Rl - Zacks Investment Research



November 10, 2009

Research Analyst: Madhurima Das, C.A

Editor: Tanuka De, , MBA

Sr. Ed.: Ian Madsen, CFA: imadsen@; 1-800-767-3771 x9417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

|E*Trade Financial Corporation |(ETFC – NYSE) |$1.45* |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 3Q09 Earnings Update

Previous Edition: Coverage Initiated by One Broker, October 6, 2009 (broker material considered till October 2)

Brokers’ Recommendations: Neutral: 63.6% (7 firms); Positive: 36.4% (4); Negative: 0% (0) Prev. Ed.: 7 3; 1

Brokers’ Target Price: $1.95 (↑ $0.01 from the last edition; 10 firms) Brokers’ Avg. Expected Return: 34.1%

*NOTE: Though dated November 10, 2009, share price and broker material are as of November 3, 2009.

A Flash Update on 3Q09 Earnings was done on October 27, 2009.

Note: The tables below for Revenue, Margins, and Earnings per Share contain less brokers’ material than the brokers’ material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

E*Trade Financial Corporation (ETFC or the Company) is a global financial services company offering a wide range of financial solutions, including investing, trading, lending, and cash management to retail and institutional clients. The firm delivers its retail products and services to its 3.4 million clients, primarily online, but increasingly via advisors and branches. In addition, E*Trade offers specialist, and market-making services globally to its institutional clients.

63.6% of the firms in the Digest group rendered neutral ratings, 36.4% of the firms assigned positive ratings. None of the firms provided a negative rating. The firm with the lowest target price rated the stock Market perform and did not provide any valuation metric. One firm with the highest target price rated the stock Buy and valued the price on 15x multiple to pre-provision normalized annual earnings per share of $0.20 beginning in 2012, discounted back 1.5 years using a 20% discount rate. Another firm with the highest target price rated the stock Buy and based the valuation on normalized EPS of $0.22 along with a 20% probability.

Neutral or equivalent outlook – Seven firms or 63.6% - Target Price range: $1.57 -$2.00. According to these firms, ETFC has shored up its capital position recently but not without meaningfully diluting common shareholders which should enable management to focus on driving growth in its retail brokerage segment once again. ETFC’s improved capital position will be sufficient to absorb future losses and falling loan loss provisions may even allow the Company to be in position to report a profit as early as the next quarter, which these firms believe would likely be a significant positive catalyst for the firm’s shares. However, despite the progress on capital and credit, elevated credit costs, mixed brokerage trends, and significant dilution are likely to weigh on results in the near term. According to them, any meaningful upside would likely be driven by excess capital being used to pay down debt and/or buybacks and/or a strategic transaction, both of which are not expected in the near term.

Buy or equivalent outlook – Four firms or 36.4% - Target Price range: $2.00-$2.30. These firms believe that ETFC will benefit from the capital raise and commencement of its debt exchange offer, which will be followed by its strong fundamentals, good cash flow, and increased probability of becoming an acquisition candidate. Further, it will provide the investors with a profitable investment opportunity.

According to these firms, the worst is behind the Company and profitability should be within reach. Though the return to normalized earnings may take more than three years, they believe ETFC offers significant upside potential for patient investors, particularly given the substantially lower risks to the Company, post-capital raise. As credit losses continue to fall, they expect ETFC to become a source of significant capita, going forward. With nearly $1 billion of excess regulatory capital already on hand, they believe ETFC is overcapitalized and soon will be in a position to release capital to the holding company to further de-leverage the parent.

November 10, 2009

Recent Events

On November 4, 2009, ETFC flied its SEC form 10-Q, Quarterly report.

On October 27, 2009, ETFC announced its 3Q09 financial results. Highlights are as follows:

• Net revenue was $575.0 million, up from $377 million in 3Q08.

