E*Trade's Worth Much More Than This

| About: E*TRADE Financial (ETFC)

We have couple of firms commenting on E*Trade (NASDAQ:ETFC) after the company said on Friday it expects further write-downs on its $3 billion asset-backed securities portfolio and the U.S. Securities and Commission is investigating.

- Banc of America is lowering their target to $10.50 from $12 while keeping Neutral rating on the stock.

- Citigroup is lowering their rating on ETFC to Sell from Hold and cutting target to $7.50 from $13 saying the continued negative news flow about charges resulting from its mortgage & CDO exposure, an SEC inquiry, and continued deterioration in its financial condition, all increase the likelihood of significant client attrition.

Firm estimates that trying to liquidate E*Trade's loan & ABS portfolio would result in over $5b of losses (more than wiping out tangible equity). Based on accounting convention, E*Trade is not required to mark-to-market certain loans and securities. However, in the event that it has to sell these assets as a result of losing its funding sources (e.g. deposits & repo lines), losses could be realized. Citi's haircuts to arrive at the $5b loss estimate include 10% on 1st lien loans, 20% on HELOCs, and 25% on its ABS portfolio.

They are lowering 07/08/09 earnings estimates to $0.31, $0.90, $0.90. the tgt of $7.50, includes a 15% probability of bankruptcy.

Notablecalls: Citigroup's call is titled "Bankruptcy Risk Cannot Be Ruled Out". That's why we have the stock down 30% in pre-market and not 10% like it should be following Friday's news. And it would still be a bounce candidate!

This stuff sounds like '00-'02 when Guy Moszkowski was covering ETFC for Citi (then Salomon). I think he downgraded the stock to Sell at around $4. Man, this is clueless stuff. Prashant, you should have seen this coming and should now be looking for reasons to UPGRADE this stock, not downgrade. Phew!

It's a buy around $6. Even if the mortgage positions end up worthless, ETFC is worth a lot more than what it is selling for right now.