While E-Trade Group Inc.s efforts to build its nonbrokerage businesses paid off in handsome fourth-quarter earnings, the company says the job is still only partly done.
By the end of this year E-Trade hopes to have adjusted its business mix so that each of three segments brokerage, banking, and fees from lending products contributes about a third of the companys revenue.
High on E-Trades new-product priority list are auto loans and credit cards, both of which are to be rolled out by April.
We will continue to diversify away from transactions, and we have proven we can cross-sell and up-sell, Christos M. Cotsakos, E-Trades chairman and chief executive officer, said during a conference call for investors and analysts late Monday afternoon.
Early last year, when the stock market was falling, E-Trade succeeded in moving trading customers money into certificates of deposit, Mr. Cotsakos said. It also handled $10 billion of mortgage originations, half of which was generated in-house and half from correspondent lenders. The mortgage originations were driven by the refinancing boom as interest rates fell, he said.
When the stock market showed signs of bottoming out late in the year, customers began to shift funds from CDs into money-market accounts, then back into stocks to take advantage of trading rallies, and that trend will probably continue this year, Mr. Cotsakos said.
While customers may be ready to jump back into the equity markets now, they may be equally ready to jump out in the stalls between market rallies that the brokerage expects to this year, he said. E-Trade plans to switch those customers back and forth between banking and brokerage accounts as market conditions change.
Siloed financial giants will not be nimble enough to keep up, he predicted.
The credit card E-Trade plans to introduce would replace a card product it has offered for several years through the First USA subsidiary of Bank One Corp.
We can do some very unique things with the credit card, said Mitchell Caplan, the chief financial products officer and a managing director at E-Trade. For example, the card could have a rewards program, or it could feature variable pricing based on the other assets that the cardholder has with E-Trade, he said.
The company will also begin originating auto loans to expand a small portfolio of such loans it purchased from others. Next month E-Trade plans to introduce a redesigned Web site that will include a single sign-on for both banking and brokerage services, as well as account aggregation and personalized advice.
The redesigned site, the centerpiece of the companys personalized digital financial media strategy, will feature extensive individual customization, organized around investing, banking, lending, and planning, Mr. Cotsakos said. Automated planning tools will come from the software company Financial Engines and live human advice from personal financial planners at Ernst & Young LLP.
Adding further to its product mix, E-Trade announced an agreement Tuesday to offer term life insurance through with the life insurance and annuity holding company inviva Inc. Mr. Caplan said E-Trade plans ultimately to build an insurance center.
You can begin to connect a lot of these different services, he said. For example, a mortgage customer could be offered home and life insurance, plus a deposit account to help pay their mortgage bills, he said. It becomes a holistic solution for our customers.
E-Trades banking business, which includes nearly half a million accounts and a growing online mortgage arm, helped propel the parent companys fourth-quarter operating profit to seven cents a share, beating analysts estimates by three cents.
A 37% increase in interest income from E-Trade Bank helped lessen the blow of a 41% decline in trading transaction revenue, and it fueled E-Trades enthusiasm to add banking products that would further smooth its revenue stream.
E-Trade posted fourth-quarter net income of $21.6 million, or 6 cents a share, compared with $1.4 million of net income in the same period a year earlier. Net revenue rose 3.5%, to $345.4 million.
The company said it was comfortable with Wall Streets first-quarter per-share operating profit consensus estimate of 7 cents, and it raised its 2002 earnings guidance by 10 cents, to 55 cents from ongoing operations, Mr. Cotsakos said.
The number of active bank accounts grew 35%, to 491,000. Total assets at E-Trade Bank increased 19%, to $13.5 billion, while interest income climbed 37%, to $854 million.
Analysts responded cautiously on Tuesday to E-Trades results and questioned whether increasing spreads at the bank could offset lackluster activity on the trading side.
Glenn Schorr of Deutsche Banc Alex. Brown maintained his buy rating, even though he expressed concern about the quality and value of its earnings. Were not ready to get off this train just yet.
But Robertson Stephens Inc. cut its rating to buy from strong buy, because it said the stocks valuation was too high. Raymond James Financial Inc. cut its rating to market perform from buy.
E-Trades diversification plan stitched together through a number of modest acquisitions and supported by its cross-selling program is offering the type of income protection that seems to have eluded fellow brokerages.
For example, despite its acquisition two years ago of U.S. Trust to lessen its exposure to the vagaries of the brokerage business, Charles Schwab Corp., disappointed investors with a fourth-quarter loss of $13 million, or 1 cent a share for the fourth quarter, versus a profit of $139 million, or 10 cents a share, a year ago earlier.
The San Francisco company said it had finished a major restructuring that began early last year and was meant to help it weather the effect of the slowing economy on retail investor behavior.
By the end of this year Schwab had cut its work force by 25.5%, to 19,600 employees, and during the fourth quarter it shuttered its Japanese and Australian brokerage operations to shore up profits. For the year, the companys net income declined 72%, to $718 million.
Richard Repetto, an equity analyst at Putnam Lovell Securities, said Schwabs story is quite different from the increasing diversification seen at E-Trade. As diversified as they are, theyre not offering mortgage origination like E-Trade.
Schwab offers online mortgages through E-Loan Inc., but Christopher V. Dodds, Schwabs chief financial officer, said in a telephone interview: We do not see ourselves becoming a financial supermarket and diversifying on a very broad level.
The company will continue to focus on the asset side of the investor, he said.
Niamh Ring contributed to this article. 
