E*TRADE Dinged on Losses & Writedowns (ETFC, FNM, FRE)

E*TRADE Financial Corp. (NASDAQ: ETFC) posted its loss after the close.  The company posted a -$0.19 non-GAAP EPS loss while First Call had estimates at -$0.14 EPS. 

The company set aside some $319.1 million to cover rising defaults in investment portfolios and reserved a mere $30 million for loan losses.  The company noted those losses were higher than expected and tied to home equity charge offs.

One key eyesore is that E*TRADE also is taking a pre-tax loss of some$83 million during the coming quarter that is related to the sale ofsecurities in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).  Itsremaining stake is also down some $40 million so far, but the companyis looking to lighten up there.

The company said home equity lines of credit available in the portfoliowere down to $3.7 Billion at the end of June, down from $7 Billion inQ2-2007.  It did reduce debt levels by $85.8 million via debt forequity exchanges and it said it reached the goal of a run rate of $50million in annual cost savings.

To offset this the company said it has $600 million capital above whatit calls well-capitalized levels for regulatory purposes.  E*TRADE alsonoted that asset sales and reserves will give it enough cushion toweather the storm and further weakening in losses and in the markets.

The growth might not be much in the accounts side as it added some232,000 gross accounts and 30,000 net new accounts in Q2.  That isstill impressive when you consider the past.  Its total assets yr/yrwere down 24% to $162 Billion, but that was only down 4% from Q1-2008.

The company also noted that the current conditions may impede itsexpectations to return to profitability from continuing operations thisyear, but noted that its turnaround execution is working to return toprofitability.

Shares closed up over 10% at $4.05 in regular trading and are down over8% at $3.70 in the after-hours reaction.  The company halted trading ofits stock for a while, and that probably added to some selling as stockhalts on negative news are generally thought of with a negative bias.

Frankly, this is surprising that the street is reacting down thismuch.  Anyone that expected this company to be able to be profitablefrom operations and anyone expecting that there wasn’t anymorefinancial asbestos left on the books was expecting predictions from theend of 2007 or start of 2008 to still be good in an environment whereeveryone should know better by now.

There is still likely more financial asbestos that will come out, butthe fact that it has maintained this much of its account base and grownon a net account basis after all of its troubles in late 2007 has beenmore than impressive.  We want to stress that there is also still a chance that the company will decide later in the year to raise some additional cash as a final cushion going into 2009, so don’t be surprised if you see that later this year.  That’s what makes a ball game. 

Jon C. Ogg
July 22, 2008