Think E*Trade (ETFC) can’t survive its loan portfolio, stuffed as it is with real estate investments? Think again, says Sandler O’Neill Partners analyst Richard Repetto. In a note to clients this morning, Repetto writes that following on a $550 million capital raise on June 18, and its debt swap announced on June 22, the company has the money it needs to keep going and to transition from a “bad bank” — one stuffed with bad loans — to a “broker/plain vanilla” bank.
Repetto up’d his estimates for this year and next and improved his rating on the stock from “Hold” to “Buy,” with a price target of $1.65.
After analyzing loan-loss possibilities for E*Trades portfolio, Ripetto came up with that number by taking his estimate for the brokerage’s value, $5 billion, subtracting expected debt of $1.5 billion to $1.8 billion, and adding back in cash. This gives not credit to the retail banking business, notes Repetto, and no premium in valuation to the brokerage business.
Key here is that after analyzing the loan portfolio, Repetto came up with projected two-year cumulative losses of $2 billion to $2.9 billion, or 8% to 12% of the portfolio, which is not far from E*Trade management’s own projection of $2.1 billion to $2.8 billion.
In perhaps a rare example of a hedge fund really prompting good things, E*Trade’s brokerage business stabilized starting in Q1 of 2008, right after Citadel Investment took its stake in the firm, reversing assset and account losses at E*Trade in 2007. Since then, the brokerage has performed in line with peers such as T.D Ameritrade (AMTD), says Repetto. E*Trade client assets rose 1.6% in the first quarter, better than Schwab and Ameritrade, to $110.4 billion, though E*Trade had a bigger shortfall in client assets in the fourth quarter of 2008, so it nets out that E*Trade is tracking the other brokers.
Repetto narrowed his loss estimate for E*Trade because of a higher share count from the equity offering, from a loss of $1.09 to a loss of just 57 cents this year, and for next year from a loss of 10 cents to a profit of 5 cents.
E*Trade shares today rose 1 cent, or 1.6%, to $1.29.
For my own bullish take on E*Trade, see the recent “Barron’s Take” article I penned.
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