Color on Citi Upgrade of E*TRADE (ETFC): Debt Exchange Eases Capital Concerns, Takeover Likelihood Increasing

More color on Citi's earlier upgrade of E*TRADE (Nasdaq: ETFC):

Citigroup upgrades E*TRADE (Nasdaq: ETFC) from Hold to Buy, also raising its price target from $1.50 to $2.30.

The firm reduced its FY09 and FY10 loss estimates from $0.52 and $0.15 to $0.43 and $0.09, respectively, saying the recent $1.7 billion debt exchange has eased capital concerns. The Street is currently looking for a FY09 loss of $0.65 and a FY10 loss of $0.02. Citi sees loan losses through 2012 of $6.4 billion, or about 20% of E*TRADE's mortgage portfolio, but also expects higher rates of provisioning during the next ten quarters despite slowing 30-89 day delinquency trends. As E*TRADE's portfolio continues to stabilize, Citi believes there could be an increased likelihood for a potential takeover bid by competitors like Charles Schwab (Nasdaq: SCHW) or TD Ameritrade (Nasdaq: AMTD).

With shares of E*TRADE trading about 4% higher to $1.74 amid the upgrade, the firm's new price target represents potential upside of about 32% from current levels.

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