Rising interest rates and a return of volatility to the stock market should benefit the likes of E*TRADE and TD Ameritrade, prompting Wall Street firm Keefe, Bruyette & Woods to raise its investment ratings on the two online brokerages. Earlier this week, Keefe, Bruyette & Woods analyst Kyle Voigt upgraded his rating on E*TRADE Financial Corporation (ETFC) to outperform from market perform and reiterated a $61 price target. The rating on TD Ameritrade Holding Corporation (AMTD) also went to outperform from market perform, with Voigt reiterating his $66.50 price target.
Based on these price targets, the analyst expects E*TRADE's stock to increase 13% and TD Ameritrade shares to appreciate nearly 12%. Shares of both companies have been up this year despite February's market correction. In a research report covered by Benzinga, Voigt said that, with the Federal Reserve poised to raise interest rates multiple times this year, the companies' forecasts for net interest margins may be conservative. In addition, he said that E*TRADE and TD Ameritrade are in a good position to benefit from a rising rate environment in general. The analyst also believes the volatility that came back to the stock market with a vengeance in February is good for business at both brokerages.
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"More recently, we've seen a return to more normalized equity market volatility, and should this persist, we believe that there could be upside to our numbers, even in a scenario where margin balances decline," Voigt wrote in the research report. The analyst noted that E*TRADE could be an attractive buyout target for rival TD Ameritrade. If a deal were to happen, it could increase earnings per share by double digits, the analyst wrote, according to Benzinga.
Keefe, Bruyette & Woods isn't the only Wall Street firm that thinks a deal between TD Ameritrade and E*TRADE would make sense. Back in November, Deutsche Bank upgraded shares of the TD Amertirade in part because of the potential for it to acquire E*TRADE. Back then, Deutsche Bank said that a deal between the two is "viable" this year because both stocks would benefit from it.
In June, E*TRADE was given an ultimatum from its board: come up with a clear growth strategy or face the potential of a sale by the end of the following year. Since then, the New York-based online brokerage firm has revealed that it is spending $275 million in cash to purchase Trust Company of America as a way to enter the financial advisory market in a bigger way. Furthermore, in the most recently reported quarter, the online brokerage announced that it is purchasing more than one million accounts from Capital One Financial Corporation (COF). According to E*TRADE, which is paying $170 million for the portfolio of brokerage accounts, the accounts have $18 billion in assets. As of the end of last year, $1.9 billion of these assets were in cash, with $0.2 billion in customer margin balances.