Etrade Cuts Dead Weight

Discussion in 'Wall St. News' started by infolode, Sep 17, 2007.

  1. AP
    E-Trade Financial to Restructure Units
    Monday September 17, 6:33 pm ET
    By Joe Bel Bruno
    E-Trade Financial to Restructure Mortgage Operations, Trading on Credit Worries

    NEW YORK (AP) -- E-Trade Financial Corp. said Monday a tightening in global credit markets will force the discount brokerage to exit businesses that don't deal directly with retail investors, a move that will significantly cut into profit this year.

    The New York-based brokerage said the restructuring will impact "noncore businesses that lack a direct and strategic connection with retail customers." Among the units that will be affected are E-Trade's wholesale mortgage operations and direct mortgage lending business.

    Institutional sales and trading will be aligned more toward retail customers. The company said severance and other restructuring costs are estimated at about $32 million, a majority of which will occur in the fourth quarter.

    E-Trade reduced its 2007 earnings-per-share estimates to between $1.05 to $1.15 per share, down from a range of $1.53 to $1.67. Analysts polled by Thomson Financial had projected a profit of $1.60 per share.

    Mitchell H. Caplan, E-Trade's chief executive, said the restructuring "addresses the recent shifts in the global financial markets and allows us to focus on accelerating plans to further align both our balance sheet and business operations with our core asset -- the retail customer."

    The company did not detail how many positions might be cut as part of the restructuring, though an executive at E-Trade said layoffs would be "next to nothing."

    E-Trade, and the big Wall Street investment banks, have been squeezed as defaults in subprime loans have caused investors to become hesitant about taking risk. This has caused everything from corporate credit to stock trading to suffer.

    The news comes weeks ahead of its scheduled third-quarter earnings report, and gives a glimpse of what bigger Wall Street brokerages might report in the coming days. Lehman Brothers Holdings Inc. will post its numbers on Tuesday, followed by Morgan Stanley on Wednesday, and the results from Bear Stearns Cos. and Goldman Sachs Group Inc. on Thursday.

    E-Trade, which also operates a bank that provides loans to customers, will continue to offer mortgage products. However, turbulence in the subprime market has hurt E-Trade's business of using its cash to buy third-party loans made by other lenders.

    "It is not a subprime thing, the very small portion of subprime loans we have is performing well within expectations," said E-Trade President and Chief Operating Officer R. Jarrett Lilien in an interview with the Associated Press. "Really what is going on right now is your second mortgages, home equity lines of credit, and installment loans. That's really the issue where the market is deteriorating."

    The brokerage has been expanding in recent years beyond just online trading, and has built up its mortgage business to become one of the company's biggest earnings drivers. E-Trade plans to exit its business of buying loans made by other lenders, which will cause it to set aside $245 million to cover losses over the next four years.

    Lilien said that as of the end of August, 2 percent of its $17-billion mortgage portfolio was comprised of delinquent loans. An estimated 2.8 percent of its $12.6 billion home equity portfolio is also considered to be at increased risk.

    The company also will take a charge of up to $100 million to cover losses to part of its securities portfolio, which includes some assets backed by mortgages that have lost value.

    While exiting or restructuring these businesses, he said the company hopes to increase the portion of its balance sheet being driven by its own customers -- moving away from buying third-party securities. He hopes that as much as 85 percent will come from E-Trade customers, up from 60 percent during the third quarter.

    There has been speculation that E-Trade was having discussions with rival TD Ameritrade Holding Corp. about a possible combination. Shares of E-Trade plunged $1.21, or 8.5 percent, to $13 in after-hours trading after it shed 18 cents in the regular session.