E*Trade Financial Corp.’s (ETFC) rating outlook has been raised to “stable” from “negative” by Moody’s Investors Service, a subsidiary of Moody’s Corp. (MCO). The rating outlook lift reflects stronger capital levels and lowered burden of debt at E*Trade. Additionally, the resilience of its online brokerage business and a reduced probability of losses in E*Trade loan portfolio were recognized while raising the rating outlook.

Currently, Moody’s has “B3” long-term issuer rating and a “D-/Ba3” rating on E*Trade Bank. The “B3” rating is six notches below investment-grade status and “Ba3” is three notches below investment grade.

Second Quarter Results

Last week, E*Trade reported its second quarter results, turning to profitability after incurring losses for the last three years. E*Trade reported earnings of 12 cents per share versus the Zacks Consensus Estimate of a loss of 11 cents.

The significant turnaround in its results was helped by a drop in loan loss provisions in the quarter. Results were also supported by lower operating expenses, though revenues dropped in the quarter.

E*Trade’s provision for loan losses for the quarter decreased $102 million sequentially to $166 million. This represents the seventh straight decline in its provision for loan losses. Net charge-offs were down $63 million from the prior quarter to $225 million.

Moody’s Standpoint

According to Moody’s, the excess capital and improved pre-provision earnings and cash position would aid E*Trade in absorbing loan losses in the next few quarters. Though the rating agency is concerned about the vulnerable credit profile of E*Trade, it recognizes an improvement in delinquency trends.

Nevertheless, E*Trade online business remains good despite an overall slowdown in activity levels industry wide. Additionally, the somewhat stabilization in the asset quality reflects that management can now focus more on the company’s core business.

E*Trade is currently rated as Zacks #3 Rank (Hold), implying that there is no clear directional pressure on the shares over the short term. The stock has a long-term Neutral recommendation.
 
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