(ETFC) E*TRADE’s January DARTs Perk Up – Analyst Blog

Online broker E*TRADE Financial Corporation (ETFC) released its Activity Report for January 2012 on Monday, recording a sequential rise in average U.S. trades. However, trades dropped from the year-ago period due to high market volatility, which pushed investors to the sidelines.

For the reported month, Daily Average Revenue Trades (DARTs) were 145,390, up 20% sequentially. However, on a year-over-year (y/y) basis, it went down 20%.

Broker performance is generally measured through DARTs. These represent number of trades from which brokers can expect commissions or fees.

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

For the month, total brokerage accounts of E*TRADE included gross new brokerage accounts of 30,298 and net new brokerage accounts of 10,041. In January, net new brokerage assets were $0.7 billion, rising from $0.5 billion in the prior month. 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 $126.5 billion, up 7.1% sequentially. Further, brokerage-related cash climbed 4.7% sequentially to $29.0 billion, as customers were net sellers of approximately $0.9 billion in securities. Bank-related cash and deposits remained stable at $7.8 billion in the reported month.

Quarterly Performance

As of December 31, 2011, DARTs were 140,000, down 15% sequentially and 7% y/y. Net new brokerage assets reported were $1.7 billion in the quarter, significantly down from $2.6 billion in the prior quarter and $2.4 billion in the prior-year quarter.

Overall, credit quality was mixed during the quarter. E*TRADE’s provision for loan losses jumped 25% sequentially to $123 million. Net charge-offs were $120.3 million, down from $157.0 million in the prior quarter, while allowance for loan losses also increased sequentially to $823 million from $820 million.

For E*TRADE’s entire loan portfolio, special mention delinquencies inched up 2% sequentially, but declined 21% y/y; while total at-risk delinquencies inched down 1% sequentially and fell 27% y/y.

E*TRADE reduced its balance sheet risk further. The company’s loan portfolio ended the quarter at $13.2 billion, down by $664 million from the prior quarter and $3.0 billion from the year-ago quarter, mainly related to $544 million and $2.3 billion of paydowns, respectively.

Peer Performance

Among E*TRADE’s peers, last week TD Ameritrade Holding Corporation (AMTD) also recorded a sequential rise, but a year-over-year decline in average U.S. trades for January 2012. The company’s DARTs were 374,000, up 18% sequentially, but down 17% y/y.

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 whenever 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 may add near-term pressure on the interest margin. Though the company’s capital position and improving delinquency trends are positive, regulatory issues in the current uncertain environment is on the downside.

Yet, improvement in new brokerage accounts suggests that management is focusing more on the company’s core business and the decreasing operating expenses reflect better expense management.

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

TD AMERITRADE (AMTD): Free Stock Analysis Report

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

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