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E*TRADE's August DARTs Slide

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On Wednesday, E*TRADE Financial Corporation (ETFC - Free Report) , an online brokerage firm, reported a decline of 5% in average U.S. trade numbers compared with the prior month, in its Activity Report for the month of August 2012. Moreover, the U.S. trades dropped on a year-on-year basis. This implies that the company witnessed insufficient trading activity during the month under review.

For the reported month, Daily Average Revenue Trades (DARTs) were 121,570, down 37% year over year. The fall in DARTs largely resulted from the uncertain economic recovery and investors’ reluctance to invest in the equity markets.

Broker performance is generally measured through the DARTs that represent the number of trades from which brokers can expect commissions or fees.

At the end of the month, total number of accounts came in at approximately 4.4 million, of which, about 2.9 million are brokerage accounts, 1.1 million are stock plan accounts and 0.4 million are banking accounts.

For the month, total brokerage accounts of E*TRADE included gross new brokerage accounts of 33,303 and net new brokerage accounts of 18,034. In August, net new brokerage assets were $1.1 billion, expanding from $0.3 billion in the prior month. Total brokerage accounts and net new brokerage accounts symbolize the company’s ability to attract and retain customers who trade and invest.

During the month, E*TRADE’s customer security holdings were $139.3 billion, up 3% from the prior month. Further, brokerage-related cash surged 6.1% from last month to $31.4 billion, while customers sold approximately $1.2 billion in securities. Bank-related cash and deposits remained unchanged at $7.3 billion.

Total special delinquencies (30 to 89 days delinquent) waned 3% from June 2012 and 6% from the prior month to $339 million in E*TRADE’s entire loan portfolio. Total delinquencies (30 to 179 days delinquent) dropped 4% from June 2012 and 6% from the prior month to $520 million.

Quarterly Performance

As of June 30, 2012, DARTs were 139,000, down 12% sequentially. Net new brokerage assets reported were $2.2 billion in the quarter, falling significantly from $4.0 billion in the prior quarter.

E*TRADE's provision for loan losses declined 6.4% sequentially to $67.3 million. Net charge-offs also plummeted 61.8% sequentially to $120.7 million, while allowance for loan losses skidded 9.2% sequentially to $525.8 million.

Moreover, for E*TRADE’s entire loan portfolio, special mention delinquencies dipped 7% sequentially, and total at-risk delinquencies slumped 6% sequentially.

E*TRADE further reduced the risks related to its balance sheet. The company’s loan portfolio was $11.8 billion at the end of the reported quarter, down by $624 million from the prior quarter, mainly related to $503 million of paydowns.

Peer Performance

Last week, among E*TRADE’s peers, TD Ameritrade Holding Corporation (AMTD - Free Report) reported a 9% fall in average U.S. trades compared with the prior month in its Activity Report for the month of August 2012. Moreover, U.S. trades dropped 37% on a year-over-year basis. For the month, TD Ameritrade reported $461.2 billion in total client assets, up 15% year over year and 3% from the prior month.

Moreover, earlier this week, another peer, Charles Schwab Corp. (SCHW - Free Report) , released its Monthly Activity Report for August 2012. The company recorded a decrease of 31% in DARTs from August 2011 to 375,900. Additionally, the company’s DARTs slipped 5% from the prior month.

Our Viewpoint

The competitive position of brokerage business in the market depends on trading customers, with emphasis on active traders. As the long-term investing customer group is less developed against the trading customers, there is an opportunity for future growth whenever there is an expansion in the long-term customer base.

Development of innovative ways for online trading and long-term investing products and services, delivery of advanced customer service, creative and cost-effective marketing and sales, as well as expense discipline can be considered as key factors in executing E*TRADE’s strategy of boosting its trading and investing business.

Furthermore, E*TRADE’s initiatives to reduce balance sheet risk are encouraging, although it might pressurize the near-term interest margin. Though the company’s capital position and improving delinquency trends are the positives, volatility in global markets remains a major concern. Moreover, lower trading activities, fluctuating interest rates and sluggish equity markets are expected to continuously impact the company’s financials in the near term.

E*TRADE currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.

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