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Online brokerage firm, E*TRADE Financial Corporation (ETFC - Analyst Report) reported a hike in its Daily Average Revenue Trades (DARTs) for the month of Jan 2013. According to the monthly market activity report for Jan 2013, E*TRADE’s DARTs were 153,580, improving 18% from Dec 2012 and 6% from Jan 2012, on the back of increased investments by investors.

Broker performance is generally measured through the DARTs that represent the number of trades from which brokers can expect commissions or fees. The fall in DARTs largely resulted from the uncertain economic recovery and investors’ reluctance to invest in the equity markets.

At the end of the month under review, E*TRADE’s total number of accounts came in at approximately 4.5 million, of which about 2.9 million are brokerage accounts, 1.2 million are stock plan accounts and 0.5 million are banking accounts.

For the reported month, E*TRADE’s total brokerage accounts included 31,286 gross new brokerage accounts and net new brokerage accounts of 9,127. Moreover, net new brokerage assets were $1.0 billion, rising from $0.7 billion in the prior-year. Gross new brokerage accounts and net new brokerage accounts reflect the company’s ability to attract and retain customers who trade and invest.

During the month, E*TRADE’s customer security holdings were $143.8 billion, up 3.7% from the prior month. Further, brokerage-related cash moved up marginally by 0.9% from last month to $34.2 billion, with customers being the net buyers of about $0.3 billion in securities. Moreover, bank-related cash and deposits dipped by $0.2 billion from Dec 2012 and ended the month at $6.9 billion.

Quarterly Performance

As of Dec 31, 2012, DARTs were 128,000, down 1% sequentially. 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.

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.

Peer Performance

Earlier this week, among E*TRADE’s peers, TD Ameritrade Holding Corporation (AMTD - Analyst Report) reported a 17% rise in average U.S. trades compared with the prior month in its Activity Report for the month of Jan 2013. Moreover, U.S. trades surged 3% on a year-over-year basis to 387,000. For the month, TD Ameritrade reported $499.3 billion in total client assets, up 17% year over year and 4% from the prior month.

Moreover, another peer, Charles Schwab Corp. (SCHW - Analyst Report) is expected to release its Monthly Activity Report for Jan 2013, later this week.

Our Viewpoint

The competitive position of brokerage business in the market depends on trading customers, with emphasis on active traders. As the long-term investing customer group is less developed against the trading customers, there is scope for future growth whenever there is an expansion in the long-term customer base.

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

Amid the challenging economy, rising DARTs and new brokerage accounts will be beneficial to the company. However, we remain concerned about the sluggish macroeconomic environment, which might lead to lower trading activities. Moreover, fluctuating interest rates are expected to continuously impact the company’s financials in the near term.

However, E*TRADE’s initiatives to reduce balance sheet risk appear to be promising, although they will put near-term pressure on the net interest margin. Moreover, its expense discipline and better capital position are impressive and will likely aid the company navigate through the current cycle.

E*TRADE currently retains a Zacks Rank #3 (Hold). Among peers, companies in the same industry include Evercore Partners Inc. (EVR - Snapshot Report) with a Zacks Rank #1 (Strong Buy).

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