UPDATE 2-E*Trade, in sign of strength, to pull capital from bank

Wed Sep 4, 2013 11:23am EDT

By Jed Horowitz

Sept 4 (Reuters) - E*Trade Financial Corp said on Wednesday U.S. bank regulators have approved its request to use capital from its bank subsidiary for broader corporate purposes, a sign of progress in its recovery from bad mortgage loans that severely crippled the company.

Shares of E*Trade, which under new management is focusing on rebuilding its online discount brokerage business and eviscerating bad credits and expenses, were up 8.5 percent in late morning trading.

"They're approaching the finishing line" on the expense-cutting and debt reduction, said Christopher Harris, an analyst at Wells Fargo Securities who has the equivalent of a "hold" rating on E*Trade's shares. Harris said regulatory approval to draw capital from the bank had not been expected until at least the year-end.

The New York-based company said it would deploy $100 million of bank capital to its parent this month and seek approval for distributions of $100 million per quarter "over the near term."

In a filing with the Securities and Exchange Commission, E*Trade did not say how it will use the money. In recent presentations, it said paying off corporate debt was a priority.

The company would be able to retire its $500 million of 6 percent notes before they are callable in November 2014 if regulatory approval continues over the next four quarters, according to Harris. That would reduce its overall debt by nearly 30 percent.

The company, which set aside $325 million for expected loan write-offs and writedowns over the past four quarters, has reduced its bank balance sheet by about $8 billion since the end of 2011, but still has about $9 billion of risky mortgage and related loans. It also has another $800 million of 6.375 percent notes outstanding that are callable in November 2015.

E*Trade said approval for "upstreaming" the bank dividends came from the Office of the Comptroller of the Currency, the regulator for national banks, and from the Federal Reserve Bank of Richmond.

"Today's announcement reflects E*Trade's significant progress on our capital plan, including de-risking and deleveraging the balance sheet, bolstering our enterprise risk management capabilities and strengthening the Company's overall financial position," Chief Financial Officer Matthew Audette said in a statement.

Reuters last week reported that at least four firms were bidding for E*Trade's Chicago-based market-making business, G1 Execution Services, which is expected to sell for more than $100 million. E*Trade took a $142.4 million impairment charge to close the unit earlier this summer.

Despite the earlier-than-expected approval for drawing money from the bank, several analysts said they were not changing their recommendations on E*Trade's stock.

"We believe this positive news is appropriately reflected in E*Trade's valuation," David Chiaverini, an analyst at Bank of Montreal's BMO Capital Markets, wrote in a note to clients.

In the longer term, continued progress could lead to approval for E*Trade to initiate stock buybacks and pay shareholder dividends. But for now, those are farther down on the company's "capital priorities," Chiaverini wrote.

The firm's steady reduction of debt and poorly performing mortgage loans could eventually position the company for a sale, said another analyst who asked for anonymity because of a company policy against discussing mergers.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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