DBRS: E*TRADE 3Q14 Earnings Up on Lower Expenses & Provisions; Financial Flexibility Cont to Improve

Summary:
• 3Q14 net income of $86 million, up 25% QoQ, driven by lower expenses and very low levels of loan loss provisions; net revenues ticked up QoQ with growth in commissions as business performance continued to be strong.
• ETRADE upstreamed its fifth consecutive dividend from ETRADE Bank to the Parent, further improving its financial flexibility and enhancing its ability to reduce its high-cost debt burden.
• DBRS rates ETRADE’s Issuer & Senior debt at BB (low) and ETRADE Bank’s Deposits & Senior Debt at BB (high); all ratings have a Stable trend.

DBRS, Inc. (DBRS) considers ETRADE Financial Corporation’s (ETRADE, the Company or the Parent) 3Q14 results as solid, represented by continued franchise momentum, which is driving generally stable revenues, combined with an improving risk profile that is contributing to low levels of loan loss provisions, while funding and capitalization remain strong. During the quarter, the Company continued to show growth in its direct brokerage franchise, adding 24,000 net new brokerage accounts and $2.3 billion net new brokerage assets, driving total customer assets to $282 billion. DARTs of 153,000 were solid and margin balances reached record levels with increased customer activity and engagement, providing important contributions for revenues.

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 $163 million, the Company easily absorbed provisioning of just $10 million in 3Q14. While provisions are at the bottom of the Company’s expected range of $10 million to $30 million quarterly, DBRS views this level as manageable. Hindering earnings growth is the elevated interest expense of $29 million associated with the Company’s corporate debt outstanding of approximately $1.8 billion. ETRADE Bank upstreamed capital to the Parent for the fifth consecutive quarter ($75 million in 3Q14), bringing the total dividend amount over this time-frame to $400 million. Corporate cash reached $610 million, a $40 million increase quarter-on-quarter (QoQ). At end-3Q14, ETRADE Bank reported a consolidated Tier 1 leverage ratio of 10.4%, well above its current target level of 9.5%. DBRS expects that ETRADE will continue conversations internally and with its regulator regarding the possibility of early retirement of its debt, with a first callable date in November 2014.

E*TRADE’s funding and liquidity position remains strong. Benefiting from its brokerage client franchise, deposits at the bank fund a sizable portion of the balance sheet; comprising 61% of total liabilities. Corporate cash is sufficient to cover over five years’ worth of debt servicing requirements. Capitalization remains robust, as reflected by the Company’s estimated Tier 1 Common ratio of 16.1% at the consolidated level and 24.6% at the Bank.

DBRS rates ETRADE’s Issuer & Senior debt at BB (low) and ETRADE Bank’s Deposits & Senior Debt at BB (high) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.