By Jed Horowitz
Sept 4 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
"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.