In what's become a theme this earnings season for financial stocks, E*TRADE
Thank you, Mr. Tax Man
Analysts were expecting around $0.09 per share in profit for E*TRADE; imagine their surprise when the company posted $0.22 instead. That looks amazing, but $0.09 of that $0.22 was due to a tax benefit thanks to IRS deductions that weren't previously in force.
Such single-item distortions have been prevalent this earnings season for financials, what with Bank of America's
Getting on its feet
Regardless of the nice break it received, E*TRADE's results were encouraging. Stripping out the tax benefit puts EPS at $0.13 per share, or 30% above what analysts had expected. That totals out to net profit of $62.6 million for Q1, a nice about-face from the $6 million loss of the previous quarter and a nearly 40% rise from Q4 2011's bottom line.
Other metrics provide more fuel for optimism. With America's housing and debt crises subsiding, the company relaxed its provisions for loan losses; the amount dropped 41% quarter on quarter and at nearly the same level on an annual basis. This is particularly encouraging, as a bad loan book can easily whack profitability for even the mightiest banks. Maybe this is a start for E*TRADE, an encouraging sign that it intends to move away from lending.
A tough crowd
E*TRADE's starting to do quite well, but since discount broking is a sector crowded with strong competitors, it'll have to do better. Even with that happy tax gain included, its net margin was only around 13% -- several percentage points shy of Charles Schwab's
It's good that E*TRADE seems to be fixing its loan portfolio and getting back to brokerage basics. If it continues to improve, maybe in the future it won't need a big tax break to post impressive net profit numbers.
Meanwhile, we've identified a few promising financial stocks. Want to learn more? You can download our free report.