E-Trade shares take big drop
NEW YORK - Shares of online brokerage E-Trade Financial lost more than half their value Monday, with a Citigroup analyst saying customers were poised to flee and the company was at risk of bankruptcy.
Other analysts said the picture was not as bleak, though, and the company said assets actually improved in October. It also moved to reassure customers that it could withstand a substantial write-down of assets and remain in business.
Shares of E-Trade tumbled 58.7 percent, or $5.04, to $3.55. Earlier in the session, shares fell as low as $3.46. Shares had traded between $8.02 and $26.08 during the past year.
The online brokerage firm said Friday it would take an undisclosed write-down on a portfolio of securities and collateralized debt obligations, known as CDOs, backed by mortgages.
E-Trade said it has a $3 billion portfolio of asset-backed securities, which includes about $450 million in complex financial instruments such as CDOs and second-lien securities. As the mortgages backing those investments have increasingly defaulted, the value of those securities declined, forcing firms to write down their value.
E-Trade’s president and chief operating officer, Jarrett Lilien, said in a letter to clients Monday the firm could handle an immediate write-down of $1 billion and “still remain well capitalized.”
Early Monday, Citi Investment Research analyst Prashant Bhatia laid out a worst-case scenario for E-Trade, saying the write-downs and a Securities and Exchange Commission inquiry could lead to a significant number of clients closing accounts. Bhatia pegged E-Trade’s chances of filing for bankruptcy at 15 percent.
Fox-Pitt, Kelton analyst David Trone discounted the chance of bankruptcy, though he said a $4 stock price implied a prediction by the markets of a 65 percent chance of insolvency.
“The board would likely sell [E-Trade] before allowing bankruptcy,” he said in a client note.
E-Trade was not available to comment on the Citi note. Bhatia was traveling and not available to comment, Citi said.
Sandler O’Neill & Partners analyst Richard Repetto downgraded the company to “Hold,” but said E-Trade’s brokerage business was still strong.
Repetto expects E-Trade to look for alternatives to deal with the weakness at its bank, including a capital infusion similar to Bank of America’s August investment in Countrywide Financial, a sale of bank assets or a sale of the company all together.