E*Trade Group seems to be making it, though not on its brokerage business, which like most others has been languishing, but on its stand-alone Internet banking unit.

The development surprised analysts in the second quarter, most of whom expected the company to earn a penny a share. But E*Trade came in with two cents a share. The reason, according to UBS Warburg, was E*Trade's banking unit, E*Trade Bank."In our view," writes UBS, "E*Trade Bank earnings drove the quarter's earnings-per-share, offsetting losses in the international business, while the e-brokerage, we believe, was marginally profitable." UBS says the bank's revenues were primarily $38 million in net interest income and $24 million in mortgage origination fees and gains on sales of mortgages.

But E*Trade wasn't surprised by the success of its Internet bank. Acquisitions have helped increase the number of E*Trade Bank users, namely the purchase of Advanta in the past quarter. According to E*Trade, the Advanta acquisition added $390 million of customer deposits. In the past quarter, E*Trade Bank has added 30,000 new accounts, half of them coming from the Advanta acquisition.

Deborah Newman, vice president of E*Trade's corporate communications, says more customers may have been drawn to the Internet bank because of a slowing economy. "In different market conditions, customers have different needs," says Newman. "When the stock market was hot, so was the online brokerage business."
The investment bank attributed the 3% increase in net interest income to a growth in assets. The increase would have been higher if E*Trade Bank had employed more of its cash, which UBS expects to take place in coming months.

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