E*TRADE's November DARTs Down

Online broker E*TRADE Financial Corporation (ETFC - Analyst Report) released its Activity Report for November 2011 on Wednesday, recording a sequential as well as year-over-year drop in average U.S. trades. High market volatility was primarily responsible for the unimpressive results.

Moreover, the fourth quarter is a slower period for trading as it is a holiday season. Besides, continual worries regarding the European sovereign-debt crisis and the U.S. economy have restrained retail clients from trading.

For the reported month, Daily Average Revenue Trades (DARTs) were 141,361, down 10% sequentially and 11% year over year. Broker performance is generally measured through DARTs. DARTs represent number of trades from which brokers can expect commissions or fees.

At the end of the month, total accounts came in at approximately 4.3 million, including about 2.8 million brokerage accounts, 1.1 million stock plan accounts and 0.5 million banking accounts.

For the month, total brokerage accounts of E*TRADE included gross new brokerage accounts of 24,541 and net new brokerage accounts of 207. In November, net new brokerage assets were $0.6 billion, in line with the prior month. Total brokerage accounts and net new brokerage accounts indicate the company’s ability to attract and retain trading and investing customers.

During the month, E*TRADE’s customer security holdings were $120.1 billion, down 1% sequentially. Further, brokerage-related cash dropped 3% sequentially to $26.3 billion, while customers were net purchasers of approximately $1.6 billion in securities. Bank-related cash and deposits remained stable at $7.8 billion in the reported month.

Total special delinquencies (30 to 89 days delinquent) remained stable compared with September 2011 and climbed 5% from the prior month to $461 million in E*TRADE’s entire loan portfolio. Total delinquencies (30 to 179 days delinquent) were also flat compared with September 2011 and edged up 2% from the prior month to $715 million.

Quarterly Performance

As of September 30, 2011, DARTs were 165,000, up 11% sequentially and 30% year over year. Net new brokerage assets reported were $2.6 billion, significantly up from $1.5 billion in the prior quarter and $1.4 billion in the prior-year quarter.

Overall credit quality improvement was recorded in the quarter. E*TRADE's provision for loan losses decreased 4.6% sequentially to $98.4 million. Net charge-offs were $157.0 million, down from $178.1 million in the prior quarter, while allowance for loan losses also decreased sequentially to $0.8 billion from $0.9 billion.

For E*TRADE’s entire loan portfolio, special mention delinquencies were flat sequentially and declined 24% year over year, while total at-risk delinquencies plummeted 5.0% sequentially and 28% year over year.

E*TRADE further reduced its balance sheet with $0.7 billion loan portfolio contraction, of which $0.6 billion was due to prepayments or scheduled principal reductions.

Peer Performance

E*TRADE’s closest competitor Charles Schwab Corp. (SCHW - Analyst Report) also released its Monthly Activity Report for November 2011, recording declines of 15% sequentially but increase of 5% year over year in DARTs. The company’s DARTs were 433,500 during the month under review. Continued decline in client activities led to lower DARTs.

Last week, TD Ameritrade Holding Corporation (AMTD - Analyst Report) also recorded a sequential as well as year-over-year decline in average U.S. trades for November 2011. The company’s DARTs were 377,000, down 7% sequentially and 4% year over year.

Our Take

The competitive position in the market for brokerage business depends on trading customers, predominantly active traders. As the long-term investing customer group is less developed against the trading customers, there is an opportunity for future growth whenever the long-term customers expand.

Development of innovative online trading and long-term investing products and services, delivery of advanced customer service, creative and cost-effective marketing and sales, and expense discipline can be considered as key factors in executing E*TRADE’s strategy to profitably boost its trading and investing business.

Furthermore, E*TRADE’s initiatives to reduce balance sheet risk are encouraging, although it may add near-term pressure on the interest margin. The company’s capital position is also marred by deteriorating delinquency trends. However, volatility in global markets remains a cause of concern.

E*TRADE currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.