Nov. 13, 2007 (Investor’s Business Daily delivered by Newstex) –
Might E-Trade lose customers to Charles Schwab and TD Ameritrade?
Investors apparently believe so. E-Trade Financial (NASDAQ:ETFC) ETFC shares plummeted 59% to a more than five-year low on Monday after an analyst wrote that the company faces a 15% chance of bankruptcy.
Shares of Ameritrade AMTD and Schwab SCHW, E-Trade’s big rivals, rose 5.4% and 2.6%, respectively.
No analysts have followed Citi (NYSE:C) Investment Research’s Prashant Bhatia’s lead in giving the chances of any bankruptcy. Several analysts say E-Trade remains well-capitalized. In a statement to customers Monday, E-Trade said it could absorb a write-down of as much as $1 billion if it came to that.
“(E-Trade’s) not anywhere close to filing for (bankruptcy),” Morningstar analyst Patrick O’Shaughnessy said. “It’s still doing quite well in terms of its core operating metrics.”
O’Shaughnessy, though, also says it’s important that E-Trade retain its depositors. “Losing depositors becomes a self-fulfilling prophecy if you start sending out bankruptcy concerns,” he said.
An executive in this field cautioned that E-Trade’s problems aren’t shared by other brokers.
“This is a one-company event. E-Trade leveraged their balance sheet (with mortgage-backed securities) more than any other online broker,” said Gabriel Dalporto, chief strategy officer of privately held discount broker Zecco.com and a former E-Trade executive.
E-Trade’s problems erupted late Friday after the company warned that its write-down of asset-backed securities will be bigger than expected this quarter. The securities are backed by home loans tied to the subprime lending crisis.
“Management believes the additional deterioration observed since Sept. 30 will likely result in write-downs that exceed the previous expectations,” the company said in a statement.
In September, E-Trade said it expected about $200 million in total impairment in the value of its securities related to collateralized debt obligations and mortgages for the rest of 2007 and 2008.
On Friday, E-Trade said the size of its fourth-quarter write-down will depend on several factors.
On Sunday, Bhatia downgraded E-Trade to sell from hold and lowered his price target to $7.50 from $13. He wrote that E-Trade may be forced to sell loans and securities at a big discount to cover losses.
E-Trade holds about $3 billion in asset-backed securities. Some is invested in mortgage-backed securities that are slipping into default because of the subprime crisis.
Bhatia, in his note, estimates that half of E-Trade’s brokerage deposit accounts are higher than the FDIC’s $100,000 insurance limit. He said these accounts are the ones most likely to be closed by users worried about E-Trade’s future.
Last quarter, E-Trade’s retail brokerage unit posted record revenue of $474 million. Daily average revenue trades surged 44% from a year earlier to a record 194,000. On Monday, E-Trade said its total retail client assets rose 4% from September to $226.7 billion.
But the mortgage meltdown forced E-Trade to report a third-quarter loss of 14 cents a share. Analysts had expected a 10-cent profit.
O’Shaughnessy estimates that the riskiest assets in E-Trade home loan-backed securities total about $450 million. They consist mostly of collateralized debt obligations and second lien home loans.
Newstex ID: IBD-0001-20928977
Originally published in the November 13, 2007 version of Investor’s Business Daily.
