E*TRADE Financial’s ETFC ratings have been kept on review for upgrade by Moody's Investors Service, the rating arm of Moody's Corporation MCO. Long-term issuer rating of Baa2 and senior unsecured ratings are also under review.
Further, affirming baa1 baseline credit assessment (BCA) and P-1 short term bank deposit ratings, Moody’s kept all other ratings of E*TRADE Bank on review for upgrade, including baa1 adjusted BCA.
Rationale Behind Review for Upgrade
Moody’s action follows the recent announcement of an all-stock acquisition deal, under which the U.S. investment bank, Morgan Stanley MS will acquire E*TRADE for $13 billion.
Per Moody’s, compared with E*TRADE's on a standalone basis, creditworthiness of the combined company will be stronger. Notably, E*TRADE Bank's baa1 BCA rating is a notch higher than Morgan Stanley's baa2 BCA, which is on review for upgrade. Therefore, Moody’s has affirmed this rating.
The deal awaits certain regulatory approvals and customary approvals by shareholders of E*TRADE. The transaction is anticipated to close in the final quarter of 2020. Therefore, the reviews for upgrade of E*TRADE will depend on the deal’s closure.
Regarding E*TRADE's corporate governance as a standalone entity, Moody's assessment makes a one-notch downward corporate behavior adjustment in creditworthiness as the rating firm expects the company to explore more M&A opportunities for supporting organic growth.
Factors That Might Trigger Change in Ratings
An upward ratings change can happen on the deal’s closure and initiatives for profitable new revenue streams to balance E*TRADE's current activities without addition of significant credit risk. In addition, improved profitability and prudent cost management can prompt the rating firm for an upgrade.
However, financial impact due to further elimination of the bank’s trading commissions, deterioration in the firm’s value and rise in debt leverage might exert downward rating pressure.
Shares of E*TRADE have gained 32.2% over the past six months, outperforming 21.9% growth recorded by the industry.
Currently, the stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A worth-considering stock includes LPL Financial Holdings Inc. LPLA, which has been witnessing upward estimate revisions for the last 60 days. Additionally, the stock has gained nearly 30.3%, over the last six months. It currently carries a Zacks Rank of 2 (Buy).
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