FBR cuts E*Trade Financial’s (ETFC) target by 1/3 to $3. It also says that, in light of the $11+ billion home-equity portfolio, the stock is still too scary to buy.
The target cut was prompted by ETFC’s sale of their Canadian brokerage operations (although the recent stock collapse may have had something to do with it too). The firm had mixed reactions to the $442 million sale to Scotiabank.
FBR did not agree with management’s assessment that the business was non-core:
Management described the sale as a continuation of exiting non-core businesses that generated around $30M in pretax income. Although the company saw it as an opportunity to shore up capital by selling an asset with a 4% after-tax return on investment, we viewed the business as one that was beginning to achieve scale as a part of its global trading offering and one that generated an attractive 27% ROE due to the low capital necessary to operate.
Yet, FBR understands that saving the rest of the company is important and that this move will ultimately help:
Nevertheless, shoring up the bank is more important to the franchise long term.…
Assuming the $96M of debt-for-equity swaps that the company has completed since 1Q08, plus the $511M in total proceeds from the Canadian operations sale, which is used to capitalise the bank’s balance sheet, these moves increase the bank’s capital base to $4.25B, a nearly 17% increase. In our opinion, this move adds much needed capital support to the bank, but we remain cautious given the risk remaining in its $11.4B home equity runoff portfolio (with an additional $5.3B of unused
FBR maintains MARKET PERFORM on E*Trade Financial (ETFC), target price cut from $4.50 to $3.