• Reported net loss from continuing operations, was $832.0 million, or $0.66 per share versus a net loss of $320.8 million, or $0.60 per share in 3Q08. The Company reported a net loss including discontinued operations of $832 million, or $0.66 per share versus a net loss of $50.5 million, or $0.09 per share, in 3Q08.

On October 7, 2009, ETFC announced the launch of Equity Edge Online, the new web- based, integrated, end-to-end equity compensation management platform from E*TRADE FINANCIAL Corporate Services. In an ever-changing regulatory environment, Equity Edge Online provides flexible, accurate and auditable financial reporting, enabling companies to save time, reduce costs and increase efficiencies in their employee stock plan solutions.

Overview

Based in New York City, E*TRADE Financial Corporation (ETFC or the Company) provides financial solutions to retail, and institutional customers globally. It offers retail investing and trading products and services, including automated order placement and execution of market and limit equity, futures, options, exchange-traded funds, and bond orders; real-time streaming quotes, commentary, and news; advanced trading platforms for traders; personalized portfolio tracking; and access to approximately 7,000 non-proprietary, and proprietary mutual funds. ETFC’s products and services also include Federal Deposit Insurance Corporation-insured sweep deposit account; mortgage, home equity lines of credit, and second mortgage loans secured by real estate; vehicle, marine, automobile, and credit card loans; and online bill payment services. In addition, ETFC provides advisory and asset management services to retail clients; and token-based security solution, which offers security at the point of access to the Internet to safeguard personal financial information. The Company serves retail, institutional, and corporate customers through the Internet, and other electronic media. ETFC operates on a calendar year basis.

For more information about the Company, please visit its website at .

The analysts identified the following issues in evaluating the investment merits of ETFC:

|Key Positive Arguments |Key Negative Arguments |

|Better expense discipline |Stiff competition from larger financial services companies |

|Steady increase in ETFC’s growth rates despite the difficult yield |Downturn in domestic equity markets is likely to pressure the |

|environment |Company’s trading revenue |

|Strong customer momentum |Interest rate risk and pricing pressure |

|International growth |Anticipated credit losses based on the loans outstanding, principal |

|Strong fundamentals |transaction losses, and reduced net interest spreads |

E*TRADE Retail primarily consists of retail brokerage operations, and also includes consumer loan originations, and revenue obtained from the Institutional segment with broker sweep deposits. ETFC’s corporate business, which serves corporations with employee stock options services, also falls under Retail. E*TRADE Institutional comprises the institutional securities businesses (market making as well as stock loan operations), as well as balance sheet-sourced spread income of the banking unit.

November 10, 2009

Revenue

Prior to the 3Q09 earnings release, the Digest NII growth forecast was 0.0% for FY09 and (2.7%) for FY10. The Digest growth forecast for non-interest income was 36.2% for FY09 and (3.5%) for FY10. Following the 3Q09 earnings release, the Digest NII growth forecast decreased to (1.0%) for FY09 and (2.8%) for FY10. The Digest growth forecast for non-interest income increased to 46.6% for FY09, but decreased to (4.0%) for FY10.

|($ in Million) |

|Positive |36.4%↑ |

|Neutral |63.6% |

|Negative |0.0%↓ |

|Average Target Price |$1.95↑ |

|Digest High |$2.30 |

|Digest Low |$1.57↓ |

|No. of Analysts with Target Price/Total |10/11 |

The key risks to the target price are primarily related to the macro environment, including the condition of the economy and the equity markets’ operating environment, interest rate levels, and integration risks. ETFC is also exposed to several industry-specific risks, including a flattening yield curve, a prolonged equity market downturn, intense price competition, and low levels of retail client activity. ETFC could also be potentially exposed to credit losses based on its loans outstanding, and principal transaction losses.

