E-Trade strategy to reduce its risk
The troubled discount brokerage has sold off mortgage bonds. But investors are still wary.
NEW YORK - Troubled discount brokerage E-Trade Financial Corp. said yesterday that it was restructuring to reduce risk on its balance sheet, in a series of moves that helped lift its shares off their all-time lows.
E-Trade said it recently sold from its investment portfolio about $3 billion of mortgage-backed securities and municipal bonds, in addition to a November sale of its $3 billion asset-backed securities portfolio. The latest sale will result in a loss of less than $5 million on the investments.
E-Trade also said it would leave its institutional-trading business, affecting about 30 employees. The change means E-Trade will now be solely focused on its retail-banking and brokerage operations.
While the moves E-Trade is making will reduce risk, Bank of America Securities L.L.C. analyst Michael Hecht said the changes would also pressure revenue. The closure of the institutional-trading business and the sale of the securities and bonds further reduce revenue streams, Hecht wrote in a research note.
E-Trade shares rose 15 cents yesterday to close at $2.40 in Nasdaq trading.
Like many other financial institutions, E-Trade has struggled with the rapid deterioration in the mortgage and credit markets. In early November, the brokerage firm disclosed it would take a write-down on a portfolio of bonds and debt backed by mortgages.
Mortgages have increasingly defaulted in recent months, leading banks and other financial institutions to cut the value of their holdings. While shares of E-Trade rose on news of the mortgage-bond sales, investors are still worried about the bank's portfolio of home-equity loans and lines of credit.
One of the biggest challenges E-Trade is facing now is deterioration in the home-equity portfolio, Richard Repetto, an analyst with Sandler O'Neill & Partners L.P., said in an interview.
Unlike first mortgages - where rising defaults have largely been tied to subprime borrowers with poor credit history - defaults among home-equity loans and lines of credit have been rising for all types of borrowers, including prime customers.
Worries about solvency because of credit questions drove customers away late in 2007. E-Trade said total client assets ended the year at $190 billion, a 16 percent decline from the $226 billion in assets held just two months earlier.
Much of that decline came in November, though, and E-Trade has been able to stabilize its assets since November, Repetto said.