DBRS: E*TRADE Ratings Unchanged After 2Q13 Earnings; Senior at B (high)

DBRS, Inc. (DBRS) has today commented that its ratings of ETRADE Financial Corporation (ETRADE or the Company) remain unchanged following the release of the Company’s 2Q13 results. DBRS rates ETRADE’s Issuer & Senior Debt at B (high) and ETRADE Bank’s (the Bank) Deposits & Senior Debt at BB. All ratings have a Stable trend.

For the quarter, the Company reported a net loss of $54 million, driven by a goodwill impairment charge of $142 million associated with the decision to sell its market making business unit. This follows positive net income of $35 million in 1Q13 and $40 million in 2Q12. While a third quarterly loss in the last six quarters is disappointing, DBRS notes that the net loss in 2Q13 was driven by strategic actions as ETRADE focus on its core businesses. Excluding the goodwill charge, ETRADE recorded solid net income of $60 million evidencing continued positive underlying trends. Specifically, E*TRADE reported that it sustained momentum in its flagship brokerage business, continued to shrink its legacy loan book, and completed its deleveraging and expense management efforts, all while meeting its capital plan targets.

DBRS sees the Company continuing to have success in its core brokerage franchise, as indicated by its strong business performance. The Company recorded net revenues of $440 million for 2Q13 (up 5% QoQ, but down 3% YoY) with the Trading & Investing (T&I) segment contributing $309 million (up 4% QoQ, but down 3% YoY). Reflecting continued positive momentum in the underlying business, daily average revenue trades (DARTs) rose to 150,000 during the quarter (up 1% QoQ and 8% YoY). Also, net new brokerage accounts were stable QoQ at 30,000, while the annualized attrition rate matched a record low 8.4%.

The Balance Sheet Management (BSM) segment, which houses the Company’s legacy loan portfolio, delivered pre-tax income of $44 million on net revenues of $131 million (up 7% QoQ, but down 3% YoY). Illustrating progress with the Company’s deleveraging efforts, which are now largely complete, the loan portfolio contracted $0.5 billion QoQ to $9.6 billion. With special mention delinquencies, total at-risk delinquencies, net charge offs (NCOs), and allowances for loan losses all maintaining their downward trajectory, the drag on earnings from E*TRADE’s legacy portfolio continues to become less burdensome.

Expense management is another key area where ETRADE has made considerable progress. Having launched its expense reduction plan in 2012, the Company captured all of the targeted cost savings primarily through headcount reduction during the quarter. Reflecting the effects of this plan, ETRADE’s run-rate of total operating expenses have declined from a quarterly average of $309 million for 2011 to $291 million for 2012 and $284 million for 1H13 (excluding the goodwill impairment charge). Concurrently, the Company continues to invest in building up its enterprise risk management capabilities. DBRS views the completion of the expense reduction plan in conjunction with improving enterprise risk management as enhancing the Company’s overall efficiency and operating capabilities.

E*TRADE’s funding and liquidity position remains sound. Corporate cash, at $251 million, is sufficient to cover two years’ worth of debt servicing requirements. Wholesale borrowings increased by $0.5 billion during the quarter driven by a material pickup in client activity right at the end of the quarter, but this temporary increase was reversed in early July.

Regulatory capital ratios continue to improve at both the holding company and bank level. On a consolidated basis, ETRADE reported a Tier 1 common ratio of 12.2% at 2Q13, up from 11.2% in 1Q13 and 10.2% in 2Q12. At the Bank level, the Company reported a Tier 1 common ratio of 21.6% at 2Q13, up from 20.7% at 1Q13 and 16.7% at 2Q12. The solid capital ratios show ETRADE’s increased capital cushion that provides it with greater loss absorption capacity. Meanwhile, Tier 1 leverage ratio at the Bank level reached management’s target of 9.5%.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on June 25, 2014 to remove unnecessary disclosures.]