Banking may have helped provide means and perhaps a partial motive for E-Trade Financial Corp. to try to buy Ameritrade Holding Corp., industry watchers said Monday.
A banking subsidiary has helped offset revenue pressure on E-Trade in a brutal online-trading price war, they said. And Ameritrade has been preparing to open a bank of its own, one analyst said.
Reports that E-Trade, of New York, was pursuing Ameritrade, of Omaha, emerged last week. As of Monday afternoon neither company had issued an official statement, nor would either comment for this story.
Banking operations have strengthened E-Trade's financial position, said Matt Bienfang, a senior analyst at TowerGroup Inc., a Needham, Mass., unit of MasterCard International.
The banking business helps E-Trade "from the perspective of 'How do I smooth my top line a little bit instead of being subject to the volatility of the market?' " Mr. Bienfang said Monday.
E-Trade reported first-quarter revenue of $420 million, 4.9% more than a year earlier; Ameritrade's rose 2.7%, to $263 million. E-Trade's net income increased 4%, to $92 million; Ameritrade's dropped 12%, to $71 million.
Mitchell H. Caplan, E-Trade's chief executive, said during its first-quarter earnings conference call last month that its successful results reflected "the power and flexibility of our integrated model."
Lauren Bender, a senior analyst Celent Communications LLC in Boston, said Ameritrade has applied for a bank charter, which would let it imitate E-Trade's strategy. Ameritrade may have been planning to introduce its own bank later this year, she said. (Ameritrade told American Banker last month that it had no immediate plans to open a bank.)
Ms. Bender agreed that E-Trade's bank has offset lower trading profits; she estimated that banking contributes 40% of its revenue, and said it is unlikely that E-Trade would have considered the deal if it was 40% smaller.
E-Trade's average commission per revenue trade has dropped to $9.78, from $13.48 in 2002, Ms. Bender said. "The bank has certainly helped them in terms of profitability."
Gwenn Bezard, a research director at Aite Group LLC of Boston, said that E-Trade may be concerned that Ameritrade would become a bigger threat if it developed a banking business.
"The banking unit has been critical" to E-Trade's ability to make money in an environment made tough by the pricing war, Mr. Bezard said. If Ameritrade's business model becomes similar to E-Trade's, "it means E-Trade is going to lose that specific advantage."
Ms. Bender said online brokers are burdened by too much technology and not enough business. Big investments in capacity were made to meet the trading peaks of 1999 and 2000, she said. As a result, companies like E-Trade and Ameritrade have systems that can deal with about 65% more trades than they are handling now, Ms. Bender said.
Though online brokerage firms have responded to the decline by lowering fees, "trading is probably not going to come back to 2000 levels," she said.
E-Trade has offered banking products since 2000, when it bought Telebanc Financial Corp. Last month it introduced E-Trade Complete, a service that further combines banking and brokerage.
E-Trade has 642,264 bank accounts and nearly 3 million brokerage accounts.
