DBRS: E*TRADE Demonstrates Underlying Earnings Momentum and Improves Financial Flexibility

Summary:
• 4Q14 net income continues to demonstrate positive underlying trends with revenues supported by increases in client assets and activity levels, while continued low level of provisioning contribute to the bottom line.
• The Company’s organizational realignment is positive from a ratings perspective, as it improves financial flexibility and enhances ETRADE’s ability to reduce corporate debt. • DBRS rates ETRADE’s Issuer & Senior debt at BB (low) and E*TRADE Bank’s Deposits & Senior Debt at BB (high); all ratings have a Stable trend.

DBRS, Inc. (DBRS) views ETRADE Financial Corporation’s (ETRADE, the Company or the Parent) 4Q14 results as sound, with momentum in core areas continuing to drive the franchise and improving its ability to reduce corporate debt. From a ratings perspective, DBRS views positively E*TRADE’s sustained efforts to reduce corporate debt while also achieving strong performance in its core retail brokerage business.

For the quarter, excluding a $59 million pre-tax charge related to the early repayment of corporate debt, E*TRADE reported solid net income of $78 million, which is largely in line with recent quarters. Strengths in core businesses continued during 4Q14 as DARTS increased 10% from 3Q14 to 168,000 and, furthermore, with the addition of $3.5 billion in net new brokerage assets in the quarter, the Company reached a record $10.9 billion in net new brokerage assets for full year 2014. Moreover, continued improvement in the risk profile is contributing to low levels of loan loss provisions, which were flat from the prior quarter, while funding and capitalization remain strong.

ETRADE’s financial flexibility has also improved following the announcement that the Company received regulatory approval to realign its organizational structure and move its broker-dealers out from under ETRADE Bank (the Bank). The approval allows E*TRADE to move a large portion of its capital generation capacity outside the scope of the Bank which has much higher regulatory capital requirements and where distributions to the Parent are limited by the regulator. The Company plans to dividend approximately $430 million of excess broker-dealer capital to the Parent during 1Q15. In addition, regulatory approval was received for the Bank to operate with a minimum Tier 1 leverage ratio of 9.0%, down from previous levels, indicating a further vote of confidence from the Bank regulator. At end-4Q14, the Bank reported a Tier 1 leverage ratio of 10.6%.

DBRS views these approvals, combined with E*TRADE’s November actions, which included a $400 million debt reduction and refinancing of existing notes to further extend its maturity profile, as significantly improving the Company’s financial flexibility and increasing its opportunity to reduce leverage at the Parent.

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