Discount brokerage E*Trade Financial Corp. reported a second-quarter loss of $54 million on Wednesday due to a $142 million charge related to the sale of its market-making unit.
Excluding the loss taken for the unexpected future sale of its G1 Execution Services business, E*Trade reported a better-than-expected profit of 21 cents per share on revenue of $439.9 million. Analysts surveyed by Thomson Reuters I/B/E/S on average forecast profit of 12 cents per share on revenue of $419.8 million.
E*Trade shares, which have gained 52.1 percent this year, rose more than 4.5 percent in after-market trading following the release of the second-quarter report. The company's new management said it has made strong progress in improving its wobbly credit structure, cutting costs and putting in better services for brokerage customers.
"We can crisply turn the corner and deliver for our customers and owners," Chief Executive Paul Idzik said on a conference call with analysts.
The sale of the market-making unit, which executes stock trades placed by E*Trade customers and other brokerage firms, is expected in three to six months. It reflects the New York-based company's decision to focus on its core retail brokerage and bank deposit businesses, Idzik said.
E*Trade bought the business in 2001, around the same time it also began building the commercial bank that ultimately led to billions of dollars of subprime-related losses during the financial crisis.
Investors chose to focus on the progress made since Idzik joined E*Trade in January rather than on the dismantling of G1 Execution.
Citadel LLC founder Kenneth Griffin, who invested more than $2.6 billion in E*Trade since 2007 before selling the stake earlier this year at a big profit, had criticized the inefficiency of the firm's order execution business. Citadel, a Chicago-based hedge fund, also runs a competing market-making operation.
"Our decision to exit the market-making business underscores management's intensifying focus on our core customer franchise and the desire to concentrate our efforts on areas that directly support the core of the company," Idzik said in a prepared statement.
E*Trade reported a net loss of $54.4 million, or 19 cents per share, for the second quarter, compared with a profit of $39.5 million, or 14 cents per share, a year earlier.
The company added a net 30,000 brokerage accounts during the quarter along with $220 billion in new customer assets. Clients made an average of 150,000 trades during the second quarter, more than double the total of two years ago. Like larger rival TD Ameritrade Holdings Corp, which reported its results earlier this week, E*Trade said client trading in July has fallen as markets have become less volatile.
E*Trade's provision for loan losses fell to $46.1 million during the quarter from $67.3 million a year earlier, a sign of a contraction in its bad loan portfolio. On the conference call, executives said the provision should range between $40 million and $60 million over the next few quarters.
The company said its bank's capital strength is well-positioned for new regulatory rules, while its core businesses will prosper with rising interest rates. And unlike competitors TD Ameritrade and Charles Schwab Corp, E*Trade said its net interest spread reflecting the difference between what it makes on investments and pays for financing grew during the quarter.
E*Trade's Tier One leverage ratio, a key measure of its capital strength that is being closely watched by investors, rose to 9.5 percent of assets from 7.9 percent a year earlier. That is the benchmark the company said would allow it to soon ask regulators to move cash from its bank to its holding company so that it can invest in improvements and, ultimately, return capital to shareholders through dividends or share buybacks.
Idzik also said the company has completed its $110 million cost-cutting program and installed a new senior executive team, including a marketing head who has replaced the advertising agency that created the firm's celebrated wise-cracking "E*Trade baby" campaign.
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