E*Trade Restructures, Lowers Outlook on Loan Losses

E*Trade Financial late Monday slashed its 2008 earnings forecast, citing bad loans related to the U.S. housing market crisis and charges related to a restructuring that will see the on-line brokerage exit the wholesale mortgage business and all "non-core businesses that lack a direct and strategic connection with retail customers." The reorganization also will include a restructuring of its balance sheet so the company is more reliant on cash and assets. Charge-offs of $95M for loan losses and an increased provision expense of $245M are expected in the second half, as well as an estimated $32M in restructuring-related charges. Against that backdrop, E*Trade said it now sees 2008 earnings of $1.05-$1.15/share, down from its previous outlook for earnings of between $1.53 and $1.67/share. Analysts polled by Thomson Financial had expected earnings of $1.60/share, on average. "We want to get this issue behind us and put the focus solely back on our core retail customer," said E*Trade CEO Mitch Caplan. Rival Ameritrade, with whom E*Trade reportedly has held merger talks, has expressed concerns about E*Trade's reliance on the mortgage business. As of the end of August, E*Trade said 2% of its $17B mortgage portfolio was composed of delinquent loans, while 2.8% of its $12.6B home-equity portfolio was at increased risk. E*Trade said its funding sources were "sound" and that it was "well capitalized." Shares slid 5.8% to $13.38 AH following the announcement.

Sources: Press release, Wall Street Journal, Bloomberg
Commentary: E*Trade Plummets Over Mortgage Concerns
Stocks/ETFs to watch: ETFC. Competitors: AMTD, SCHW. ETFs: KCE
Earnings call transcript: E*TRADE Financial Q2 2007

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