E*TRADE could see a ratings upgrade from Moody's Investors Service, which announced this week that it has put the New York-based company and its E*TRADE Bank on review for an upgrade.
In a press release, Moody's said that the credit profile at E*TRADE Financial Corporation (ETFC) has been improving as the company benefits from a rising interest rate environment and is expanding its balance sheet with cash it receives from sweeping deposits. With more rate hikes expected by the Federal Reserve in 2018, Moody's believes that E*TRADE is "strongly positioned" to continue to benefit, which should offset any hit from lowering commissions in 2017. Moody's also gave the online brokerage kudos for it strengthened credit profile, saying that it "reflects the consistent execution of the firm's strategy to focus on growth at the brokerage firm." With competition fierce in the discount brokerage market, rivals including E*TRADE have been slashing commission costs. That is driving more business to the brokerages, but it does come at the expense of profits.
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As for mergers and acquisitions in the new year, Moody's said that E*TRADE's strategy to use cash and newly issued preferred shares was conservative and that it should continue to improve on that strategy if it decides to make any buys this year. In 2017, E*TRADE acquired Trust Company of America, the registered independent advisor company that has more than 180 active RIAs and $17 billion in institutional assets under custody. E*TRADE paid $275 million in that deal that raised eyebrows among some Wall Street analysts.
In determining if it will upgrade its rating on E*TRADE – which currently stands at Baa3, stable – the credit rating company said it will look at competition around commissions, its organic revenue growth performance and prospects, inorganic growth plans, and shareholder distributions.
"E*TRADE's ratings could be upgraded should Moody's conclude that the impact of future competitive pressures on commission and deposit pricing would have a manageable impact on profitability and that the firm's growth could result in further expansion of profit margins without increasing its risk profile," wrote Moody's. But if there is a change in strategy that results in a significant increase in its debt, it could result in Moody's downgrading its rating on E*TRADE rather than raising it. Other factors that would lead to a downgrade include increased asset risk at E*TRADE's bank and/or a decrease in the value of the company because of a security breach, sustained service outage or a significant legal or compliance issue, among other things, wrote Moody's.