E*TRADE Earnings Disappoint, But Survival No Longer Under Question (ETFC)

E*TRADE (NASDAQ: ETFC) has posted earnings of -$0.20 EPS on a net loss of $91.2 million, and its net revenues were nearly $316 million and estimates from First Call were -$0.10 EPS on $363.94 million in revenues. 

Amazingly enough, this company is still adding accounts.  It opened 305,000 gross new accounts, up 10 percent quarter over quarter and it produced 62,000 net new accounts, up from 7,000 in the prior quarter to end with 4.8 million accounts.  Total customer assets fell by -11% on a quarter over quarter basis, but it noted that it has also stabilized its client asset flows and generated a net inflow of $300 million.

E*TRADE increased excess Bank risk-based capital to approximately $695 million, up $260 million from last quarter.   It said that quarter end shows some $10.7 Billion in excess FHLB borrowing capacity.  The company’s provision expense of $234 million included an additional $9 million associated with a change in the timing of foreclosure and bankruptcy-related charge-offs.  Its losses of $9 million

Next quarter estimates are -$0.03 EPS on $ 404.16 million in revenues. Estimates for fiscal Dec-2008 are -$0.12 EPS on $1.65 billion in revenues.

While CEO Don Layton noted caution at the start of 2008, he noted that E*TRADE exited the quarter "with increased stability and the beginnings of a return to growth,” He also noted that the growth in new customer relationships speaks to the continued strength and appeal of the E*TRADE brand.

Its home equity portfolio is the largest source of potential losses and Layton noted it is performing broadly in line with expectations and the company is affirming its three-year cumulative loss forecast of $1 billion to $1.5 billion.  Total allowances for loan losses rose to $566 million, as provision exceeded charge-offs by $58 million during the quarter. 

E*TRADE is changing its tune to now reflect a modest recession and taking more restructuring activities as a result.  The Company is also taking action that will reduce undrawn home equity lines by an additional $1.2 billion by the end of April.  In recognizing the slowdown and challenging environment, it is has revised expense reduction program designed to lower annual run-rate compensation-related expenses by 10% or by $50 million per year.

Shares were initially punished in after-hours trading on more disclosures of financial asbestos, but this is just more proof that Wall Street isn’t factoring in the obvious.  Shares closed up some 8% today at $3.62.  At one point, shares were under $3.50 in after-hours reaction, but now shares are up an additional 2% from the close at $3.71.

E*Trade is an active stock in our weekly "10 Stocks Under $10" newsletter.

Jon C. Ogg
April 17, 2008

Jon Ogg is a producer and editor of the Special Situation newsletter and the "10 Stocks Under $10" weekly newsletter for a673b.bigscoots-temp.com.