Dissenting Opinion

E*Trade: A Bet Worth Making

I posted this on a previous recent ETFC comment and fixed some of my numbers. Note that I too am long this stock but as a long-shot sentimental bet.

But, if you suppose that if ETFC is AMTD with a bank (it's not exactly but it's good to suppose things sometimes), then if we look at the numbers we can derive some interesting information.

For example, ETFC has about 2.6 mm trading accounts doing about 180k trades/day or about 1.4 trades/account/month. AMTD has about 5 mm trading accounts doing 300k trades/day or about 1.2 trades/account/month. In other words, the accounts have pretty much the same activity rate, but ETFC has less accounts, thus less volume, call it 40% less.

All things being equal (a little stretch but go with me on this), I look to the gross revenue now. I would expect then to take AMTD gross revenue at 60% to get ETFC brokerage revenue. AMTD is running at $200 mm/month, so that implies ETFC brokerage at $120 mm/month. ETFC is reporting total revenue of $250 mm/month (and a gross margin of 60% compared to AMTD of 90%).

That implies the bank is contributing $130 mm/month to get to their $250 mm/month in revenue. So with the brokerage at 90% margin, in order to get to an overall 60% margin with these numbers implies that the bank revenue costs a staggering about $100 mm/month at a 30% gross margin.

These are gross numbers before operating expenses. Now for operating expenses. AMTD expenses are $100 mm/month so we'd expect ETFC brokerage to be at $60 mm/month. ETFC is running at $225 mm/month expenses, which again, would put the bank operating expenses at a staggering $165 mm/month!

AMTD has a 40% pre-tax net margin with a bottom line of $80 mm/month. ETFC brokerage would be the same at $48 mm/month then. Thus, the bank is losing $125 mm/month! the brokerage revenue would have to at least double in size to make up the difference and break even, or the bank losses would have to subside. To double, they would have to spend at least the $1500/account that AMTD accounts are worth, north of $4 billion. Probably much more. Seems out of the realm of possibility.

One hope would be for the regulator to allow the brokerage to breakout and keep the sweep deposits at the bank, then sell the bank FDIC style to someone. One could always hope.

E*Trade's Brokerage Business Shouldn't Be Ignored

Ah, sorry Jim. I didn't really mean to go off on the toxic loan tangent.

If you suppose that if ETFC is AMTD with a bank (it's not but it's good to suppose things sometimes), then if we look at the numbers we can derive some interesting information.

For example, ETFC has about 2.6 mm trading accounts doing about 180k trades/day or about 1.4 trades/account/month. AMTD has about 5 mm trading accounts doing 300k trades/day or about 1.2 trades/account/month. In other words, pretty much the same activity rate, but ETFC has 40% less volume.

All things being equal (a little stretch but go with me on this), I look to the gross revenue now. I would expect to take AMTD gross revenue at 60% to get ETFC brokerage revenue. AMTD is running at $200 mm/month, so that implies ETFC at $120 mm/month. ETFC is reporting $250 mm/month (by the way, with a gross margin of 40% compared to AMTD of 90%).

So I ask why? Of course, my numbers and analysis can be totally flawed and wrong. However, more analysis might show that the whole can not be supported by the brokerage. Maybe that is something to look into.

E*Trade's Brokerage Business Shouldn't Be Ignored

You have not done your due diligence.

The "mortgage division" really only originated loans for packaging to the secondary market -- all to make a bit of nice and smooth non-trading fee revenue that the analysts like to see. Their loans didn't stick around long enough for the ink to dry.

A savings bank has to have a large portion of the balance sheet in consumer loans, mortgages, credit cards, etc. They hold these assets to make spread income between what they receive in interest and what they pay their depositors. Their balance sheet was managed by an asset management company under their bank.

I'm sure that as pressure grew on management to deliver earnings, and they couldn't get it from transactions or spreads, they sold portions of their loan portfolio to make capital gains. As the secondary market soured, they sold the good loans that they could and kept the bad ones that they couldn't sell. Eventually, the only remaining assets that could be sold went to Citadel. Imagine the loan quality of the loans that even Citadel wouldn't take!

With all those brokerage sweep deposits on the balance sheet and the bank leverage, they bloomed up the balance sheet so they could continue to put out earnings that made stockholders and analysts thrilled. Most of their bank deposits are swept from the brokerage customers and pay virtually not interest.

Eventually they were stuck with assets that couldn't be sold for gains and the magic money machine grinds to a halt.

The brokerage only makes transaction and margin revenue. You can figure out pretty quickly from their metrics what their brokerage revenue is. You'll see that you can't cover the losses with the brokerage income, even with a few "massive volume" days.

Just go back over their SEC filings and company metrics to see.