E-Trade posts profit as loan losses decline

AP News
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Posted: Oct 20, 2010 6:44 PM
E-Trade posts profit as loan losses decline

E-Trade Financial Corp. posted a third-quarter profit, its second consecutive quarterly gain after three years of losses, as improvement in its loan portfolios offset declining revenue and a drop in trading by brokerage clients.

This year's second quarter was E-Trade's first profitable one since 2007, after credit losses from soured mortgage loans left the New York-based company consistently ending up in the red.

In the July-September quarter, the New York-based company reported net income of $8.4 million, or 3 cents per share, matching the consensus forecast of analysts surveyed by Thomson Reuters.

That compares with a loss of nearly $855 million, or $6.74 per share, in the same quarter a year ago, when E-Trade took a $773 million charge from a debt exchange to shore up its capital position.

But E-Trade's provision for loan losses fell to $152 million in the latest quarter, less than half of the $347 million that was set aside in the same quarter a year ago, and down from $166 million in this year's second quarter. It was the eighth consecutive quarterly decline in the loan-loss provision, and the set-aside is now 71 percent smaller than two years ago.

"The company has achieved a number of important milestones, allowing us to shift gears from defense to offense," CEO Steven Freiberg told analysts on a conference call.

However, revenue fell nearly 15 percent last quarter to $489 million, as reduced stock volatility contributed to a 30 percent decline in trading volume compared with the same quarter a year ago. Commission revenue fell nearly 16 percent to $89.5 million.

However, net new brokerage accounts totaled 7,000 during the quarter, and E-Trade ended the quarter with $159 billion in total customer assets, up from $146 billion a year ago.

Trading activity has decreased industrywide in recent months as stock price volatility has eased.

Freiberg said his company's brokerage clients _ primarily individual investors rather than institutional clients _ sharply reduced trading activity after May 6. That's when the Dow Jones industrial average careened nearly 1,000 points in less than a half-hour. Federal regulators have concluded the so-called "flash-crash" occurred when a trading firm executed a computerized selling program in an already stressed market.

"It did cause a pause of the retail investor," Freiberg said in an interview.

However, he said he expects investors to eventually return to the stock market and boost trading volume. That's because many now hold large amounts of "sidelines" cash in bank accounts or in safe-harbor investments like money-market mutual funds, which are returning near zero now because of historically low interest rates.

"There are compelling reasons for the investor to return," Freiberg said.

He said he couldn't predict when that will happen, but added that E-Trade has seen an increase in trading activity so far this month. He declined to provide specific figures on the increase.

"It does make us a bit more confident that the retail customer is feeling well enough to wade back into maybe the shallow end of the pool," he said.

E-Trade's quarterly results were also boosted by a 12 percent decline in operating expenses to $266.9 million. That decline is partly the result of a campaign by E-Trade to reduce its non-brokerage bank deposit accounts and streamline its balance sheet.

E-Trade reported quarterly results after its shares rose 26 cents, to 1.8 percent, to close at $14.75. In after-hours trading, the stock slipped 5 cents. The stock has traded in a 52-week range of $11.15 to $19.90.