E*TRADE Financial Corp. (ETFC), through its subsidiaries, provides online brokerage and related products and services primarily to individual retail investors, under the brand name of E*TRADE Financial worldwide. It offers various brokerage products and services, including automated order placement and execution of the U.S. and international equities, currencies, futures, options, exchange-traded funds, mutual funds and bonds. The Company also provides quick transfer, wireless account access, extended hours trading, quotes, research and advanced planning tools. Its banking products and services include checking, savings, sweep, money market, and certificates of deposit products. ETFC primarily provides its services through its Web site at etrade.com, as well as through its network of customer service representatives, relationship managers, and investment advisors.

The Company’s securities products and services are offered by E*TRADE Securities LLC. Bank products and services are offered by E*TRADE Bank, a Federal savings bank. The Company was founded in 1982 and is based in New York, New York.

Source: Reuters.com, SEC Filings.

The Company reported record total daily average revenue trades of 221,000 in the second quarter of 2009, a 14% sequential quarterly increase and a 28% increase versus the second quarter of 2008. ETFC also added 54,000 net new brokerage accounts during the quarter. Total net revenue increased 17% to $620.9 million for the three months ended June 30, 2009, compared to the same period in 2008. Second-quarter revenue included net interest income of $340 million, a 22% increase over the first quarter, which resulted from a 57-basis point expansion in the interest income spread to 291 basis points. The largest contributor to this significant spread expansion was the 50-basis point reduction in the annual percentage yield on the Company’s complete savings account from 145 basis points to 95 basis points.

ETFC incurred a net loss of $143.2 million or $0.22 per share for the three months ended June 30, 2009, compared with a net loss of $233 million, or $0.41 per share, in the prior quarter and a net loss of $95 million, or $0.19 per share, a year ago. The net loss was principally due to the Company’s provision for loan losses of $404.5 million.

The Company ended the quarter with assets of $48.0 billion on the balance sheet. At June 30, 2009, ETFC held cash, cash equivalents and investments required to be segregated under federal or other regulations of $6.7 billion, compared to $5.0 billion at December 31, 2008. The Company’s loan portfolio continued its run-off, shrinking by approximately $1.3 billion from last quarter, of which approximately $900 million was related to prepayments or scheduled principal reductions. To accommodate this planned long-term reduction in assets, the Company also similarly reduced its liabilities. As a result, total customer cash and deposits were reduced by $700 million to $33.7 billion. This was composed of a $1 billion increase in brokerage cash, offset by a $1.7 billion reduction in CSA and other bank deposits.

Source: Yahoo! Finance, SEC Filings.

ETFC’s shares have traded between 59 cents and $3.98 during the past year. In August, its shares oscillated around the $1.40 mark, being influenced by latest news on the Company. ETFC was down 8% in middle August after the largest shareholder in the online brokerage – hedge fund firm Citadel Investment Group – announced it entered into a trading plan allowing it to sell as many as 120 million shares between the end of August and late October. Later in the month, shares of ETFC gained 4% after S&P raised ETFC credit ratings.

Analysts polled by Thomson Reuters consider the “Hold” strategy for ETFC, with one analyst recommending the stock a “Buy,” up from 0 analysts three months ago; 10 analysts rating the stock with “Hold,” up from six analysts three months ago; one analyst expecting the stock to “Underperform,” down from three analysts three months ago; and 0 analysts recommending the stock a “Sell,” down from one analyst three months ago. According to Reuters Estimates, analysts are expecting the Company to report revenue of $633.4 million and a net loss of $0.65 per share for the fiscal year 2009; and revenue of $1,314 million and a net loss of $0.03 per share for the fiscal year 2010.

The Company ended the month of July with record brokerage accounts of more than 2.7 million, including gross new brokerage accounts of 30,019 and net new brokerage accounts of 7,467. Total accounts ended the month at more than 4.5 million. Total Daily Average Revenue Trades for July were 176,180 – a decrease of 10.3% from June and 3.6% from the year ago period. Brokerage related cash increased 6.2% in July, while security holdings increased 8.1%. This was offset by a $415 million reduction in Bank related customer cash and deposits, as the Company continued to execute on its balance sheet reduction strategy. This led to a 6.6% increase in total customer assets in the month and flat net new customer assets. Customers were net sellers of approximately $800 million in securities in July.

SmartMoney Magazine conducts a broker survey every year. Despite all the troubles in the financial sector, ETFC scored a big win in the latest SmartMoney 2009 Broker Survey, leading four out of five categories and earning the top spot for three years in a row. ETFC beat the other 15 brokers included in the survey earning 4 stars out of 5 for mutual fund and investment products and the maximum 5 stars out of 5 for the remaining categories: banking services, trading tools, research and customer service. Closely following in second place was Fidelity while Charles Schwab came in third.

In late June the Company closed a Common Stock Offering, which raised gross proceeds of $550 million. This includes proceeds from the sale of 65 million shares issued upon exercise of the underwriters’ over-allotment option. When combined with the $65 million raised under its previously disclosed Equity Drawdown Program, ETFC has raised more than $600 million of cash common equity in the second quarter. The net proceeds, after commissions, from equity offerings in the second quarter were approximately $586 million. The funds are intended to bolster E*TRADE Bank’s capital position as it continues to face losses from real estate-related investments and also to enhance the liquidity of the parent company.

ETFC launched significant debt exchange transactions for certain of its outstanding notes. The Company offered to exchange more than $1 billion of newly-issued zero coupon convertible debt for all of its 8% Senior Notes due 2011 and a portion of its 12.5% Springing Lien Notes due 2017. These actions are intended to significantly reduce the Company’s debt service burden by eliminating interest costs relating to those debt securities that are exchanged and lengthening the weighted-average maturity of its debt securities. On closing of the exchange offer, ETFC issued $1.74 billion of zero coupon class A convertible debentures and $2.3 million of zero coupon class B convertible debentures. The new notes will replace $431.8 million of debt maturing in 2011 and $1.31 billion of obligations due in 2017.

Standard & Poor’s Ratings Services upgraded ETFC’s credit ratings to ‘CCC’ from ‘CC’ after the Company’s newly completed debt exchange. Although S&P considers that ETFC’s financial condition remains weak and operating performance is poor, it assigned a stable outlook for the ratings. According to S&P, ETFC has not been profitable during the past two years and it expects earnings and operating cash flows to remain weak through the second half of 2009.

According to Bloomberg, globally, $30.1 trillion was shed from global stock markets in 2008. The stock market crash had a profound effect on all investors, including those who trade most frequently. Diminishing prices brought diminishing returns to those who tried to profit from short-term gains in the market. However, while the number of active traders has declined in 2008, the overall participation of active traders in the market has increased relative to non-active traders. Analysts at Jupiter forecast online trading will have entered 22.6 million households by 2011. Currently, as poor markets and declining numbers of advisors drive investors toward a self-service environment, online brokerages are positioning themselves to benefit from future growth. Jupiter expects the amount of assets held in online accounts to jump by about 50% to about $3 trillion by 2011.

Source: http://stockcharts.com/h-sc/ui

E*Trade Financial is trading above its 13-day moving average. This is generally considered an indication of a bullish trend. The MACD for the Company currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

The Company has been relatively stable recently. This is evidenced by the width of its Bollinger Bands, which are tighter than normal. Additionally, ETFC is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

The Company’s online brokerage business continues to improve: the average commission per trade is higher, volumes are up versus last quarter, and interest spreads are much better. There is also an increase in margin receivables as customer buying power and confidence improved. In addition, the completion of capital raising transactions provides a good groundwork to build future growth.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Net Share Purchase Activity

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