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E*TRADE's (ETFC) Q4 Earnings Beat, Trading Metrics Improve

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E*TRADE Financial (ETFC - Free Report) reported fourth-quarter 2018 earnings of $1.06 per share, which surpassed the Zacks Consensus Estimate of $1.05. Moreover, the results, including certain one-time items, compared favorably with 48 cents recorded in the prior-year quarter.

The results reflected improved net revenues and a benefit to provision for loan losses. Daily average revenue trades (DARTs) increased on a year-over-year basis. Further, the quarter registered a rise in customer accounts. However, higher expenses posed a concern.

E*TRADE’s net income available to common shareholders for the quarter came in at $270 million compared with $129 million recorded a year ago.

For full-year 2018, the company reported net income available to common shareholders of $1.02 billion or $3.88 per share, up from $589 million or $2.15 per share.

Revenues Improve, Expenses Rise

Net revenues in the reported quarter came in at $735 million, lagging the Zacks Consensus Estimate of $747.4 million. Revenues were up 15.4% from the year-ago quarter.

Total revenues for 2018 were $2.87 billion, up 21.4% from the year-ago quarter. However, it lagged the Zacks Consensus Estimate of $2.89 billion.

Net interest income climbed 15% on a year-over-year basis to $482 million, primarily due to higher interest income, partially offset by elevated interest expenses. Net interest margin was 3.20%, up 28 basis points from 2.92% reported in the prior-year quarter.

Non-interest income of $253 million increased 16.1%. The reported quarter recorded higher commissions.

Total non-interest expenses increased 4.9% year over year to $382 million. The rise resulted mainly from higher compensation and benefits expenses, amortization of other intangibles and advertising and market development expenses.

Improved Trading Performance

Total DARTs increased 29% year over year to 295,692 in the fourth quarter, including 31% in derivatives. At the end of the quarter, E*TRADE had nearly 7 million customer accounts (including 4.9 million brokerage accounts), up 28%.

Further, the company’s total customer assets were $414.1 billion, up 8% year over year. Brokerage-related cash increased 2% to $54.2 billion.

Notably, customers were net buyers of about $1.6 billion of securities compared with $2.3 billion in the prior-year quarter. Net new brokerage assets totaled $19.1 billion, up significantly from $3.2 billion.

Credit Quality Improves

E*TRADE’s overall credit quality depicted an improvement. Net recoveries were $8 million in the fourth quarter compared with $6 million recorded in the prior-year quarter. Also, the company recorded a provision benefit of $12 million compared with $26 million reported a year ago.

Allowance for loan losses declined 50% year over year to $37 million.

Balance Sheet and Capital Ratios

E*TRADE’s loan portfolio totaled $2.1 billion at the end of the reported quarter, down from $2.3 billion as of Sep 30, 2018.

As of Dec 31, 2018, E*TRADE had total assets of $65 billion compared with $64.7 billion in the previous quarter.

The company’s capital ratios remained strong. As of Dec 31, 2018, E*TRADE reported Tier 1 risk-based capital ratio of 37.4% compared with 39.5% in the year-ago quarter. Total risk-based capital ratio was 37.7%, down from 43.8%. Tier 1 leverage ratio was 6.6% compared with 7.4% in the year-ago quarter.

During the fourth quarter, the company repurchased 10.3 million shares at an average price of $48.53.

Our Viewpoint

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

E*TRADE Financial Corporation Price, Consensus and EPS Surprise

 

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 (SCHW - Free Report) reported fourth-quarter 2018 earnings of 65 cents per share that beat the Zacks Consensus Estimate of 64 cents. Also, earnings surged 59% from the prior-year quarter.

Interactive Brokers Group, Inc.’s (IBKR - Free Report) fourth-quarter 2018 earnings per share of 57 cents missed the Zacks Consensus Estimate of 59 cents. The figure compares favorably with the prior-year quarter’s adjusted earnings of 43 cents.

Weak trading and underwriting performance affected Morgan Stanley’s (MS - Free Report) fourth-quarter 2018 adjusted earnings of 73 cents per share, which lagged the Zacks Consensus Estimate of 90 cents. The figure also reflected 13% decline from the prior-year quarter.

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