UPDATE 2-Analyst cuts E*Trade, citing home equity book
NEW YORK, Dec 3 (Reuters) - Banc of America Securities downgraded E*Trade Financial Corp (ETFC.O: Quote, Profile, Research) on Monday, citing concerns about the company's main brokerage business, and its home equity loan portfolio.
Banc of America Securities, in a note, cut its rating on E*Trade to "sell" from "neutral" and slashed its price target on the stock to $2 from $9. It also lowered its 2008 earnings estimates on the company to a loss of 20 cents a share from a profit of $1 a share.
The downgrade followed other analyst cuts on Friday, a day after the company said it had secured a $2.55 billion cash infusion from Chicago hedge fund Citadel Investment Group.
The shares closed down 49 cents on Monday, or nearly 10.7 percent, to $4.11. The stock has lost about 85 percent of its value since January, falling in recent months as the company disclosed troubles in its mortgage business.
Under the deal with Citadel, E*Trade sold off its asset-backed securities (ABS) portfolio, the key source of its troubles, and also got a cash injection, but analysts said the deal was a much better one for Citadel than E*Trade.
Banc of America Securities analyst Michael Hecht said in his Monday note that despite the Citadel deal, he was concerned that E*Trade's brokerage business, which he called a "dwindling asset", could no longer offset "negative value at the bank."
Hecht said the company's $12 billion home equity portfolio continued to be of chief concern, and said he expected a best-case scenario to be another $1 billion addition to its reserves, which would wipe out 2008 earnings, while the worst case is a continued fire sale of assets resulting in an outright sale of the company's home equity portfolio.
E*Trade said late on Monday that its allowance was adequate to cover losses in 2008.
"The evaluation of our home equity portfolio, along with external consultants, assumes the losses will take place over several years, not at one time," said an E*Trade spokeswoman.
She reiterated that the company plans to increase its allowance for loan losses to $400 million by year end, and said that sufficiently increases loss coverage, based on the composition and performance of its loan portfolio.
Several brokerages, including Goldman Sachs and Credit Suisse, on Friday cut their earnings estimates on E*Trade, citing the high costs and dilutive terms of the deal between the company and Citadel.
UPDATE 2-Analyst cuts E*Trade, citing home equity book | U.S. | Reuters