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On Jun 27, 2013, we reiterated our long-term recommendation on E*TRADE Financial Corporation (ETFC - Analyst Report) at Neutral. Our decision rests on its improved total daily average revenue trades (DARTs) as well as increased new brokerage accounts. However, a fall in total revenue and heightened operating expenses are the causes of concern.

Why Neutral?

E*TRADE has returned to earnings in the first quarter of 2013, after posting losses in the prior couple of quarters. Aided by loan portfolio contractions, improved credit quality and a strong capital position, the company reported earnings per share of 12 cents versus a net loss of 65 cents in the year-ago period. However, results were in line with the Zacks Consensus Estimate.

Though E*TRADE’s DARTs were affected by the volatility in equity markets last year, recent market trends have been favorable to the company. Moreover, E*TRADE’s  focus on loss mitigation strategies – such as short sales, loan modifications and transfers to better servicers – are expected to further improve DARTs in the coming months.

We also commend the company’s efforts to ease its balance sheet risk by reducing credit risk in its loan portfolios. Further, cost reduction initiatives undertaken by the company are expected to be profitable in the future.

However, the current low interest rate environment will likely keep E*TRADE’s net interest spread and net interest income under pressure. Further, we are concerned about the recent regulatory upheavals, which will affect E*TRADE’s capital and business over the long term.

The Zacks Consensus Estimate for 2013 and 2014 remained stable at 50 cents and 62 cents per share, respectively, over the last 60 days. Hence, E*TRADE carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better performing stocks in the same sector include Cowen Group, Inc. (COWN - Snapshot Report), GAIN Capital Holdings, Inc. (GCAP) and GFI Group Inc. (GFIG - Snapshot Report), all of which carry a Zacks Rank #2 (Buy).

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