compared with $46.3 billion as of Dec 31, 2013.

The company's capital ratios improved. As of Sep 30, 2014, E*TRADE reported Tier 1 common ratio of 16.1%, up from 12.9% in the year-ago quarter. Total risk-based capital ratio was 19.7%, up from 16.6% in the prior-year quarter. Tier 1 leverage ratio was 7.57%, increasing from 6.6% in the year-ago quarter.

Our Take

Results of E*TRADE reflect a strong quarter. Increase in customer assets and improvement in DARTs are impressive. The company's initiatives to reduce balance sheet risk keep 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 #3 (Hold).

Performance of Other Investment Brokers

The Charles Schwab Corp.'s (SCHW) third-quarter 2014 earnings of 24 cents per share missed the Zacks Consensus Estimate by a penny owing to a rise in expenses. However, this was up 9% from 22 cents earned in the year-ago quarter.

Interactive Brokers Group, Inc.'s (IBKR) third-quarter 2014 adjusted earnings per share of 5 cents largely missed the Zacks Consensus Estimate of 23 cents. Also, the reported figure came in 84% below the year-ago quarter earnings. Substantial trading losses in the Market Making as well as Corporate segments resulted in the overall poor performance by the company.

TD Ameritrade Holding Corporation (AMTD) is slated to report results on Oct 28.