E-Trade Shares Pummeled After Unexpected Loss; Results Hit by its Home Loan Portfolio

Published on Thursday, 26 January 2012 13:47 Written by J Hawk

New York, January 26^th (TradersHuddle.com) – New York City based E-Trade Financial Corporation (NASDAQ: ETFC) posted an unexpected loss in its fourth quarter net income of -$6.346 million that disappointed the market considerably and resulted in negative Q4 earnings per share of -$0.02 for the quarterly period that concluded on December 31^st of 2011.

Despite the Q4 loss, the firm managed to stay in the black for the year, posting net income of $158 million for 2011 that represents earnings per share of $0.59. Nevertheless, the financial services company reported that its total net revenue fell to $475 million for the fourth quarter, versus the $507 million seen in the previous quarter and the $518 million result for Q4 of 2010.

According to a survey of nine market analysts by Zacks Investment Research, the consensus earnings forecast for E-Trade was for earnings per share of $0.20 in Q4 2011. This was the first time that E-Trade’s financial results had come in worse than expected during 2011 and was also the first quarterly loss the firm had posted last year.

Given the earnings short fall relative to expectations, the stock market responded negatively to E-Trade’s latest earnings news. The stock initially fell as low $8.25 after the announcement, but as of this writing, the stock had recovered some of its initial losses, and was trading down -$1.089 or -11.63% on the day to the $8.271 per share level in active NASDAQ trading volume of 16.6 million shares.

CEO Sounds Optimistic as Brokerage Account Openings Fall in Q4 but Rise Overall For 2011

Along with its earnings, E-Trade reported having opened a net amount of just 10,000 brokerage accounts in the fourth quarter of 2011.  This was lower than the 13,000 accounts opened in the prior quarter and was only 35% of the 28,000 accounts opened in the same quarter of 2010.

E-Trade CEO and Chairman Steven Freiberg said about the results that, "While there were unique items impacting our results in the quarter, our return to full year profitability in 2011, for the first time in five years, marks significant progress for the company.” He went on to note that, "Despite the systemic burdens of an unfavorable macro-economic environment, a regulatory transition, and certain well-publicized events in 2011 - our brokerage business generated nearly twice the net new accounts, with healthy growth in both net new assets and DARTs compared to 2010. Furthermore, we continue to de-risk and strengthen the franchise, with an ever-shrinking credit overhang and significantly improved capital levels over last year.”

Looking forward, CEO Freiberg seemed positive about E-Trade’s prospects, stating that, “As we enter the New Year, we are confident in our capacity to manage through current macro-economic challenges, and even more optimistic in our ability to capitalize on future improvements in market and economic conditions.” He also mentioned that, “Over the coming months, we have several platform enhancements, new products and services scheduled to launch, providing us a high level of confidence in the continued strength of our franchise."

Home Loan Losses and Regulatory Shift Affected E-Trade’s Earnings

The innovative financial services and online brokerage company reported that its earnings were especially hard hit by its home loan portfolio.

The quarterly loss also reflected reporting changes required by its new main banking regulatory body, the Office of Thrift Supervision or OTS, which is the U.S. agency responsible for regulating thrifts and savings associations.  The company was formerly regulated by the OCC, the Office of the Comptroller of the Currency.

The Technical Picture for E-Trade Remains Bearish

From a technical perspective, E-Trade’s (NASDAQ: ETFC) share price has shown a long-term downward trend after peaking at $271.20 in March of 2006. The initially sharp decline has flattened out somewhat since 2008 below the $50 level, and the last year has seen general softness prevail in the share price as it traded down from its Feb 11^th high of $18.00 to its December 19^th low of $7.42.

Since reversing upwards off of that $7.42 support point, the short term trend in E-Trade’s share price has since been correctively higher, although recent declining sessions since January 23^rd have seen that up channel break, indicating a reversal to the downside. Initial resistance is noted in the $9.40-$9.73 region and above that at $10.87 and $11.69.