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E*TRADE Financial Poised for Growth, Peer Pressure Lingers

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On Nov 28, 2016, we issued an updated research report on E*TRADE Financial Corporation (ETFC - Free Report) . We believe that the company’s renewed focus on strengthening its trading business will boost its growth.

Management targets to achieve 2-3% incremental growth over a period of 18-24 months across assets, accounts, and trades. Further, the company’s numerous restructuring measures and efforts to streamline balance-sheet risk remains encouraging. However, fierce competition with big players, heightened regulatory norms and restrictions on the use of credit facility pose near-term threat for the company’s profitability and operational flexibility.

The company adopted restructuring move of eliminating entire wholesale funding obligations. This resulted in improving the company’s balance-sheet composition, along with removal of high-cost funding and making space for onboard low-cost deposits. These restructuring actions are expected to eliminate nearly $21 million of future annual expenses, mainly compensation and benefits.

Further, in order to streamline balance-sheet risk, the company resorted to reducing credit risk in its legacy loan portfolios. We expect that such balance-sheet restructuring will significantly improve the company’s financials going forward.

In 2014, the company revamped the E*TRADE brand. It is now focused on reinforcing its leadership position in trading business. E*TRADE is working on enhancing its digital platform through improved capabilities on professional trading and mobile platforms, and introduction of new brokerage products and services, to better serve its customers.

In Sep 2016, the company acquired an online options broker – OptionsHouse – to boost its derivative platform. Notably, management is focused on derivatives mix with a target of increasing it to 35% of Daily Average Revenue Trades (DARTs) within the next two years.

Further, driven by a solid capital position, E*TRADE seeks to enhance shareholder value. The company repurchased around $502 million of common shares as of Jun 30, 2016, under its Nov 2015 share repurchase program of $800 million. Notably, this was the first time in over eight years, in which the bank returned capital to shareholders through share buybacks.

However, during third-quarter 2016, the company did not make any share repurchase owing to the OptionsHouse acquisition. Nonetheless, in absence of any attractive business opportunity, management anticipates to resume share buybacks in second-quarter 2017.

E*TRADE’s improving credit trends also remain encouraging for its future growth prospects. The company recorded a benefit to provision for loan losses during the first nine months of 2016, compared to provision for loan losses in the prior year. With provisions likely to trend at normalized levels driven by management’s efforts to optimize balance sheet, the company’s bottom-line growth remains positive.

However, E*TRADE is exposed to intense competition from several established and renowned players that have greater financial, technical and marketing capabilities. These peers can offer better terms of service and conduct promotional activities to attract customers. Also, they are relatively better positioned to withstand the changing market conditions and adapt rapidly to take advantage of the available opportunities. These competitive factors can have an adverse impact on E*TRADE’s revenue and customer base.

Moreover, E*TRADE, like many other financial services companies, is subject to stringent regulations. The Federal Reserve has drafted a series of new rules for the major U.S. financial institutions, in order to stabilize the financial system. Such on-going rule-making processes are likely to affect the company’s financial and business operations over the long term.

E*TRADE’s shares gained around 14% so far this year on the NasdaqGS. However, the stock has underperformed 16% gain of the Zacks categorized Investment Brokers industry.

Further, the Zacks Consensus Estimate for the current year has been revised upward by 5.9% to $1.79 per share, over the past 60 days. Notably, the company has a positive record of earnings surprises in the trailing four quarters, building the average to 22.8%.

Currently E*TRADE carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Other stocks to consider

Stifel Financial Corp. (SF - Free Report) sports a Zacks Rank #1. The Zacks Consensus Estimate for the current year moved up 4.5% to $2.58 per share over the last 30 days.

Goldman Sachs Group, Inc. (GS - Free Report) and Evercore Partners Inc. (EVR - Free Report) carry a Zacks Rank #2. Over the last 30 days, the Zacks Consensus Estimate for the current year grew nearly 2% to $15.33 per share and 4% to $4.16 per share, respectively.

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