Post by jeffolie on Nov 12, 2007 17:04:27 GMT -6
E-Trade halved on warning, sell rating
Online broker backs off outlook, citing securities portfolio
By Greg Morcroft, MarketWatch
NEW YORK (MarketWatch) -- Shares of E-Trade Financial Corp. lost more than half their value Monday, plunging as the company faces more subprime-related write-downs and as analysts at Citigroup suggest a possible bankruptcy for the online broker. Moreover, Fitch Ratings downgraded the firm's collateralized CDO asset manager rating to CAM4 from CAM2- in light of concerns about E-Trade's ability to manage exposure to some debt securities.
The rating agency said E-Trade's performance on CDOs, short for collateralized debt obligations, remains below the average of its peers.
Companies with CAM4 ratings, Fitch explained Monday, "will generally necessitate heightened ... surveillance owing to the presence of situations or conditions in need of improvement or as a result of significant recent changes in operating practices, ownership, management, operational infrastructure, and/or business strategy that give rise to concerns regarding the match between the organization's current competencies and wherewithal and the planned execution of CDO investment objectives."
Shares of E-Trade ( Last: 3.55-5.04-58.67%closed off 58.2%, to $3.58.
E-Trade COO and President Jarrett Lillien said that there are no immediate plans to change management or any new announcements pending.
"My feeling is that there are no knee jerk actions that we need to take in next few days, but if we need to take actions to restore confidence, all we want is to do what's best with the franchise, I'm not important what's important is the franchise," Lillien told MarketWatch in an interview Monday.
"We'll take whatever actions we need to take," he said.
Monday's declines added to losses that the shares sustained in late trading Friday, after the company warned about further write-downs in the fourth quarter. E-Trade also backed away from an earnings forecast issued less than a month ago, because the value of its asset-backed securities portfolio dropped further.
"Bankruptcy risk cannot be ruled out," Citi analysts wrote in a note Sunday. They also lowered E-Trade's rating to sell.
"In our case, we have a couple of analysts that seem to like to take as much of the information as they can and sensationalize things," Lillien said.
Also, late Friday, E-Trade revealed that it is the target of an informal Securities and Exchange Commission inquiry regarding its loan and security portfolios.
Will customers pull their assets?
"The continued negative news flow about charges resulting from its mortgage and CDO exposure, an SEC inquiry and continued deterioration in its financial condition all increase the likelihood of significant client attrition," the Citi analysts said.
In particular, they could move assets to online rivals such as Charles Schwab Corp. and TD Ameritrade Holding Corp. with the Citi analysts noting that both companies "have been unscathed by subprime/CDO issues."
TD Ameritrade's shares rose 6.4% in recent action, while Schwab shares added 4.6%.
"We have been communicating with customers since August so it's not a new thing," Lillien said. "We have been talking about the safety of their accounts, and we had a lot of conversations with customers today."
"When you get a move in your stock like today, you are going to have more discussions with everyone," he added. "The issue is what kind of capital is there? We feel we have plenty of excess liquidity and capital," Lillien said.
E-Trade said that the fair value of its $3 billion asset-backed securities, or ABS, portfolio has continued to decline since the end of the third quarter. CDOs and other securities backed by second-lien mortgages saw the biggest hits, the broker explained.
"We estimate that trying to liquidate E-Trade's loan and ABS portfolio would result in over $5 billion of losses, more than wiping out tangible equity," Citi analysts said. They estimated the write-downs and provisions would total about $500 million.
E-Trade had roughly $450 million in total exposure to asset-backed CDOs and second-lien securities as of Sept. 30. That included about $50 million of AAA-rated asset-backed CDOs that have been downgraded to junk status.
The drop in value will result in further write-downs during the fourth quarter -- something that hadn't been expected when E-Trade updated its 2007 earnings outlook just on Oct. 17.
Profit forecasts 'no longer beneficial' "Investors should no longer expect these earnings levels to be achieved," the broker said in a statement.
"Actual securities-related losses will depend on future market developments, including the potential for future downgrades by rating agencies, which are extremely difficult to predict," the company added. "Accordingly, management believes it is no longer beneficial to provide earnings expectations for the remainder of the year."
Separately, E-Trade said Monday that total daily average revenue trades rose 23% in October from the previous month, to 227,344.
Total retail client assets also rose, increasing 4% to $226.7 billion, the online broker said. Gross new retail accounts for October were 105,601, brining total retail accounts to about 4.74 million.
"Monthly results were quite positive. We have been able to keep growth going," Lillien said.
