(ETFC) E*TRADE Financial Corporation’s October Daily Average Revenue Trades Perks Up

Online broker E*TRADE Financial Corporation (ETFC) released its Monthly Activity Report for October 2011 on Wednesday, recording a sequential as well as year-over-year rise in average U.S. trades driven by volatile markets.

For the reported month, Daily Average Revenue Trades (DARTs) were 157,713, up 3% sequentially and 9% year over year. Broker performance is generally measured through DARTs. DARTs represent a number of trades from which brokers can expect commissions or fees.

At the end of the month, total accounts were approximately 4.3 million, including about 2.8 million brokerage accounts, 1.1 million stock plan accounts and 0.5 million banking accounts.

Total brokerage accounts of E*TRADE include gross new brokerage accounts of 22,723. The figure also reflects a decrease of 836 net new brokerage accounts from September. In October, net new brokerage assets were $0.6 billion. Total brokerage accounts and net new brokerage accounts indicate the company’s ability to attract and retain trading and investing customers.

During the month, E*TRADE’s customer security holdings were $121.3 billion, up 10% sequentially. Further, brokerage-related cash climbed 3.8% sequentially to $27.1 billion, while customers were net sellers of approximately $0.9 billion in securities in October. Bank-related cash and deposits remained stable at $7.8 billion in the reported month.

Quarterly Performance

As of September 30, 2011, DARTs was 165,000, up 11% sequentially and 30% year over year. Net new brokerage assets reported were $2.6 billion in the quarter, significantly up from $1.5 billion in the prior quarter and $1.4 billion in the prior-year quarter. Overall credit quality improvement was recorded in the quarter. E*TRADE’s provision for loan losses decreased 4.6% sequentially to $98.4 million. Net charge-offs were $157.0 million, down from $178.1 million in the prior quarter, while allowance for loan losses also decreased sequentially to $0.8 billion from $0.9 billion.

For E*TRADE’s entire loan portfolio, special mention delinquencies were flat sequentially and declined 24% year over year, while total at-risk delinquencies plummeted 5.0% sequentially and 28% year over year.

E*TRADE reduced its balance sheet risk further, with its loan portfolio contracting $0.7 billion from the last quarter, of which $0.6 billion was due to prepayments or scheduled principal reductions.

Peer Performance

Earlier this week, E*TRADE’s closest competitor Charles Schwab Corp. (SCHW) also released its Monthly Activity Report for October 2011, recording gains of 9% sequentially and 37% year over year in client activity. The company’s DARTs were 509,500 during the month under review. The upsurge was mainly attributable to a seasonal rise in mutual fund transactions on its OneSource platform.

Last week, TD Ameritrade Holding Corporation (AMTD) also recorded a sequential as well as year-over-year rise in average U.S. trades for October 2011. The company’s DARTs were 407,000, up 4% sequentially and 12% year over year.

Our Take

The competitive position in the market for brokerage business depends on trading customers, predominantly active traders. As the long-term investing customer group is less developed against the trading customers, there is an opportunity for future growth if and when the long-term customers expand.

Development of innovative online trading and long-term investing products and services, delivery of advanced customer service, creative and cost-effective marketing and sales, and expense discipline can be considered as key factors in executing E*TRADE’s strategy to profitably boost its trading and investing business.

Furthermore, E*TRADE’s initiatives to reduce balance sheet risk are encouraging, although it will add near-term pressure on the interest margin. The company’s capital position and improving delinquency trends are positive. Moreover, improvement in credit quality metrics suggests that management can now focus more on the company’s core business. However, volatility in global markets and uncertainty in economic recovery remains cause of concern.

E*TRADE currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.

TD AMERITRADE (AMTD): Free Stock Analysis Report

E TRADE FINL CP (ETFC): Free Stock Analysis Report

SCHWAB(CHAS) (SCHW): Free Stock Analysis Report

Zacks Investment Research

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