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E*TRADE Gets Nod for Capital Diversion

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E*TRADE Financial Corporation (ETFC - Free Report) has gained approval from U.S. regulators to transfer capital from its banking subsidiary, E*TRADE Bank. The capital will be used for general corporate purposes.

The authorization comes as a relief to this online discount brokerage firm, which was embroiled in mortgage-related discrepancies during the financial crisis. Though the amount being sent from the bank is lower than expected, it will help the beleaguered firm recover from its capital deficiencies.

E*Trade Bank will transfer a dividend of $75 million to its parent company. The parent company also plans to seek consent for continuous quarterly distributions from the banking subsidiary going forward. The value distributions will be determined according to the bank’s net income in the previous quarter.

The latest regulatory nod is the second time that E*TRADE Financial gained approval to divert capital from its banking subsidiary. In September, E*TRADE Bank had gained sanction to distribute dividend capital totaling $100 million to the parent company.

We commend E*TRADE’s initiatives to reduce balance sheet risks but believe that these will put near-term pressure on net interest margin. The company’s revivification of its discount brokerage business following the mortgage-related issues during the financial crisis appears to be promising.

Moreover, a decrease in expenses reflects the successful execution of the company’s cost reduction initiatives. Further, E*TRADE’s decision to focus on core operations and exit the market making business is expected to improve profitability. Nevertheless, amid a challenging economy, decline in top line and market volatility remain concerns.

E*TRADE currently carries a Zacks Rank #3 (Hold). Some other investment brokers that are performing well include Ladenburg Thalmann Financial Services Inc. (LTS - Free Report) , The Charles Schwab Corp. (SCHW - Free Report) and Interactive Brokers Group, Inc. (IBKR - Free Report) . While Ladenburg Thalmann has a Zacks Rank #1 (Strong Buy), Charles Schwab and Interactive Brokers hold a Zacks Rank #2 (Buy).

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