DBRS: E*TRADE’s 4Q13 Results Demonstrate Continued Momentum

Summary:

• 4Q13 net income of $58 million, up 22% QoQ, as net revenues improved with higher trading activity, increased brokerage accounts and net new assets, while provisioning for loan losses continued to decline
• ETRADE announced another sequential dividend from the ETRADE Bank to the corporation, further increasing its financial flexibility
• 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

From DBRS Inc.’s (DBRS) perspective, the 4Q13 results of ETRADE Financial Corporation (ETRADE or the Company) demonstrate the continued momentum of its core franchise. This momentum is evident in the Company’s strong business performance, with growth across various brokerage metrics (DARTs, net new brokerage accounts/assets, margin receivables) which contributed to a 6.8% increase in net interest income and a 6.9% increase in commissions and fees sequentially. Longer run trends demonstrate a significant reduction in credit costs, with full year provisioning for loan losses of $143 million at about half the 2012 level and a notable 91% below peak levels in 2008.

With revenue growth and much lower provisioning levels, ETRADE is consistently generating sufficient operating income before provisions and taxes (IBPT) to absorb provisioning for loan losses. With operating IBPT of $152 million in 4Q13, the Company easily absorbed provisioning for loan losses of $17 million, which is down to pre-crisis levels. With improving credit trends, 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 still constrains overall profitability.

ETRADE’s financial flexibility is also improving following a second sequential dividend from the Bank to the Parent (3Q13: $100 million, 4Q13: $75 million). Corporate cash stood at $415 million at 4Q13, approximately flat to the 4Q12 corporate cash balance as dividends to the Parent were largely offset by interest payments on corporate debt. DBRS expects that ETRADE will retain the ability to upstream dividends so long as the Bank maintains a cushion of excess capital. ETRADE reported a Tier 1 leverage ratio of 9.5% at the Bank in 4Q13, which is at its current target level but above its ultimate target threshold of 8% at the Bank. At 4Q13, ETRADE has excess capital of $652 million above the 8% level.

Reflecting progress in its Capital Plan and funding strategy, ETRADE has been successful in its deleveraging efforts and its funding profile has improved with reduced borrowing costs as a result of its 2012 corporate debt refinancing. Regulatory capitalization remains robust with a Tier 1 Common ratio of 13.8% at the consolidated level and 23.0% at the Bank. ETRADE estimates that these ratios would significantly improve if calculated based on Basel 3 rules.

DBRS rates ETRADE’s Issuer & Senior debt at B (high) and ETRADE Bank’s Deposits & Senior Debt at BB. All ratings have a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]