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E*TRADE (ETFC) Beats on Q1 Earnings; DARTs Down Y/Y

E*TRADE Financial Corporation’s ETFC first-quarter 2016  adjusted earnings came in at 43 cents per share, comfortably beating the Zacks Consensus Estimate of 33 cents. The reported figure also compared favorably with the prior-year quarter adjusted earnings of 29 cents.

Results reflected increased revenues and a benefit from provisions. Further, the quarter witnessed an increase in customer accounts with reduced delinquencies. However, on the flip side, the quarter witnessed a decline in daily average revenue trades (DARTs).

Adjusted net income for the quarter was $122 million, up from $85 million in the prior-year quarter.

Including a $31 million income tax benefit related to the release of a valuation allowance against state deferred tax assets, E*TRADE reported net income of $153 million or 53 cents per share in the reported quarter.

Notably, the company made several reporting changes in the first quarter of 2016 including consolidation of its reporting segments.

Performance in Detail

Net revenue for the first quarter of 2016 came in at $472 million, increasing 7% year over year. However, revenues missed the Zacks Consensus Estimate of $475 million.

Net interest income increased 14.8% on a year-over-year basis to $287 million, primarily due to reduced expenses, partially offset by lower interest income. Net interest margin was 2.81%, up from 2.42% in the year-ago quarter.

Non-interest income was of $185 million, down 3.1% year over year. The decline largely reflected reduced commissions as well as lower gains on securities, partially offset by higher fees and service charges.

Total non-interest expense declined 16.4% year over year to $312 million. Notably, the prior year quarter recorded a $73 million pre-tax loss on early extinguishment of debt.

Total DARTs decreased 3% year over year to 165,122 in the reported quarter.

At the end of the reported quarter, E*TRADE had 5.0 million customer accounts (including 3.3 million brokerage accounts), up 4% from the year-ago quarter. Though net new brokerage accounts and end of period brokerage accounts improved on a year over year basis, these included the impact of closure of 4,430 accounts tied with the shutdown of the company's operations in Hong Kong and Singapore in the first-quarter 2016.

The company’s total customer assets were $284.5 billion, down 5% year over year. Brokerage-related cash increased 2% year over year to $42.6 billion.

Customers were net buyers of about $1.2 billion of securities compared with $3.1 billion net selling activity in the prior-year quarter. Net new brokerage assets totaled $2.9 billion, down from $3.5 billion in the prior-year quarter.

Credit Quality

Overall, credit quality improved at E*TRADE. Net recoveries were $3 million in the quarter compared with charge-offs of $7 million in the year-ago quarter. Further, the company witnessed a benefit to provision for loan losses of $34 million compared with provisions of $5 million in the year-ago quarter.

Allowance for loan losses declined 20% year over year to $322 million.

Further, total special delinquencies (30 to 89 days delinquent) declined 60% year over year to $131 million in E*TRADE’s entire loan portfolio. Also, total delinquencies (30 to 179 days delinquent) declined 56% year over year to $188 million.

Balance Sheet and Capital Ratios

E*TRADE continued to lower its balance-sheet risk. The company’s loan portfolio totaled $4.4 million at the end of the reported quarter, down 23% year over year.

As of Mar 31, 2016, E*TRADE had total assets of $47.9 billion compared with $46.8 billion as of Mar 31, 2015.

The company’s capital ratios remained strong. Under the Basel III Standardized Approach that was brought into effect in Jan 2015, E*TRADE reported Tier 1 risk-based capital ratio of 34.5% as of Mar 31, 2016 compared with 35.0% in the year-ago quarter. Total risk-based capital ratio was 40.0% against 39.4% in the prior-year quarter. Tier 1 leverage ratio was 7.8% against 8.4% in the year-ago quarter.

Share Repurchase

In Nov 2015, the company announced a repurchase authorization of up to $800 million of its common stock. During the reported quarter, the company repurchased 13.1 million shares for $301 million at an average price of $23, completing almost half of the authorization as the company took opportunity of the market dislocations during the reported quarter.

Our Viewpoint

Results of E*TRADE reflect a decent performance, given all the challenges in the quarter including modest trading activity and heightened market volatility.  Further, the company remains on track towards its target of achieving a balance sheet size of $50 billion by second-quarter 2016. Additionally, E*TRADE’s continued share buyback instills investors’ confidence in the stock.

E*TRADE currently carries a Zacks Rank #3 (Hold).

Performance of Other Investment Brokers

TD Ameritrade Holding Corporation AMTD reported earnings per share of 38 cents, in line with the Zacks Consensus Estimate. Notably, the bottom line improved 8.6% year over year. Results reflected strong trading activity that was driven by the heightened volatility in the quarter. Also the quarter benefitted from the December rate hike with improved spread-based revenues. The company witnessed record client assets and interest rate sensitive assets.

Interactive Brokers Group, Inc. IBKR reported first-quarter 2016 adjusted earnings per share of 51 cents, which beat the Zacks Consensus Estimate of 45 cents. Earnings improved substantially from a loss of 22 cents recorded in the year-ago quarter. Results primarily benefited from a strong growth in commissions and execution fees and net interest income. Also the quarter witnessed a rise in DARTs and lower expenses.

The Charles Schwab Corp.’s SCHW first-quarter 2016 earnings of 29 cents per share were in line with the Zacks Consensus Estimate. Further, it was up 32% from the prior-year quarter figure. Revenue growth, primarily driven by increased equity market volatility, and benefit from provisions acted as the tailwinds. However, higher expenses remained a concern.

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E TRADE FINL CP (ETFC): Free Stock Analysis Report
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TD AMERITRADE (AMTD): Free Stock Analysis Report
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