E*TRADE Bank: A Strong Strategic Fit in E*TRADE’s Business Model




E*TRADE (ETFC) operates its own bank—E*TRADE Bank. It’s a federally chartered savings bank that’s utilized by the company’s broker-dealers to maximize the value of customer deposits. The bank also provides its customers with FDIC (Federal Deposit Insurance Corporation) insurance on a certain amount of customer deposits. The bank monetizes deposits by investing primarily in low-risk, agency mortgage-backed securities. On a standalone basis, the bank generated a total of $92 million in net income in 1Q15.

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Strong capital adequacy

As of March 31, 2015, the company reported bank and consolidated Tier 1 leverage ratios under the Basel III Standardized Approach of 9.8% and 8.4%. In the previous quarter, it reported bank and consolidated Tier 1 leverage ratios of 10.6% and 8.1% before the implementation of Basel III and the move of E*TRADE Securities from the bank. On a pro forma basis, the bank has ~$240 million of capital in excess of the regulatory threshold.

E*TRADE is gradually moving client deposits held in third-party banks to its own bank. In the March quarter, it completed the conversion of sweep deposits to a new platform. It started to utilize them in March. The company moved $1.25 billion of customer deposits held by third-party banks back on its own bank’s balance sheet. With the new platform, E*TRADE can move deposits on and off the balance sheet much more efficiently. This gives it a powerful tool for managing the size of the balance sheet.

Here’s how a few of the firm’s peers in the brokerage industry fared in terms of operating margin:

  • Interactive Brokers (IBKR) – 45.37%
  • TD Ameritrade Holding (AMTD) – 41.07%
  • Charles Schwab (SCHW) – 34.35%

Together, these companies form 1.26% of the Financial Select Sector SPDR Fund (XLF).


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