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.
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Fool contributor Eric Volkman owns shares of TD AMERITRADE. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services have recommended buying shares of TD AMERITRADE and Charles Schwab and creating a bull put spread position in TD AMERITRADE. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.