Donald H. Layton all but waved a "mission accomplished" banner after announcing plans Wednesday to leave E-Trade Financial Corp., but his successor will face plenty of challenges.
The company said Layton, 59, will step down as chairman and chief executive by yearend, when his contract expires. He said in an interview Wednesday that he has fixed the New York company's balance sheet and guided it through the difficult credit cycle. Still, analysts say, E-Trade's next chief executive will have to make crucial decisions, such as whether to sell its banking unit.
If it can divest its banking arm, E-Trade could be an attractive acquisition target for TD Ameritrade or Charles Schwab & Co. If E-Trade decides to keep its banking unit, that could be a sign it plans to stay independent.
"The new CEO has two options — continue cleaning up the balance sheet and moving E-Trade toward a sale or, if it remains independent, defining a new strategy to compete with Fidelity [Investments], TD Ameritrade and Schwab," said Matt Snowling, an analyst at Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets Corp.
Snowling said he thinks a sale is the most likely option.
E-Trade, hit hard by its investments in real estate loans and bonds backed by the troubled assets, has suffered eight consecutive quarterly losses. It lost $143.2 million, or 22 cents per share, during the second quarter, when it increased its provision for loan losses by 26.8%, to $404.5 million, from a year earlier.
Layton, who was named chairman in November 2007 and became CEO in March 2008, said he spent much of his tenure "shrinking the loan portfolio every quarter by about $1 billion per quarter." Despite speculation the bank would be sold, he said, "that was never a viable alternative" because the banking and brokerage operations were "inextricably intertwined."
Looking forward, "consolidation is a long-term trend, and the board will deal with it and determine what will provide the maximum shareholder value," he said.
Layton, who previously was vice chairman of investment banking at JPMorgan Chase & Co., said the "basic objective" during his tenure was to "get the company through the credit cycle and fix the balance sheet, which meant managing credit risk and raising capital" and "to get the business growing again."
"I think both of those things have been accomplished," he said. "Our statistics indicate that we are adding accounts and the business is growing despite cutting expenses."
Michael Hecht, an analyst at JMP Securities, said E-Trade has made "good" progress generating capital. But "why stop mid-stream?" he asked. "They really need evidence of sustained positive earnings before they can declare victory."
Last year, E-Trade generated $700 million of capital by selling its Canadian operations and its minority stake in an Indian brokerage firm. "If the recession had fit more traditional patterns," Layton said, that capital would have been enough, but "when the economy went into a deeper recession last September, it required us to raise more." In August E-Trade completed a $1.74 billion debt swap to build capital.
Michael Vinciquerra, an analyst at BMO Capital Markets, said Layton was hired "to keep the ship from sinking" and that, though the balance sheet will require "more baby-sitting," the next CEO can focus on the brokerage business.
E-Trade's board of directors plans to begin a search for a new CEO immediately. Layton said the board is looking for an external candidate. His successor "will get to devote the majority of … time to building the franchise and less time trying to get through the credit cycle."
He said his successor would look to increase sales through financial advisers and "extend the brand to the mass affluent."
Layton and the analysts agreed that banking services will be crucial if E-Trade wants to remain independent. "To run an online brokerage company, having a bank remains an advantage," Layton said. "It enables you to handle your own sweep accounts, and you can offer customers more savings products. We need a bank, and we like having a bank for our customers."
Hecht said he expects E-Trade will need to maintain "some type of bank" if it wants to compete against TD Ameritrade and Schwab, each of which has banking operations. TD Ameritrade remains interested in buying E-Trade's brokerage business, he said, but only if it is able to get rid of the banking operations first. "A deal will happen at some point but not any point soon," he said.
