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E*TRADE's stock to reach $35 in medium term

E*TRADE Financial Corp, a US provider of online brokerage and other financial products and services, issued decent financials for the third quarter of 2015. Adjusted net revenues increased 0.7% y-o-y to $443 mn, mostly in line with expectations. Commissions, fees and service charges were $170 mn, up from $167 mn in both the prior quarter and the third quarter of 2014. Average commission per trade was $10.87 compared with $10.96 in the prior quarter and $11.05 in the third quarter of 2014, however, daily average revenue trades (DARTs) grew 4% sequentially and 2% y-o-y to 156,000. Adjusted earnings per share grew 32% to 33 cents and surpassed analysts’ average projection of 29 cents.

At the end of Q3, E*TRADE had 4.9 mn customer accounts (including 3.2 mn brokerage accounts), up 3% from the year-ago quarter. The company’s total customer assets were $276.6 bn, down 2% y-o-y. Brokerage-related cash was relatively stable y-o-y at $40.2 bn. Customers were net buyers of about $3.7 bn of securities, compared with $2.2 bn in the prior-year quarter. Net new brokerage assets were $2.1 bn.

Overall, credit quality improved at E*TRADE. Net charge-offs were $1 mn compared with $10 mn in the prior-year quarter. Allowance for loan losses declined 6.2% y-o-y to $376 mn. Further, total special delinquencies (30 to 89 days delinquent) declined 28.9% y-o-y to $113 mn in E*TRADE’s entire loan portfolio. Consolidated Tier 1 leverage ratio improved to 8.5%, versus 7.7% in the year-ago quarter.

My outlook for E*TRADE remains optimistic. The company benefited from higher customer trading activity in Q3, which is usually a seasonally slow quarter. I also positively value E*TRADE’s elimination of the wholesale funding obligations, which will lead to significant improvement in the company’s balance sheet composition with removal of high-cost funding. Further, the company remains on track to reduce its legacy loan portfolio. Though a challenging economy, market volatility and new regulations could pressurize the company’s fundamentals, E*TRADE’s decision to focus on core operations is expected to improve profitability.

Currently, E*TRADE’s shares are consolidating above $30 resistance level and, I believe, have a potential to reach a $35 mark in medium term.