E-Trade may need more capital as bad loans lead to big losses

As expected, ongoing struggles by E-Trade Financial (ETFC) to manage its loan portfolio did not go over well on Wall Street.

The online broker reported a higher than expected net loss of $232.7 million, or 41 cents a share, largely due to rising delinquencies and charge-offs that compelled it to raise its loan-loss provisions. The loss was higher than the 39 cents per share many analysts were expecting. A year earlier the company reported a net loss of $91 million or 20 cents per share.

Delinquent loans increased from 4.3 percent a year ago to 9.2 percent in the first quarter. Net charge-offs rose from 2.4 percent last year to 5.3 percent. Loan losses have hurt E-Trade's performance over the last few quarters, and with its provision for loan losses at $454 million for the quarter -- $59 million less than last quarter -- the bank acknowledged that regulators have instructed it to raise more capital. The company's total allowance for loan losses increased $120 million to $1.2 billion, or 5 percent of gross loans receivable, and it intends to do more.

"We have been increasing our efforts to reduce the size of the bank's balance sheet and the associated risk, to de-leverage the parent company's capital structure and also to generate additional capital to inject into the Bank," said E-Trade CEO Don Layton.

He said the bank could pursue equity issuances and asset sales as possible solutions. The company is still awaiting word on $800 million in assistance from the federal government's Troubled Asset Relief Program.

"TARP would be nice, but we think we are in a fine place to raise capital without it," Layton said.

The company said it had increased customer accounts and deposits by getting its fair share of market share in the online brokerage space and by taking market share away from traditional brokerage firms as consumers turn to self-directed investing to exert more control over their investments in this difficult economic environment. It also said that loan losses across its portfolio were beginning to stabilize.

"The range of expectations of credit losses should be narrowing down the rest of the year," Layton said. "There is some notion of a light at the end of the tunnel."

Investors may not be convinced.
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