S&P Upgrades E*TRADE Financial (ETFC) to 'BBB-'; Capital, Liquidity Improving on Lifted MOU

Highlights:

• E*TRADE has built capital and met the requirements for regulators to recently lift their memoranda of understanding on both E*TRADE Bank and E*TRADE Financial.
• We believe the easing of regulatory capital and liquidity restraints, coupled with the firm building capital as measured by a risk-adjusted capital ratio of 17.3% has improved its capital and liquidity.
• As a result, we have raised our issuer credit and debt ratings E*TRADE Financial Corp. to 'BBB-', and raised our issuer credit ratings on E*TRADE Bank to 'BBB/A-2'.
• The stable outlook reflects our expectation that the firm's credit costs will rise significantly over the next 18 months as $1.5 billion of home equity loans begin amortizing but that capitalization and funding will remain very strong.

Standard & Poor's Ratings Services said it raised its issuer credit and debt ratings on E*TRADE Financial (Nasdaq: ETFC) (E*TRADE) to 'BBB-' from 'BB-'. At the same time, we raised our long- and short-term issuer credit ratings on E*TRADE Bank to 'BBB/A-2' from 'BB+/B'. We removed all the ratings from CreditWatch, where they were listed on May 15, 2015, with positive implications. The outlook for both entities is stable.

"We believe that easing regulatory capital and liquidity restraints, coupled with the firm building capital, has improved its financial profile," said Standard & Poor's credit analyst Robert Hoban.

We have raised our capital assessment on the firm because we believe that its capital plan, as enforced by regulators, provides sufficient capital to maintain the risk-adjusted capital (RAC) ratio above 15% over the next 18 months. It was 17.3% as of the end of first-quarter 2015. Given how much capital the firm has retained, we believe that even if credit losses surpass management's expectations by a wide margin, it is unlikely to erode consolidated capitalization significantly. Still, some regulatory restrictions remain, including agreements to maintain a high bank Tier 1 leverage ratio. However, we see these less as a hindrance to creditworthiness and more of an obstacle to management reducing capital and liquidity through shareholder spending, particularly if credit costs are higher than expected and the bank suffers losses.

The stable outlook reflects our expectation that credit losses will rise sharply and remain elevated for the next 18 months, but that the firm will maintain a RAC ratio above 15%. Furthermore, we expect the firm will look to redeploy some capital and may slightly increase short-term wholesale funding, but not before second half of 2016, and that the GSFR and LCM will remain above 250% and 200%, respectively.

We could lower the ratings if the firm suffers higher-than-expected losses or capital otherwise falls such that we no longer expect the RAC ratio to remain above 15% or the LCM above 200%, or the firm unexpectedly increased higher risk assets.

Given the legacy asset issue over the next 18 months and the firm's business model, we see little near-term potential for an upgrade. Over the longer term, we could raise the ratings if the firm has reduced higher-risk assets. We could also upgrade the company if it successfully expands its business mix and share of wallet to include more stable recurring revenue businesses while maintaining its capital and liquidity ratios.

You May Also Be Interested In

• Hilton Worldwide (HLT) PT Raised to $205 at Macquarie, 'we await a better entry point'
• Texas Instruments (TXN) PT Raised to $167 at Truist Securities
• Boeing (BA) Cut To Baa3 From Baa2 By Moody's, Outlook Negative