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E*TRADE Financial Corporation (ETFC - Analyst Report) reported first-quarter 2013 net income of 12 cents per share, in line with the Zacks Consensus Estimate. However, results improved from a net loss of 65 cents per share in the prior quarter.

Increased new brokerage accounts with a rise in total daily average revenue trades (DARTs) acted as the positives for the quarter. In addition, loan portfolio contractions, improved credit quality and a strong capital position added fuel to the fire. However, decrease in total revenue in the ongoing challenging macroeconomic environment and elevated operating expenses acted as the headwinds.

In the quarter under review, E*TRADE reported net income of $35 million compared with a net loss of $186 million in the prior quarter.

Performance in Detail

Net revenue dipped 10% sequentially to $420 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 $437.0 million.

The DARTs for the reported quarter increased 16% sequentially to 149,000.

Net new brokerage assets reported were $3.1 billion, up from $2.3 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 30,000 surged considerably from the prior-quarter level of 10,000.

Net operating interest income plummeted 7% sequentially to $241 million in the quarter under review. The decline was due to lower interest income, partially offset by reduced interest expenses. Moreover, net interest spread in the quarter was 2.30%, down from 2.38% in the last quarter, attributable to lower average interest-earnings assets.

Non-interest income declined to $179 million, down 13.5% sequentially. The dip was primarily due to decreased net gains on loans and securities, partially offset by higher fees and service charges along with elevated commissions.

Total operating expenses moved up 3.9% sequentially to $296 million. The upsurge was primarily attributable to higher advertising and market development costs and increased compensation and benefits expenses. These negatives were partially offset by lower other operating expenses, lower occupancy and equipment expenses, higher advertising and reduced professional services.

Credit Quality

Overall, credit quality improved during the quarter. E*TRADE's provision for loan losses dipped 42% to $43 million on a sequential basis. Net charge-offs also declined 33% sequentially to $68 million. Further, allowance for loan losses declined 5.4% sequentially to $455 million.

For E*TRADE’s entire loan portfolio, special mention delinquencies decreased 9% sequentially, and total at-risk delinquencies moved down 8% sequentially.

Balance Sheet

E*TRADE reduced its balance sheet risk further. The company’s loan portfolio was $10 billion at the end of the reported quarter, down $0.5 billion sequentially.

The company’s total customer assets stood at $219 billion, up from $201 billion in the prior quarter. Total assets ended the quarter at $45.0 billion, down by $2.4 billion sequentially, as E*TRADE directed about $3.0 billion in brokerage-related customer cash to select third party institutions.

The company commands a strong capital position. As of Mar 31, 2013, E*TRADE reported Tier 1 common ratio of 11.2% compared with 10.3% in the prior quarter. Total risk-based capital ratio was 14.8%, up from 13.7% in the prior quarter. Tier 1 leverage ratio was 6.0%, up from 5.5% in the last quarter.

Competitive Landscape

Among other investment brokers, Charles Schwab Corporation (SCHW - Analyst Report) as well as Interactive Brokers Group, Inc.’s (IBKR - Analyst Report) first-quarter 2013 earnings missed the Zacks Consensus Estimate. However, TD Ameritrade Holding Corporation (AMTD - Analyst Report) reported its fiscal second-quarter 2013 (ended Mar 31, 2013) net income of 26 cents per share, marginally beating the Zacks Consensus Estimate of 24 cents.

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 to 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 strong capital position, decreasing delinquencies, increase in new brokerage accounts and improvement in DARTs are impressive.

Yet, amid a challenging economy, reducing revenues and rising expenses remain looming concerns. E*TRADE currently carries a Zacks Rank #3 (Hold).

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