We are maintaining our ‘Neutral’ recommendation on E*TRADE Financial Corporation (ETFC - Free Report) as we believe that the risk-reward profile for the company is currently balanced. Our decision is primarily based on the company’s better-than-expected second quarter 2012 results. However, the volatility in global markets remains a major concern.
E*TRADE’s second-quarter 2012 earnings per share marginally exceeded the Zacks Consensus Estimate. The upbeat performance reflected an upturn in brokerage accounts, though total daily average revenue trades (DARTs) declined. The decrease in operating expenses also acted as a tailwind. Moreover, improved credit quality and healthy capital position were the positives.
Yet, reduced revenue was a dampener. E*TRADE’s initiatives to reduce balance sheet risk look promising; however, it will put near-term pressure on the net interest margin (NIM).
E*TRADE’s competitive strategy is to attract and retain customers by emphasizing its low-cost, easy to use and innovative products. These initiatives and customer services are expected to further bring down the attrition rate of the annual brokerage accounts. The company is well-positioned to meet the needs of both traders and investors in the near term as well as over the long-term. As a result of decline in DART levels in the second quarter, the company is concentrating on loss-mitigation strategies like short sales, loan modifications and transfers to better services.
The company’s international restructuring strategies, which were initiated in 2008, have improved its operating leverage to some extent. Further, it continues to streamline the balance sheet risk by reducing credit risks in loan portfolios. These initiatives are expected to significantly improve E*TRADE’s financial strength.
On the flip side, the low interest rate environment has pressurized the spread as well as net interest income. Additionally, the global macroeconomic uncertainty refrained many retail investors from the market and continued to stress the real estate sector. Until and unless the economy gains stability, we will be concerned on the company’s buoyancy factor. Moreover, the stringent regulatory environment remains a headwind.
Although the company is taking initiatives to strengthen its client-advisor relationship, it is likely to experience a pressure on DARTs due to a disengagement of retail traders. Sluggish economic recovery, strict regulatory environment and investors’ reluctance to invest in the equity markets can further put pressure on the DARTs.
Shares of E*TRADE currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. One of its peers – TD Ameritrade Holding Corporation (AMTD - Free Report) also retains a Zacks #3 Rank.