Metrics detailing current management effectiveness are as follows:

|Metric (TTM) |ETFC |Industry |S&P 500 |

|Return on Assets (ROA) |-3.0%↓ |-0.7%↑ |3.5% |

|Return on Investments (ROI) |-4.1%↓ |-2.8%↑ |4.7%↓ |

|Return on Equity (ROE) |-48.0%↓ |-11.4%↑ |8.4% |

ROA, ROI and ROE are lower than the overall market averages (as measured by S&P 500) of 3.5%, 4.7% and 8.4%, respectively.

Capital Structure/Solvency/Cash Flow/Governance/Other

During the quarter, ETFC successfully completed a comprehensive recapitalization, substantially improving the Company’s financial position.

The Company continues to maintain Bank capital ratios substantially in excess of regulatory well-capitalized thresholds. As of September 30, the Company reported Bank Tier 1 capital ratios of 6.72% to total adjusted assets and 13.15% to risk-weighted assets. The Bank had excess risk-based total capital (i.e., above the level regulators define as well capitalized) of $985 million as of September 30, 2009. These capital ratios reflect $100 million of cash that was contributed as Tier 1 equity to the Bank during the quarter.

In late August, the Company completed its $1.74 billion debt exchange, materially reducing its debt burden. The exchange reduced the Parent company’s annual interest payments by more than half, to $160 million per year, and extended maturities. As of September 30, approximately $592 million of the convertible debt had been converted to equity. In addition, the Company successfully raised $150 million of cash equity during the quarter, further enhancing the Parent company’s liquidity and bringing the total cash gross proceeds from common stock issuances this year to $765 million.

Others

On September 23, 2009, ETFC announced that it has completed its previously announced At the Market (ATM) common stock offering. Pursuant to this offering, the Company sold 80,226,756 shares of common stock for gross proceeds of $150 million, resulting in net proceeds of approximately $147 million after deducting commissions and offering expenses.

On September 9, 2009, ETFC announced that Donald H. Layton, will step down as Chairman and CEO of the Company at the end of 2009 when his contract expires.

November 10, 2009

Potentially Severe Problems

The Company has not disclosed any equity-threatening exposure to sub-prime mortgages, or other impaired financial instruments or derivatives as its peers, and some investment banks have.

November 10, 2009

Long-Term Growth

ETFC’s long-term growth rates range from (20.0%) (FBR Capital) to 0.0% (JMP Sec.). The Digest average long-term growth rate is (10.0%).

According to the analysts, ETFC has undertaken numerous growth initiatives to better understand its clientele and provide improved services to high value or potential high value clients. Additionally, the Company is the only U.S. discount broker with a meaningful focus on international markets. ETFC hopes to offer basic banking services in the European Union that will complement its trading-based brokerage operations.

The strategy of ETFC will continue to build assets both by organic and external means. The Company’s prime focus, is on acquiring assets in the international markets, where commissions are higher and tax rates are lower (high-margin revenue). Additionally, according to the analysts, the Company is aggressively spending on marketing (brand awareness), trading platform, and customer service (an area, where some analysts believe attention is long overdue). Secular trends suggest that trading commissions will continue to trend lower in the coming years, with pricing pressure intensifying in a fiercely competitive market. The analysts, however, believe ETFC will be able to deflect away some negative secular forces due to its bank/brokerage hybrid model, as it comes to market with its online banking platform, its superior operating leverage (due to tight cost controls), and its aggressive focus on expanding, and consolidating its asset base.

November 10, 2009

Upcoming Events

|Event |Date |

|FOMC meeting |December 15/16, 2009 |

|4Q09 & FY09 earnings release (expected) |January 25, 2010 |

Individual Analyst Opinions

POSITIVE RATINGS (36.4%)

FBR Capital – Outperform ($2.25 - target price) – 10/28/09: The firm reiterated an Outperform rating and target price of $2.25. INVESTMENT SUMMARY: The firm believes that the worst is over for the Company and it will return to profitability. Even though the return to normalized earnings may take more than three years, the firm believes ETFC offers significant upside potential for patient investors, particularly given it’s substantially lower risks after the capital raise.

