E*TRADE Financial Corporation‘s (ETFC) fourth-quarter loss of 4 cents per share was in line with the Zacks Consensus Estimate. The loss for the reported quarter significantly narrowed from the loss of 67 cents in the prior quarter and 50 cents in the prior-year quarter.

E*TRADE reported a fourth-quarter net loss of $67.1 million, compared to a loss of $275.6 million a year earlier.

The loss of the online broker reduced from the year-ago quarter, primarily due to lower provision for loan losses. Results were also supported by higher revenue and lower operating expenses. According to the Chairman and interim CEO, E*TRADE has positioned itself for sustainable growth by successfully recapitalizing the balance sheet and maintaining its focus on the online brokerage business.

Estimate Revisions Trend

There were no estimate revisions in either direction over the last 7 days. Over the last 30 days, one of the 15 analysts covering the stock lowered estimates for full year 2010, while one moved in the opposite direction. Currently the Zacks Consensus Estimate for 2010 is for a one-cent loss, which would be a substantial improvement over the full-year 2009 loss of $1.18 per share. In 2008, E*TRADE had a loss of $1.58 per share.

The same number of estimate revisions for 2010 in both directions indicates no clear directional pressure on the performance of the stock in the upcoming quarters. As a result, our long-term recommendation on the stock remains “Neutral”.

With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters, with two positive and two negative surprises. However, the average remained negative at 11%. This implies that E*TRADE has fallen short of the Zacks Consensus Estimate by 11% over the last four quarters. The surprise outlook for the coming quarters needs to be taken with a pinch of salt given the extremely low earnings numbers involved. The current Zacks Consensus Estimates for the first quarter and full-year 2010 are losses of 2 cents and one cent, respectively. The upside potential of these estimates, essentially a proxy for future earnings surprises, currently stands at 50% and 200% for the first quarter and full-year 2010, respectively.

Quarter in Detail

Total revenue for the quarter decreased 9.0% sequentially but increased 7.6% year-over-year to $523.4 million. The year-over-year increase in revenue was due primarily to lower other-than-temporary impairment (OTTI) and higher fees and service charges. For full year 2009, total revenue increased 15.1% over 2008 to $2.2 billion.

The performance of E*TRADE’s online brokerage business was impressive for the full year, with total daily average revenue trades (DARTs) of 197,000, up 4.8% from 188,000 in 2008. However, for the reported quarter, total DARTs decreased 12.0% sequentially and 20% year-over-year to 174,000.

Net interest income was down marginally but up 17.1% year-over-year to $321 million. Net interest income was almost flat sequentially as a $459 million decline in average interest-earning assets to $43.8 billion was largely offset by a 4 basis point expansion in the net interest income spread to 2.86%.

E*TRADE’s provision for loan losses for the reported quarter decreased 15.8% sequentially and 43.0% year-over-year to $292 million.

Total operating expense increased 5.5% sequentially but decreased 0.9% year-over-year to $318 million. The sequential increase was due primarily to charges associated with the restructuring of E*TRADE’s international operations, seasonal advertising, and higher real estate owned (REO) expenses.

E*TRADE continued to make progress in reducing balance sheet risk as its loan portfolio contracted by $1.1 billion from last quarter, of which $0.8 billion was due to prepayments or scheduled principal reductions.

E*TRADE continues to maintain Bank capital ratios well above the regulatory well-capitalized thresholds. As of Dec 31, 2009, E*TRADE reported Bank Tier 1 capital ratios of 6.69% to total adjusted assets and 12.79% to risk-weighted assets.

E*TRADE did not receive bailout from the government during the height of the financial crisis. In fact, last year, it declined $800 million as part of the government’s $700 billion financial bailout program. E*TRADE is rumored to be a takeover target of its peers Charles Schwab Corp. (SCHW) and TD Ameritrade Holding Corp. (AMTD). Both the competitors reported profit declines in the latest quarter.

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