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E*TRADE Financial Corporation (ETFC - Analyst Report) reported fourth quarter 2012 net loss of 65 cents per share, wider than the Zacks Consensus Estimated loss of 54 cents. Moreover, results compared unfavorably with net loss of 10 cents per share reported in the prior quarter.

Lower-than-expected results were affected by reduced new brokerage accounts with a slump in total daily average revenue trades (DARTs). In addition, decrease in total revenue acted as a headwind for the company in the ongoing challenging macro-economic environment. Yet, lower operating expenses depicting prudent expense management coupled with total loan portfolio contractions were the positives for the quarter.

E*TRADE reported fourth quarter net loss of $186 million, deteriorating from a loss of $29 million in the prior quarter.

For full year 2012, net loss was $112.6 million or 39 cents per share, down from net income of $156.7 million or 54 cents per share in the prior year. However, full year earnings were above the Zacks Consensus Estimated loss of 38 cents per share.

Performance in Detail

Net revenue dipped 4.6% sequentially to $467.7 million in the quarter, attributed to lower non-interest income as well as reduced net operating interest income. Moreover, the reported revenues lagged the Zacks Consensus Estimate of $479.0 million.

For full year 2012, total net revenue dropped 5% year over year to $1.9 billion, driven by a fall in net operating interest income and non-interest income. Yet, full year revenues were in line with the Zacks Consensus Estimate.

The DARTs for the reported quarter decreased 1% sequentially to 128,000. For full year 2012, DARTs totaled 138,000, down from 157,000 in the prior year.

Net new brokerage assets reported were $2.3 billion, up from $1.9 billion in the prior quarter. At the end of the quarter, E*TRADE reported 4.5 million customer accounts, including 2.9 million brokerage accounts. Net new brokerage accounts of 10,000 dipped considerably from the prior quarter’s level of 18,000.

Net operating interest income plummeted 0.3% sequentially to $260.2 million in the quarter under review. The decline was due to lower interest income, though partially offset by reduced interest expenses. However, net interest spread in the quarter was 2.38%, up from 2.28% in the last quarter.

Non-interest income declined to $207.4 million, down 9.5% sequentially. The dip compared to the prior quarter was due to decreased net gains on loans and securities, lower fees and service charges along with reduced commissions.

Total operating expenses moved down 1.2% sequentially to $285.4 million. The decline was primarily attributable to lower occupancy and equipment expenses and decreased compensation and benefits expenses. These declines were partially offset by elevated other operating expenses, higher advertising and market development costs and elevated professional services.

Credit Quality

Overall, credit quality was mixed during the quarter. E*TRADE's provision for loan losses dipped 47% to $74.4 million on a sequential basis. Net charge-offs also declined 36% sequentially to $102 million. Further, allowance for loan losses declined 5.4% sequentially to $481 million.

For E*TRADE’s entire loan portfolio, special mention delinquencies increased 5% sequentially, and total at-risk delinquencies jumped 1% sequentially.

Balance Sheet

E*TRADE reduced its balance sheet risk further. The company’s loan portfolio was $10.6 billion at the end of the reported quarter, down by $557 million from the prior quarter, mainly related to $455 million of paydowns.

The company holds a strong capital position. As of Dec 31, 2012, E*TRADE reported Tier 1 common ratio of 10.3% compared with 10.9% in the prior quarter and 9.4% in the year-ago quarter.

Total risk-based capital ratio was 13.7%, down from 14.3% in the prior quarter but up from 12.7% in the prior-year quarter. Tier 1 leverage ratio was 5.5%, down from 5.8% in the last quarter and 5.7% in the prior-year quarter.

In Conclusion

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, compared with the trading customers, there is an opportunity for future growth as and when 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 the key factors in executing E*TRADE’s strategy to profitably expand trading and investing business.

Further, E*TRADE’s initiatives to reduce balance sheet risk appear to be promising, although, it will put near-term pressure on the net interest margin. The company’s capital position and decreasing operating expenses are impressive. Yet, amid a challenging economy, reducing DARTs and new brokerage accounts remain a matter of concern.

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

Among E*TRADE’s peers, companies with Zacks Rank #1 (Strong Buy) include Evercore Partners Inc. (EVR - Snapshot Report) and Greenhill & Co., Inc. (GHL - Snapshot Report), while TD Ameritrade Holding Corporation (AMTD - Analyst Report) carries a Zacks Rank #2.

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