Citigroup – Buy ($2.30 – target price) – 10/27/09: The firm maintained a Buy rating and a target price of $2.30. INVESTMENT SUMMARY: According to the firm, the trading and investing segment, E*Trades core business, continues to exhibit strong growth and could be an attractive purchase candidate for rival competitors. ETFC’s loan portfolio is a risk, but the firm believes there is now a better range of identifiable credit losses. It believes management is adequately reserving for total expected cumulative losses while generating sufficient capital to maintain debt servicing requirements. It also adds, as investors see stabilization in the portfolio loss trends, there is an increasing probability that ETFC will be acquired by one of its major competitors.

Goldman – Buy ($2.30 – target price) – 10/28/09: The firm maintained a Buy rating, and a target price of $2.30. INVESTMENT SUMMARY: The firm remains confident that the worst of ETFC’s credit issues are behind it and the Company will likely return to profitability by 3Q10.

Sandler O'Neill – Buy ($2.00 - target price) – 10/28/09: The firm maintained a Buy rating and a target price of $2.00. INVESTMENT SUMMARY: The firm expects, as each quarter goes by and the loan portfolio runs down, ETFC gets closer to returning to profitability. The firm also expects the Company to solely focus on its core retail brokerage strategy, rather than the credit issues that have plagued the Company over the past two years.

NEUTRAL RATINGS (63.6%)

BMO Capital – Market Perform ($2.00 - target price) – 10/29/09: The firm reiterated a Market Perform rating, and a target price of $2.00. INVESTMENT SUMMARY: The firm believes the Company can be considered for a merger for at least a few more quarters, but does not consider the shares as overly attractive. The firm thus maintains its market perform rating.

Collins Stewart – Hold ($1.80 - target price) – 10/28/09: The firm maintained its Hold rating and a target price of $1.80. INVESTMENT SUMMARY: The firm states ETFC has shored up its capital position recently but not without meaningfully diluting common shareholders which should enable management to focus on driving growth in its retail brokerage segment once again. However, the firm anticipates credit costs to remain high near term and advises investors not to get overly aggressive in buying the shares, given the current valuation.

Barclays Capital – Equal Weight ($1.75 – target price) – 10/28/09: The firm reiterated an Equal Weight rating and a target price of $1.75.

Deutsche Bank – Hold ($1.80 – target price) – 10/27/09: The firm reaffirmed a Hold rating and a target price of $1.80. INVESTMENT SUMMARY: The firm believes despite the progress on capital and credit, elevated credit costs, mixed brokerage trends, and significant dilution are likely to weigh on the results in the near term. Any meaningful upside would likely be driven by excess capital being used to pay down debt and/or buybacks and/or a strategic transaction, which according to the firm are unlikely in the near term.

Fox Pitt – In Line ($1.68 - target price) – 10/28/09: The firm adhered to an In-Line rating and a target price of $1.68.

JMP Sec. – Market Perform ($1.57 - target price) – 10/28/09: The firm maintained a Market Perform rating with a target price of $1.57. INVESTMENT SUMMARY: Despite resilience in its retail business, as credit concerns continue to weigh on profitability, the firm maintains its rating on ETFC.

Raymond James – Market Perform (no target price) – 11/03/09: The firm upgraded its rating from Underperform to Market Perform with no specific target price. INVESTMENT SUMMARY: According to the firm, massive share dilution and lower pre-provision net interest income will limit ETFC’s earnings potential in the long-term. Although there is likely upside to the firm’s net interest margin, the firm believes this will be offset by a significantly reduced loan portfolio. Accordingly, the firm considers re-attaining the pre-credit issue earnings levels to be a challenge.

NEGATIVE RATINGS (0.0%)

|Research Analyst |Madhurima Das |

|Copy Editor |Sreela Bose |

|Content Ed. |Tanuka De |

|No. of brokers reported/Total |11/11 |

|brokers | |

|Reason for Update |Earnings |

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Zacks Research Digest

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