A Buyback May be Coming for E*Trade (ETFC) - Nomura

Steven Chubak from Nomura had the E*TRADE (NASDAQ: ETFC) management team on the road including Paul Idzik, CEO, and Brett Goodman, Head of IR. The conversations focused on three areas: potential loan sales, SIFI and M&A. Perhaps most importantly, a buyback can now occur since the S&P debt rating increase. Notes follow:

Loan Sale: Favorable delinquency trends, combined with improving home prices, prompted the firm to lower its provision guidance for 2016 (to near-zero levels). ETFC currently expects the loan book to run off at ~$300mn per quarter, and the firm continues to explore opportunities for a potential sale of the portfolio.

SIFI: , E*TRADE aims to stay below the $50bn SIFI threshold, with the firm continually analyzing the risk / reward of crossing over. When it makes economic sense, E*TRADE plans to “jump” over the threshold (i.e., not merely “step” over it). Management would not disclose the costs associated with becoming a SIFI, but noted that it is not insignificant, and therefore the decision will not be taken lightly. E*TRADE has articulated its plan to grow the bank by onboarding off-balance sheet (OBS) deposits without crossing the systemically important (SIFI) threshold. The firm currently has ~$15bn of OBS deposits today, $4bn of which are in money market funds (and cannot be readily transferred). This leaves ~$11bn which ETFC can move on balance sheet. As of the most recent update, since the end of 3Q, ETFC had onboarded $1.25bn of deposits, with a goal of onboarding an additional $2bn by year-end.

M&A: Consistent with messaging from the 3Q earnings conference call, Idzik noted that E*TRADE would consider growing inorganically if compelling opportunities were to arise, with potential acquisitions falling into three broad categories:

Brokerage: There are significant benefits to scale / meaningful expense takeouts, but Idzik noted there are few compelling opportunities in this area

RIA: Idzik noted that the industry would need more clarity on the proposed Dept. of Labor (DOL) fiduciary standard before any deal could be confidently completed as the associated earnings risk remains highly uncertain

Banking in order to better monetize customer deposits:. However, growth at the bank would almost certainly require E*TRADE to cross the $50bn SIFI threshold, which means acquisitions in this area would merit particular scrutiny. As noted in our previous analysis, crossing the SIFI threshold would result in the firm incurring significant incremental regulatory expense, and doing this organically could be a multi-year process.

E*TRADE’s capital return potential was severely limited given debt covenants prohibiting it from repurchasing a material amount of shares while the firm’s credit rating remained below investment grade. Following S&P’s August upgrade of the firm to BBB- (i.e., exiting junk territory), these restrictions have been lifted, and the initiation of a share repurchase program is on the table for the future.

The firm maintained a Buy rating and price target of $31 on ETFC.

For an analyst ratings summary and ratings history on E*TRADE click here. For more ratings news on E*TRADE click here.

Shares of E*TRADE closed at $30.04 yesterday.

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