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Battered E*Trade banking on government funds
November 21, 2008 / 7:42 PM / 9 years ago

Battered E*Trade banking on government funds

<p>A sign is seen outside the E*Trade offices in New York November 12, 2007. REUTERS/Lucas Jackson</p>

NEW YORK (Reuters) - The troubles at E*Trade Financial Corp (ETFC.O) have worsened and now hinge on whether it can secure U.S. government funds that would bring some relief to its book of bad mortgage loans.

Shares of the discount brokerage tumbled below $1 to its lowest price ever this week, indicating that investors think chances are slim it will secure the $800 million it applied for under the Troubled Asset Relief Program (TARP) rescue program.

Competitors, including Charles Schwab Corp SCHW.O and TD Ameritrade Holding Corp (AMTD.O), have said they are loath to bid for the smaller and now very cheap company, but have made no secret they covet E*Trade’s brokerage business, which has kept it afloat despite the drag of its mortgage business.

Roger Freeman, a Barclays Capital analyst attending a business update hosted by Schwab this week, said E*Trade’s existence “depends on whether it gets the TARP.”

E*Trade’s survival probably hinges more on whether its customers continue to drive growth, according to analysts. But after a string of quarterly losses, the TARP funding is vital for the near term. But there are serious doubts the company will qualify alongside larger banks whose collapse could further shake a weakened U.S. economy.

“The way the stock is trading now, it appears as though a lot of investors don’t expect them to get the TARP funding,” said one analyst, who did not want to be named due to E*Trade’s delicate situation. E*Trade Bank offers credit cards, savings and checking accounts, and mortgage and home equity loans and hash about $28 billion in deposits.

About 5 percent, or $1.4 billion, of the customer deposits are not insured by the Federal Deposit Insurance Corp, according to the company.

The purpose of the government’s TARP program is to capitalize struggling financial institutions so they can resume lending. Some analysts said it is unlikely that E*Trade, in crisis mode, will be able to lend.

“Inherently, it seems to go against the spirit of the TARP program,” the analyst said of E*Trade’s application.

The company’s argument for public funds focuses on the fact that TARP is partly intended to support those institutions that facilitate liquidity in the market.

E*Trade has said it is confident it will secure the funding and expects to make an announcement later this month. The company has $665 million in cash available to increase the capital of its banking arm if necessary.

Last month, E*Trade’s daily trading and new client accounts both jumped from September, due largely to the volatile market selloff. “Customers have been consistently supportive of our business,” said company spokeswoman Pam Erickson.

WORST-CASE SCENARIO

Overall, discount brokers are enjoying a spike in trading revenues, but they face the worst-case prospect of a lengthy bear market during which individual investors could exit in droves.

“Despite the reasonably healthy trends in the core brokerage franchise, we believe continued credit headwinds, a lack of earnings visibility and a limited capital cushion for common shareholders gives us no reason to become more constructive on E*Trade shares at current levels,” Credit Suisse analyst Howard Chen wrote to clients this week.

The analyst added that because few details on the TARP application have been provided, he has not factored that into earnings estimates.

Shares fell 7 cents to 87 cents on Nasdaq on Friday.

The company spokeswoman declined to comment on the stock price.

E*Trade has absorbed a series of price and ratings downgrades since the last quarterly update, when it boosted its provision for loan losses by 62 percent and warned that charges in its home equity portfolio would be higher than expected.

The company had $26.4 billion in total loans -- including consumer, mortgages and home equity -- on its books at the end of September, with about 3 percent, or about $792 million, considered “nonperforming”.

TELEBANC ACQUISITION

E*Trade, a high flyer in the 1990s technology boom, entered the mortgage business with its 2000 acquisition of Internet bank Telebanc.

The deal helped E*Trade weather the tech-market crash that followed, but also hurt when the mortgage market started to crack last year.

As recently as July, 2007, E*Trade shares were worth more than the stock of both Schwab and Ameritrade. But they plunged as the mortgage portfolio soured, and now the larger rivals are eyeing the healthy segments of E*Trade’s business.

If E*Trade fails, some 4.4 million retail accounts would be exposed, opening the door to a possible government-sponsored takeover intended to protect clients, analysts said.

“We have an interest in the brokerage accounts of any of our competitors in the brokerage business,” Schwab Chief Executive Walter Bettinger said this week. But he added: “We do not have any interest in taking on a complex balance sheet issue, a complex set of loans or securities that will require ... massive work-outs, writedowns and impairments.”

E*Trade had $119.4 billion in total assets at the end of October, of which $16.4 billion was brokerage-related cash.

E*Trade has “a very good brokerage operation,” Toronto-Dominion Bank (TD.TO) CEO Ed Clark -- who also sits on Ameritrade’s board -- said in an interview this week.

“But they are associated with very bad assets, and so we’re not interested to take asset risk in order to buy E*Trade.”

Additional reporting by Lynne Olver in Toronto; editing by Jeffrey Benkoe

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