(Adds CEO quotes, payment for order flow data and details
By Jed Horowitz and Neha Dimri
April 23 E*Trade Financial Corp
reported a higher-than-expected quarterly profit on Wednesday,
helped by a surge in customer trading activity and progress in
reducing its bank subsidiary's portfolio of bad loans.
Net income at the discount brokerage company nearly tripled
to $97 million, or 33 cents per share, in the first quarter,
from $35 million, or 12 cents per share, a year earlier.
That handily beat analysts' average forecast of 23 cents per
share, according to Thomson Reuters I/B/E/S.
The company's net revenue rose 13 percent to $475 million,
also beating analysts' average estimate of $454.6 million.
E*Trade, which was on the brink of failure during the
financial crisis due to its bank's subprime mortgage portfolio,
set aside $4 million to cover loan losses, well below a $43
million provision in the first quarter of 2013. That was partly
because it sold $800 million of troubled residential loans at a
profit during the quarter, reducing its loan portfolio to $7.4
E*Trade said re-engagement of individual investors in the
firm's core business of trading stocks and options after years
of caution played a big part in its quarterly gains.
"Customers were overwhelmingly bullish," Paul Idzik, the
company's chief executive officer, told analysts on a conference
call. Favorable economic conditions and few alternative
investment choices brought client activity to "levels not seen
in years," he said.
He also insisted that E*Trade takes pain to ensure that its
customers trades are executed at the best possible price. Shares
of E*Trade and other discount brokers were battered earlier this
month after publication of Michael Lewis's book "Flash Boys"
said that markets were rigged.
The book raised concerns that regulators could end discount
brokers' practice of selling customers' stock and option orders
to market-makers and exchanges for execution, a practice known
as "payment for order flow."
In an unusual disclosure, E*Trade Chief Financial Officer
Matt Audette said on the conference call that the company
received $25 million in such payments in the first quarter.
Earlier Wednesday, competitor TD Ameritrade Holding
also defended its order flow practices but declined to disclose
how much revenue they produce.
Idzik joined E*Trade in January 2013 with a mission to
return the company to its discount brokerage roots. In his year
at the helm he has replaced virtually his entire management
team. He also oversaw the demise of the company's famous E*Trade
talking baby TV ads because they were not appealing to the core
constituency of investors.
Idzik has also helped restore the sustainability of the
company's bank that it still uses to hold client cash.
Discount brokers' profits are tied to both customer trading
activity and rising interest rates that let them capture a big
return on the cash customers leave in their accounts.
Rates remain low, but trading has exploded as investors
shake off the long-lingering effects of the 2008-2009 market
collapse and search for returns they cannot get from bonds or
The enthusiasm for markets also boosted the firm's interest
revenue as customers borrowed in their margin accounts to buy
stocks. Margin balances of $7.3 million at the end of the
quarter were at their highest level in six years, Idzik said.
Daily average trades at the company hit 198,000 in the
quarter, the highest level in almost five years. Its average
commission rate fell 6 percent to $10.64 per trade because stock
trading was stronger than more expensive options trading.
E*Trade as of March 31 had 3.1 million brokerage accounts,
up 5 percent from a year earlier and 2 percent since the end of
2013. The company said clients are closing accounts at a
record-low annual rate of 7.1 percent.
Analysts at Wells Fargo raised their rating on E*Trade
stock to "outperform" from "market perform" before the results
were released on Wednesday, saying E*Trade was likely to
continue using capital at its bank to pay down expensive debt
and thus eliminate its high interest payments.
In the first quarter, regulators allowed E*Trade's bank to
lend the company $75 million. The firm also sold $800 million of
subprime home mortgage loans and booked $76 million on the sale
of its market-making business during the quarter.
Shares of E*Trade, up 117.6 percent over the past 12 months,
gained another 3.3 percent in after-hours trading to $22.20. The
stock had earlier closed down .69 percent at $21.50 on the
Nasdaq on Wednesday before the company released its earnings
(Reporting by Neha Dimri in Bangalore and Jed Horowitz in New
York; Editing by Simon Jennings, Matthew Lewis and Cynthia