E*TRADE (ETFC +0.00%) is a financial stumblebum. On the rare occasions the company rights itself and starts to walk again, its legs give out from under it and once more it flops to the ground. It hasn't stood upright very much in recent times, reporting a 2012 that saw its fifth annual net loss in the last six years,and a quarter that featured its third red bottom line in the past five quarters. What went wrong this time?
Nine-digit pain
This most recent slate of E*TRADE earnings featured important numbers printed in scarlet ink. Chief among these was bottom line, which for the quarter was well in the nine figures at $186 million, or $0.65 per share. Analysts were expecting bad, but not that bad -- their average estimate was in the neighborhood of $0.54.
Full-year net wasn't as ugly, but that doesn't mean we should crack open the champagne. That loss was "only" $113 million, but this is from a firm that posted a nearly $157 million profit the year before.
If it isn't one thing with this company, it's another. The big wound during 4Q was debt refinancing. These guys are still trying to crawl out of the hole created by an ill-fated attempt several years ago to diversify away from the traditional investment banking model. In other words, instead of depending on the fees and commissions derived from trading, they tried to make money by offering banking services.
Unfortunately, these services included mortgages, and we all know how wonderfully that business performed during the crisis era. Even the most apparently solid of banks were caught aboard that particular Titanic, and E*TRADE was not the most solid of banks.
Much of the financial sector is benefiting from the twin positives of an improved housing market and vibrant mortgage refinancing activity, but not these guys: Still in recovery mode, the company took a $257 million charge in 4Q to essentially refinance $1.3 billion in debt that it took on some time ago to deal with mortgage-related losses. And that debt had been carrying rates as high as 12.5%. It's nice that the company is making decisive moves to cut its borrowing costs, but a quarter of a billion dollars is an awfully pricey way to get that done.
Trading is fading
These problems are compounded by the difficulty all brokerages are facing these days: There just isn't that much trading going on. This was an especially acute problem at the end of last year, when Europe's economic problems and nervousness over the fiscal cliff discouraged many from being active on the markets.
This badly affected -- and impacts -- E*TRADE because, after its banking misadventures, it's essentially a wirehouse. Its trading and investment unit produced nearly 64% of its total net revenue in 4Q, which was more or less the same as the previous quarter (although lower overall, coming in at $298 million vs. 3Q's $307 million).
Meanwhile, the other players in the publicly traded brokerage sector have made much bigger strides toward diversification. Witness Charles Schwab's (SCHW +2.05%) numbers for, say asset management/administration fees vs. trading revenue. The former advanced by $81 million, or 18%, on a year-over-year basis in 4Q to land at $539 million. This more than made up for the $31 million, or 13%, decline in the firm's cut from trading.
Total net revenues, meanwhile, advanced by 9% to $1.2 billion in that time frame. Although the Schwab of the popular imagination is a dyed-in-the-wool brokerage, it's actually becoming a rather well-diversified financial. As of the last three months of 2012, trading constituted less than one-sixth of total net revenues.
TD AMERITRADE (AMTD +0.00%) is more of a traditional buy-and-seller than Schwab, but it's making progress with other means of income. In its last quarter, trading was under 40% of total revenues. Meanwhile, the company's take from what it calls "investment products" advanced at a nearly 30% clip. The total number is still small compared to trading -- $56 million against $257 million -- but if the firm can keep growing it at a double-digit pace, wirehousing as a percentage of the overall take could shrink to insignificant levels, to be replaced by more lucrative activities.
False positives
The E*TRADE earnings press release featured a few good numbers sprinkled among the many bad ones. Among the better were loan loss provisions, which in 4Q were $74 million, down considerably from the $123 million in the same period of 2011. That, however, is concurrent with a big decline in the amount of loans receivable. End-2012's figure for this line item was $10.1 billion, more than $2 billion lower than at the same period the year before.
The company also added $2.3 billion in net new brokerage assets during the quarter, besting 4Q 2011's pile by 35%. But true to form across the industry this didn't boost actual trading. Daily average revenue trades -- a crucial metric in this industry -- came in at 128,000, or 9% down from the same period the previous year. Besides, the competition is also experiencing a similar dynamic; for example, TD AMERITRADE's net new client assets advanced 53% over the same span.
It's scary to think how much E*TRADE's share price has come down from the heady days of the mid-2000s, when it regularly traded above $200 a share. These days, it's barely floating above $10, and that's after a dead-cat bounce from the sub-$8 level last autumn. It's hard to imagine the stock advancing much, even at these depressed prices. Particularly if the company keeps reporting quarters like this most recent one.
