DBRS: E*TRADE Ratings Unchanged After 3Q13 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 3Q13 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, E*TRADE reported net income of $47 million on net revenues of $417 million.

Highlights of the quarter include sustained momentum in ETRADE’s core brokerage franchise, which caters to broad-based retail clients and corporate services clients, and continued success with strategic actions such as deleveraging and capital planning. Importantly, ETRADE was granted approval by its bank regulator to upstream capital from the Bank to the Parent, given that the Bank has substantial excess risk-based capital. DBRS views this favorably from a ratings perspective, provided that capitalization at the Bank remains appropriately strong. Following a dividend distribution of $100 million from the Bank to the Parent, which boosted corporate cash to $373 million at 3Q13, the Bank continues to maintain substantial excess risk-based capital of an estimated $2.2 billion. Increased corporate cash enhances E*TRADE’s ability to not only make payments on but also pay down some of its corporate debt and reduce its interest costs, subject to regulatory approvals.

Also positive from a ratings perspective, ETRADE is consistently generating sufficient operating income before provisions and taxes (IBPT) to absorb provisioning. With operating IBPT of $146 million, the Company easily absorbed provisioning of $37 million in 3Q13, which is at its lowest level since early 2007. With special mention delinquencies, total at-risk delinquencies, net charge offs, and provision for loan losses all maintaining their downward trajectory, the drag on earnings from ETRADE’s legacy portfolio continues to become less burdensome. The remaining sizable drag on earnings is corporate interest expense. Despite being approximately halved from peak levels, corporate interest expense of $29 million remains elevated and adds pressure to overall profitability.

E*TRADE’s funding and liquidity position remains sound. Benefiting from its brokerage client franchise, deposits at the bank fund a sizable portion of the balance sheet; comprising 64% of total liabilities. Corporate cash has now reached $373 million, sufficient to cover approximately three years’ worth of debt servicing requirements.

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 12.9% at 3Q13, up from 12.2% at the prior quarter. At the Bank level, ETRADE reported a Tier 1 common ratio of 22.2% at 3Q13, up from 21.7% at 2Q13. The Company’s Tier 1 leverage ratio remains solid at 6.6% at the consolidated level and 9.5% at the Bank level.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]