Online broker E*TRADE Financial Corporation (ETFC) released its Monthly Activity Report for August 2011 on Monday, 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 193,546, up 34% sequentially and 57% 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 includes gross new brokerage accounts of 36,105 and net new brokerage accounts of 10,148 during the month. In August, net new brokerage assets were $1.6 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 $119.9 billion, down 3.9% sequentially. Further, brokerage-related cash inched down 6.1% sequentially to $26.0 billion, while customers were net purchasers of approximately $2.6 billion in securities in August. Bank-related cash and deposits plummeted 3.6% sequentially to $8.0 billion in the reported month.
For the month of August 2011, total delinquencies (30 to 89 days delinquent) edged up 10% from June 2011 and climbed 4% from the prior month to $506 million in E*TRADE’s entire loan portfolio. Total delinquencies (30 to 179 days delinquent) inched up 2% from June 2011 and dropped 1% from the prior month to $764 million.
Quarterly Performance
As of June 30, 2011, DARTs was 148,000, down 17% sequentially and 13% year over year. Net new brokerage assets reported were $1.5 billion in the quarter, significantly down from $3.9 billion in the prior quarter and $2.1 billion in the prior-year quarter. Overall credit quality improvement was recorded in the quarter.
E*TRADE’s provision for loan losses plunged 11.2% sequentially to $103.1 million. Net charge-offs were $178.0 million, down from $193.6 million in the prior quarter, while allowance for loan losses also decreased sequentially to $0.9 billion from $1.0 billion.
For E*TRADE’s entire loan portfolio, special mention delinquencies declined 9.0% sequentially and 30.0% year over year, while total at-risk delinquencies plummeted 13.0% sequentially and 33.0% 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.
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 compared with 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.
Further, initiatives to reduce balance sheet risk look promising, although it will add near-term pressure on the interest margin. Moreover, 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. Considering the fundamentals, we maintain a “Neutral” recommendation on the stock. E*TRADE’s closest competitor – Charles Schwab Corp. (SCHW) also retains a Zacks #3 Rank.
