UPDATE 2-E*Trade 1st-qtr profit falls 78 pct, capital improves

Thu Apr 18, 2013 6:38pm EDT

* Customer trades rise 16 percent from end of 2012

* New CEO to deemphasize advertising, focus on "analytical" marketing

* Capital ratios rise but firm still cutting costs -CFO

By Jed Horowitz

NEW YORK, April 18 (Reuters) - E*Trade Financial Corp. on Thursday reported progress in fixing its loss-plagued bank lending businesses and strengthening its core discount brokerage business.

The New York-based company said first-quarter net income fell 78 percent from a year earlier to $35 million, or 12 cents a share, but improved from a loss of $186.1 million in last year's fourth quarter.

"The first quarter was encouraging, as we posted solid sequential growth in customer engagement, accounts and assets," Chief Executive Paul Idzik said in a prepared statement.

Idzik joined in January as E*Trade's sixth CEO since 2009, a sign of the turmoil that has battered the firm.

The company's earnings per share matched the average estimate of 17 analysts, according to Thomson Reuters I/B/E/S.

E*Trade's revenue, however, missed analysts' estimates because of lower-than-expected gains on sales of loans and securities, and lower net interest income as short-term rates fell and the company's balance sheet shrank.

The company reported first-quarter revenue of $419.9 million against the $438.6 million expected by analysts on average.

Profit was driven by 30,000 new brokerage accounts in the quarter, $3.1 billion in new customer assets, and commission-generating daily trades that grew 16 percent from the fourth quarter of 2012.

Operating expenses jumped $10 million from the fourth quarter to $296 million, including $12 million in severance and restructuring costs. Total headcount, including consultants, fell 11 percent from a year ago to 2,937 people.

Among those forced out since Idzik's arrival were Nicholas Utton, E*Trade's chief marketing officer, and Gregory Framke, its chief operating officer and head of technology.

Three board members also are stepping down before the company's annual meeting in May, including Citadel LLC founder Kenneth Griffin. Citadel, which had been lobbying for years to sell the company, was E*Trade's biggest shareholder until it sold its remaining 9.6 percent stake in March.

"Ensuring we have the right leadership team in place is a core priority of mine," Idzik said on a conference call with analysts. "I will very much miss Ken's drive, counsel and insight."

The company said it has no plans to replace Framke but is looking for a new marketing chief.

E*Trade, known for its precocious-baby ads, needs a "much sharper" marketing focus that deemphasizes advertising and looks more closely at "analytics," Idzik said.

E*Trade's provision for loan losses fell to $43 million from $74 million in the fourth quarter, a sign of a contraction in its bad loans. It also trimmed its balance sheet more than expected, causing net operating interest income to fall to $241 million from $285 million a year ago.

As a result of loan sales and deposit transfers, total assets fell $2.4 billion during the quarter to $45 billion, bringing the company close to its long-term goal of reducing assets by $8.5 billion. It expects to hit the goal this quarter after transferring $500 million of customer cash to an outside bank, a company official said.

E*Trade's Tier One leverage ratio, a key measure of its capital strength that is being closely watched by investors, rose to 9.3 percent of assets from 8.7 percent a year ago. The company expects to ask regulators to let the bank move excess cash to its holding company when the ratio reaches 9.5 percent, giving it cash for growth at the brokerage firm and for potential distribution to investors through dividends or share buybacks.

"There are lots of things to do before we make that request," Chief Financial Officer Matthew Audette cautioned on the call with analysts. E*Trade still has to "fix" its risk-management capabilities and complete more cost-cutting, he said.

Shares of E*Trade, up 6.6 percent since the beginning of the year, gained another 3.8 percent after the results were released on Thursday following the close of the U.S. stock market.

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