On Wednesday, E*TRADE Financial Corporation (ETFC), an online brokerage firm, reported almost in-line average U.S. trades numbers compared with the prior month in its Activity Report for the month of May 2012. However, the U.S. trades dropped on a year-on-year basis.
For the reported month, Daily Average Revenue Trades (DARTs) were 146,254, down 5% year over year. The fall in DARTs largely resulted from the uncertain economic recovery and investors’ reluctance to invest in the equity markets.
Broker performance is generally measured through the DARTs that represent the number of trades from which brokers can expect commissions or fees.
At the end of the month, total number of accounts came in at approximately 4.4 million, of which, about 2.9 million are brokerage accounts, 1.1 million are stock plan accounts and 0.4 million are banking accounts.
For the month, total brokerage accounts of E*TRADE included gross new brokerage accounts of 43,040 and net new brokerage accounts of 28,140. In May, net new brokerage assets were $1.3 billion, increasing from $0.4 billion in the prior month. Total brokerage accounts and net new brokerage accounts are significant of the company’s ability to attract and retain customers who trade and invest.
During the month, E*TRADE’s customer security holdings were $130.3 billion, down 5.6% from the prior month. Further, brokerage-related cash dropped 2.0% from last month to $29.3 billion, while customers purchased approximately $1.9 billion in securities. Bank-related cash and deposits dipped 2.6% to $7.5 billion in the reported month from $7.7 billion in April 2012.
Total special delinquencies (30 to 89 days delinquent) decreased 5% from March 2012 and increased 4% from the prior month to $358 million in E*TRADE’s entire loan portfolio. Total delinquencies (30 to 179 days delinquent) dropped 3% from March 2012 and climbed 4% from the prior month to $554 million.
Quarterly Performance
As of March 31, 2012, DARTs were 157,000, up 12% sequentially. Net new brokerage assets reported were $4.0 billion in the quarter, significantly up from $1.7 billion in the prior quarter.
E*TRADE’s provision for loan losses dropped 42% sequentially to $71.9 million. Net charge-offs more than doubled to $315.6 from $120.3 million reported in the prior quarter, while allowance for loan losses also decreased 29.6% sequentially to $579.2 million.
For E*TRADE’s entire loan portfolio, special mention delinquencies dipped 20% sequentially, and total at-risk delinquencies slumped 19% sequentially.
E*TRADE further reduced the risks related to its balance sheet. The company’s loan portfolio was $12.4 billion at the end of the reported quarter, down by $780 million from the prior quarter, mainly related to $464 million of paydowns.
Peer Performance
Last week, among E*TRADE’s peers, TD Ameritrade Holding Corporation (AMTD) recorded a 2% year-over-year fall in DARTs for May 2012 to 370,000. However, DARTs improved 1% from the prior month. TD Ameritrade announced $431.7 billion of total client assets for May-end, up 3% from May 2011 and down 4% from April 2012.
Later this week, another peer, Charles Schwab Corp. (SCHW) is expected to release its Monthly Activity Report for May 2012.
Our Take
The competitive position of brokerage business in the market depends on trading customers, with emphasis on active traders. As the long-term investing customer group is less developed against the trading customers, there is an opportunity for future growth whenever there is an expansion in the long-term customer base.
Development of innovative ways for online trading and long-term investing products and services, delivery of advanced customer service, creative and cost-effective marketing and sales, as well as expense discipline can be considered as key factors in executing E*TRADE’s strategy of boosting its trading and investing business.
Furthermore, E*TRADE’s initiatives to reduce balance sheet risk are encouraging, although it might pressurize the near-term interest margin. Though the company’s capital position is positive, volatility in global markets and deteriorating delinquency trends remain major concerns.
E*TRADE currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.
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Zacks Investment Research