E*Trade Posts Surprise Profit After Three Years of Losses

By Reuters
* Back in black as loan loss provisions drop sharply

* New CEO: Likely no need to raise capital again

* Q2 EPS 12 cents vs Wall St estimate of 11-cent loss

* Shares jump 7 percent after hours

NEW YORK - Online broker E*Trade Financial Corp surprised Wall Street by posting its first quarterly profit in three years, helped by a far smaller provision for loan losses than analysts had expected, and its shares rose 7 percent.

A sharp trading spike also helped snap 11 quarters of losses for the E*Trade, whose shares were hammered in recent years as its mortgage-related loans soured.

Company executives told Reuters on Thursday it was now unlikely to need to raise external capital -- a marked change from a year ago when bankruptcy seemed a possibility.

"It's quite a substantial improvement, and I think it will be quite a pleasant surprise for the Street." said Chief Executive Steven Freiberg, who took the reins in April.

E*Trade's shares rose 7 percent after hours after closing up 4.46 percent at $13.35.

The company set aside $166 million for loan losses in the quarter, compared with $268 million in the previous quarter. Loans in E*Trade's home equity portfolio that are 30 to 89 days delinquent, its greatest exposure to loan losses, declined 14 percent from the previous quarter.

Charge-offs also dropped sequentially for a third straight quarter.

"It's quite clear that the majority of their credit issues are well past now," said Jason Ren, an analyst at Morningstar. "We'll see in the future whether provisionings can even go negative."

Citadel Investment Group helped E*Trade raise capital last year, and remains its largest shareholder.

E*Trade earned $35.1 million, or 12 cents per share, in the second quarter, compared with a loss of $143.2 million, or a loss of $2.16 per share, a year ago.

Net revenue fell 14 percent to $534 million. Analysts, on average, had expected the brokerage to post an 11-cent loss on $299.4 million of revenue, according to Thomson Reuters I/B/E/S.

Management said it expects its banking unit to generate capital going forward, although perhaps not in every quarter, and that loan loss provisions should decline through 2011.

Although E*Trade's bank unit has caused problems, its retail trading platform remained robust. Daily trading grew 10 percent from the previous quarter, helped by the brief May "flash crash" and overall market volatility as Europe's debt woes sparked fears of a double-dip recession.

But volumes sank from May to June and worries have grown that whipsawed investors could retreat further, clouding the outlook for this year's volumes. The flash crash "had an impact on the confidence level of the retail trader," Freiberg said.


E*Trade, a darling of the late 1990s tech boom that was humbled the last few years, has been busy.

The company aggressively raised capital last year, named Freiberg CEO in March, and in June completed a reverse stock split that wrested its shares out of the $1 to $2 range.

Hedge fund giant Citadel narrowed its stake in the broker in April, sending E*Trade shares down. The shares are still off about 95 percent from a 2007 high.

Rivals Charles Schwab Corp and TD Ameritrade Holding Corp also reported better-than-expected quarterly results in the last week.