Greg Morcroft is MarketWatch's financial editor in New York.
www.marketwatch.com/news/story/e-trades-shares-cut-nearly-half/story.aspx?guid=%7B2FE9802B%2DA85A%2D4674%2DA43C%2DC3F1FE6980AC%7D
Online broker backs off outlook, citing securities portfolio
By Greg Morcroft, MarketWatch
NEW YORK (MarketWatch) -- Shares of E-Trade Financial Corp. lost more than half their value Monday, plunging as the company faces more subprime-related write-downs and as analysts at Citigroup suggest a possible bankruptcy for the online broker. Moreover, Fitch Ratings downgraded the firm's collateralized CDO asset manager rating to CAM4 from CAM2- in light of concerns about E-Trade's ability to manage exposure to some debt securities.
The rating agency said E-Trade's performance on CDOs, short for collateralized debt obligations, remains below the average of its peers.
Companies with CAM4 ratings, Fitch explained Monday, "will generally necessitate heightened ... surveillance owing to the presence of situations or conditions in need of improvement or as a result of significant recent changes in operating practices, ownership, management, operational infrastructure, and/or business strategy that give rise to concerns regarding the match between the organization's current competencies and wherewithal and the planned execution of CDO investment objectives."
Shares of E-Trade ( Last: 3.55-5.04-58.67%closed off 58.2%, to $3.58.
E-Trade COO and President Jarrett Lillien said that there are no immediate plans to change management or any new announcements pending.
"My feeling is that there are no knee jerk actions that we need to take in next few days, but if we need to take actions to restore confidence, all we want is to do what's best with the franchise, I'm not important what's important is the franchise," Lillien told MarketWatch in an interview Monday.
"We'll take whatever actions we need to take," he said.
Monday's declines added to losses that the shares sustained in late trading Friday, after the company warned about further write-downs in the fourth quarter. E-Trade also backed away from an earnings forecast issued less than a month ago, because the value of its asset-backed securities portfolio dropped further.
"Bankruptcy risk cannot be ruled out," Citi analysts wrote in a note Sunday. They also lowered E-Trade's rating to sell.
"In our case, we have a couple of analysts that seem to like to take as much of the information as they can and sensationalize things," Lillien said.
Also, late Friday, E-Trade revealed that it is the target of an informal Securities and Exchange Commission inquiry regarding its loan and security portfolios.
Will customers pull their assets?
"The continued negative news flow about charges resulting from its mortgage and CDO exposure, an SEC inquiry and continued deterioration in its financial condition all increase the likelihood of significant client attrition," the Citi analysts said.
In particular, they could move assets to online rivals such as Charles Schwab Corp. and TD Ameritrade Holding Corp. with the Citi analysts noting that both companies "have been unscathed by subprime/CDO issues."
TD Ameritrade's shares rose 6.4% in recent action, while Schwab shares added 4.6%.
"We have been communicating with customers since August so it's not a new thing," Lillien said. "We have been talking about the safety of their accounts, and we had a lot of conversations with customers today."
"When you get a move in your stock like today, you are going to have more discussions with everyone," he added. "The issue is what kind of capital is there? We feel we have plenty of excess liquidity and capital," Lillien said.
E-Trade said that the fair value of its $3 billion asset-backed securities, or ABS, portfolio has continued to decline since the end of the third quarter. CDOs and other securities backed by second-lien mortgages saw the biggest hits, the broker explained.
"We estimate that trying to liquidate E-Trade's loan and ABS portfolio would result in over $5 billion of losses, more than wiping out tangible equity," Citi analysts said. They estimated the write-downs and provisions would total about $500 million.
E-Trade had roughly $450 million in total exposure to asset-backed CDOs and second-lien securities as of Sept. 30. That included about $50 million of AAA-rated asset-backed CDOs that have been downgraded to junk status.
The drop in value will result in further write-downs during the fourth quarter -- something that hadn't been expected when E-Trade updated its 2007 earnings outlook just on Oct. 17.
Profit forecasts 'no longer beneficial' "Investors should no longer expect these earnings levels to be achieved," the broker said in a statement.
"Actual securities-related losses will depend on future market developments, including the potential for future downgrades by rating agencies, which are extremely difficult to predict," the company added. "Accordingly, management believes it is no longer beneficial to provide earnings expectations for the remainder of the year."
Separately, E-Trade said Monday that total daily average revenue trades rose 23% in October from the previous month, to 227,344.
Total retail client assets also rose, increasing 4% to $226.7 billion, the online broker said. Gross new retail accounts for October were 105,601, brining total retail accounts to about 4.74 million.
"Monthly results were quite positive. We have been able to keep growth going," Lillien said.
Greg Morcroft is MarketWatch's financial editor in New York.
www.marketwatch.com/news/story/e-trades-shares-cut-nearly-half/story.aspx?guid=%7B2FE9802B%2DA85A%2D4674%2DA43C%2DC3F1FE6980AC%7D