Archive

Surprise! E*Trade back in the black

Discount broker turns first quarterly profit in nearly three years; added 18,000 net new brokerage accounts

E*Trade Financial Corp. surged the most in eight months after the online brokerage unexpectedly reported its first quarterly profit in almost three years.

The shares jumped 7.6 percent to $14.36 at 4 p.m. New York time, the most since Dec. 18. They have fallen 18 percent in 2010, compared with the 9 percent decline in the NYSE Arca Securities Broker/Dealer Index.

E*Trade reported second-quarter profit excluding some items of 12 cents a share yesterday after setting aside less for future defaults at its retail banking unit. Analysts estimated a loss of 11 cents a share, according to the average of 15 estimates compiled by Bloomberg. The brokerage had posted a loss every quarter since September 2007 because of mortgage defaults at its E*Trade Bank.

“Improving credit quality drove the return to profitability after three years of outsized credit losses,” Daniel Harris, a New York-based analyst with Goldman Sachs Group Inc., wrote in a note to clients today. “We expect that more favorable credit dynamics will translate into double-digit declines in loan loss provision expense over the next several quarters, driving the return to a more normalized earnings environment by 2012.”

Harris boosted his earnings estimate for 2010 to 7 cents a share from a loss of 35 cents, according to the note. He also raised 2011 and 2012 projections and reiterated a recommendation to buy the shares.

The company set aside $166 million for future loan defaults during the second quarter, 38 percent less than during the three-month period that ended in March.

With the return to profitability, E*Trade has the leeway to invest more in technology, and the company plans to increase spending on marketing and advertising by about 15 percent to 20 percent in 2010 from last year, Chief Executive Officer Steven Freiberg said in a telephone interview yesterday.

E*Trade added about 18,000 net new brokerage accounts during the second quarter, according to the statement. That compares with 2,000 in the first quarter.

Charles Schwab Corp., the largest independent brokerage by client assets, gained the most in more than two months after the San Francisco-based company posted earnings that beat estimates on July 16. TD Ameritrade Holding Corp. of Omaha, Nebraska, reported on July 20 fiscal third-quarter profit and revenue that beat the average analyst projections as customers traded more and added assets to their accounts.