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E*TRADE (ETFC) Q2 Earnings Beat, Trading Metrics Improve

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E*TRADE Financial (ETFC - Free Report) recorded a positive earnings surprise of 6.7% in second-quarter 2018. Earnings of 95 cents per share easily surpassed the Zacks Consensus Estimate of 89 cents. Moreover, results compared favorably with 70 cents recorded in the prior-year quarter.

Results reflected improved net revenues and a benefit to provision for loan losses. Daily average revenue trades (DARTs) increased year over year. Further, the quarter witnessed rise in customer accounts and reduced delinquencies. However, elevated operating expenses were on the downside.

E*TRADE’s net income available to common shareholders for the quarter came in at $250 million compared with $193 million recorded in the prior-year quarter.

Revenues Improve, Expenses Flare Up
 
Net revenues for the reported quarter came in at $710 million, comfortably surpassing the Zacks Consensus Estimate of $705 million. Revenues were up 23.1% from the year-ago quarter.

Net interest income climbed 27.2% on a year-over-year basis to $453 million, primarily due to higher interest income, partially offset by elevated interest expense. Net interest margin was 3.02%, up 28 basis points from 2.74% reported in the prior-year quarter.

Non-interest income of $257 million increased 16.3% from the year-ago quarter. The reported quarter recorded higher commissions, and elevated fees and service charges.

Total non-interest expenses flared up 7% year over year to $384 million. The upsurge resulted from rise in almost all the expense components.

Improved Trading Performance

Total DARTs increased 24% year over year to 259,000 in the second quarter, including 34% in derivatives. At the end of the quarter, E*TRADE had 5.8 million customer accounts (including 3.9 million brokerage accounts), up 9% from the year-ago quarter.

Further, the company’s total customer assets were $440.78 billion, up 27% year over year. Brokerage-related cash increased 2% year over year to $52.8 billion.

Notably, customers were net buyers of about $2.9 billion of securities compared with $4 billion in the prior-year quarter. Net new brokerage assets totaled $21 billion, significantly up from the year-earlier quarter.
 
Credit Quality Marks Significant Improvement

Overall, credit quality improved at E*TRADE. Net recoveries were $15 million in the April-June quarter compared with $2 million recorded in the prior-year quarter. Also, the company witnessed a provision benefit of $19 million compared with $99 million reported in the comparable period last year.

Allowance for loan losses plummeted 53.4%, year over year, to $54 million. Additionally, total special delinquencies (30-89 days delinquent) dropped 19.4% year over year to $83 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans dipped 23.3% year over year to $207 million.

Balance Sheet and Capital Ratios

E*TRADE’s loan portfolio totaled $2.4 billion at the end of the reported quarter, down from $2.7 billion as of Jun 30, 2017.

As of Jun 30, 2018, E*TRADE had total assets of $64.4 billion compared with $63.4 billion as of Jun 30, 2017.

The company’s capital ratios remained strong. As of Jun 30, 2018, E*TRADE reported Tier 1 risk-based capital ratio of 40.7% compared with 37.5% witnessed in the year-ago quarter. Total risk-based capital ratio was 45%, up from 42.4% in the prior-year quarter. Tier 1 leverage ratio was 7.1% compared with 7.5% in the year-ago quarter.

During the second quarter, the company repurchased 3 million shares at an average price of $62.51.

Our Viewpoint

E*TRADE’s trading performance and credit quality have displayed continued improvement. Though we remain cautious, given the competitive pressure, escalating expenses and macro headwinds, we anticipate the company’s focus on core operations and strategic initiatives to result in an improved profitability.
 

E*TRADE Financial Corporation Price, Consensus and EPS Surprise

E*TRADE Financial Corporation Price, Consensus and EPS Surprise | E*TRADE Financial Corporation Quote

E*TRADE currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Investment Brokers

Charles Schwab’s (SCHW - Free Report) second-quarter 2018 earnings of 60 cents per share surpassed the Zacks Consensus Estimate of 58 cents. Also, earnings surged 54% from the prior-year quarter. Revenue growth (driven by a rise in interest income and trading revenues) and absence of fee waivers supported the results. Further, the quarter witnessed an impressive rise in total client assets and new brokerage accounts. However, higher expenses remained the undermining factor.

Interactive Brokers Group, Inc. (IBKR - Free Report) released second-quarter 2018 results. Earnings per share of 58 cents surpassed the Zacks Consensus Estimate of 51 cents. Also, the figure was higher than prior-year quarter’s earnings of 32 cents per share. Results benefited from an improvement in revenues and rise in DARTs along with lower expenses. Further, the Electronic Brokerage segment continued to perform decently.

Among others, TD Ameritrade Holding Corporation (AMTD - Free Report) is scheduled to report June quarter-end results on Jul 23.

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