E*TRADE Bank Is a Strategic Part of E*TRADE’s Business Model
E*TRADE Targets Higher Growth after Weak 2Q15 Earnings
E*TRADE Bank
E*TRADE (ETFC) operates its own bank called E*TRADE Bank. It’s 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 (Federal Deposit Insurance Corporation) insurance on a certain amount of customer deposits. The bank monetizes deposits by investing primarily in low risk securities like agency mortgages. On a standalone basis, the bank generated a total of $114 million in net income in 2Q15 as compared to $106 million in the corresponding quarter last year.
Strong capital adequacy
As of June 30, 2015, E*TRADE reported bank and consolidated Tier 1 leverage ratios under the Basel III Standardized Approach of 9.8% and 8.5%, respectively. In the previous quarter, it reported bank and consolidated Tier 1 leverage ratios of 9.8% and 8.4%, respectively. Corporate cash ended the second quarter at $406 million, an increase of $148 million from the prior quarter and well above the company’s target of maintaining $100 million.
E*TRADE is gradually moving its clients’ deposits that are held in third-party banks to its own bank. With the new sweep platform, E*TRADE can move deposits on and off the balance sheet at a faster pace. This gives it a powerful tool for managing the size of the balance sheet. The company has the ability to operate close to the $50 billion threshold.
Here’s how a few of the firm’s peers in the brokerage industry fared in terms of operating margin:
Interactive Brokers’ (IBKR) operating margin was 45.37%.
TD Ameritrade’s (AMTD) operating margin was 41.07%.
Charles Schwab’s (SCHW) operating margin was 34.35%.
Together, these companies form 1.26% of the Financial Select Sector SPDR Fund (XLF).
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