UPDATE 1-RESEARCH ALERT-Banc of America cuts E*Trade to sell
(Adds details, analyst's comments, background)
By Nivedita Gupta
BANGALORE Dec 3 (Reuters) - Banc of America Securities downgraded E*Trade Financial Corp (ETFC.O: Cotización) and said, despite a $2.55 billion capital infusion into the online bank and brokerage, Citadel Investment Group emerged as the winner after buying the company's mortgage-related securities portfolio.
Banc of America 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.
E*Trade shares have lost about 80 percent of their value since January as Wall Street brokerages have taken billions of dollars of write-downs on assets underpinned by subprime mortgages. Escalating defaults on these loans to people with weak credit have roiled credit markets worldwide.
On Nov 29, E*Trade said it was getting a $2.55 billion cash infusion from investors led by Citadel Investment Group, which is also buying the mortgage-related securities portfolio that has been the primary source of the discount brokerage's recent woes.
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 bailout deal between the company and Citadel.
BofA analyst Michael Hecht believes negative value at E*Trade cannot be offset by the retail brokerage business, which he said was a dwindling asset.
Hecht expects the best-case scenario for E*Trade to be another $1 billion addition to its reserves, while the worst case would be a continued fire sale of assets resulting in an outright sale of the company's home equity portfolio. Continuación...