Yahoo Finance E*TRADE Bank Continues to Be Major Driver for Earnings
E*TRADE Benefiting from Strategic Bank and Trade Model
E*TRADE Bank
E*TRADE Financial (ETFC) operates its own bank, E*TRADE Bank. This is a federally chartered savings bank that E*TRADE’s broker-dealers utilize to maximize the value of deposits. The bank also provides its customers with FDIC insurance on a certain amount of customer deposits.
The bank monetizes deposits by investing primarily in low-risk securities such as agency mortgages. On a standalone basis, the company generated net interest income of $312 million in 1Q16 compared to $295 million in 1Q15. The increase in interest rates is expected to improve the bank’s net interest margins in the upcoming quarters.
Here’s how a few of the company’s peers in the brokerage industry fared in terms of operating margins:
Interactive Brokers (IBKR): 45.4%.
TD Ameritrade (AMTD): 41.1%.
Charles Schwab (SCHW): 34.4%.
Together, these companies form 16.1% of the iShares US Broker-Dealers ETF (IAI).
Strong capital adequacy
As of March 31, 2016, E*TRADE reported bank and consolidated Tier 1 leverage ratios under the Basel III Standardized Approach of 8.6% and 7.8%, respectively. In the previous quarter, it reported bank and consolidated Tier 1 leverage ratios of 9.7% and 9.0%, respectively.
Corporate cash ended the first quarter at $482 million, up by $35 million from the prior quarter and well above the company’s target of maintaining $100 million.
E*TRADE is gradually moving its clients’ deposits held in third-party banks to its own bank. With its new sweep platform, E*TRADE can move deposits on and off of its balance sheet at a faster pace. This gives it a powerful tool for managing the size of its balance sheet. The company has the ability to operate close to the $50 billion threshold.
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