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Driven by strong brokerage activity, E*TRADE Financial Corporation (ETFC - Analyst Report) reported first-quarter 2014 earnings per share of 33 cents, beating the Zacks Consensus Estimate by 10 cents. Results also improved significantly from 12 cents per share in the prior-year quarter.

Shares of E*TRADE nudged up more than 3% in the after-hours trading, indicating investors’ bullishness on the results. The price reaction during today’s trading session will give a better idea about investors’ response to the results.

Rise in total daily average revenue trades (DARTs) along with reduced delinquencies were the positives for the quarter. Decrease in expenses was another positive and reflects the company’s disciplined expense management. In addition, increase in customer assets, reduced provision for loan losses and a strong capital position aided the impressive results. Further, the completion of the sale of its market making business in the quarter acted as a tailwind.

E*TRADE reported net income of $97.0 million, significantly up from the prior-year quarter’s net income of $35.0 million.

Quarter in Detail

Net revenue of $475.0 million in the quarter outpaced the Zacks Consensus Estimate of $454.0 million. Further, the reported revenues increased 13.1% year over year, owing to higher non-interest income and net operating interest income.

The DARTs for the reported quarter increased 33% year over year to 197,944. Notably, the company recorded the highest growth in a period of around 5 years.

Net operating interest income increased 10.4% year over year to $266.0 million. The increase reflected higher interest income and lower interest expenses. Further, net interest spread in the quarter was 2.47%, up from 2.30% in the last-year quarter.

Non-interest income increased 16.8% year over year to $209.0 million. The rise was primarily due to increased fees and service charges along with elevated commissions, partially offset by lower revenues from principal transactions and less net gains on loans and securities

Total operating expenses were $290.0 million in the quarter, which includes $3.0 million of restructuring charges. Excluding these charges, core operating expenses was down nearly 1% year over year.

Net new brokerage assets were $4.1 billion, up from $3.1 billion in the prior-year quarter. At the end of the final quarter, E*TRADE reported 4.7 million customer accounts, including 3.1 million brokerage accounts, up from 3.0 million accounts in the prior-year quarter. Moreover, net new brokerage accounts increased to 71,902 accounts from 42,927 accounts in the prior-year quarter.

The company’s total customer assets stood at $269.0 billion, up from $218.0 billion in the prior-year quarter

Credit Quality

Overall, credit quality improved during the quarter. Net charge-offs were flat at $54.0 million sequentially. Provision for loan losses decreased significantly to $4.0 million from $43 million in the prior year quarter. Allowance for loan losses decreased 11.0% year over year to $403.0 million.

Total special delinquencies (30 to 89 days delinquent) declined 38% year over year to $195.0 million in E*TRADE’s entire loan portfolio. Also, total delinquencies (30 to 179 days delinquent) declined 44.0% year over year to $262.0 million.

Balance Sheet and Capital Ratios

E*TRADE continued to reduced its balance-sheet risk. The company’s loan portfolio stood at $7.4 billion at the end of the reported quarter, down 26.0% year over year.

As of Mar 31, 2014, E*TRADE had total assets of $46.4 billion, up from $45.0 billion as of Mar 31, 2013.

Brokerage related cash increased 16.0% year over year to $40.1 billion. Customers were net buyers of about $3.9 billion of securities, compared with $1.2 billion in the prior-year quarter.

The company’s capital ratios improved during the quarter. As of Mar 31, 2014, E*TRADE reported Tier 1 common ratio of 14.3% compared with 11.2% in the prior-year quarter. Total risk-based capital ratio was 18.0%, up from 14.8% in the prior-year quarter. Tier 1 leverage ratio was 7.0%, up from 6.0% in the year-ago quarter.

In Conclusion

E*TRADE’ started 2014 on a strong note, reflecting its efforts towards achieving growth and profitability. The company’s strong capital position, increase in customer assets and significant improvement in DARTs are impressive. We remain encouraged owing to the company’s initiatives to reduce balance sheet risk, although it will put near-term pressure on the net interest margin. Moreover, E*TRADE’s decision to focus on core operations is expected to improve profitability.

However, a challenging economy, market volatility and new regulations could pressure the company’s fundamentals.

E*TRADE currently carries a Zacks Rank #2 (Buy).

Performance of Other Investment Brokers

TD Ameritrade Holding Corporation (AMTD - Analyst Report) reported fiscal second-quarter 2014 earnings of 35 cents per share, beating the Zacks Consensus Estimate by a penny. Results reflected increased revenues. Further, the quarter continued to witness a rise in both total client assets and daily average client trades. Higher expenses were on the downside.

Interactive Brokers Group, Inc.’s (IBKR - Analyst Report) first-quarter 2014 adjusted earnings per share of 34 cents surpassed the Zacks Consensus Estimate of 29 cents. Better-than-expected results were mainly due to appreciable growth in revenues, partially offset by a slight rise in expenses. Results were also aided by solid performance in both the Electronic Brokerage and Market Making segments.

The Charles Schwab Corp.’s (SCHW - Analyst Report) first-quarter 2014 earnings of 24 cents per share beat the Zacks Consensus Estimate of 22 cents. Results benefited from strong revenue growth and prudent expense management, partially offset by a decline in benefits from provisions.

Read the Full Research Report on ETFC
Read the Full Research Report on SCHW
Read the Full Research Report on IBKR
Read the Full Research Report on AMTD


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