March 11 (Reuters) - Fox-Pitt Kelton said a “stress test” of the banking subsidiaries of four U.S. retail brokers showed that Stifel Financial Corp (SF.N) remained well-capitalized in an immediate loss scenario, while E*Trade Financial Corp (ETFC.O) may need more capital support.
The majority of E*Trade’s mortgage loans and securities are of problematic vintages, analyst David Trone said in a note to clients.
“We believe E*Trade could have $785 million of remaining loss content in its loan portfolio and $232 million of unrealized securities losses,” Trone said.
The analyst added that this loss content could lead to a fall in E*Trade’s Tier 1 capital ratio — a measure of capital strength that investors are closely watching these days — and risk-based capital ratio.
Although an immediate loss scenario would put retail brokers such as Charles Schwab Corp SCHW.O and Raymond James Financial Inc (RJF.N) below their well-capitalized levels, no company should face trouble if losses were spread over several quarters, given solid pre-provision earnings, Trone said.
“This is most significant for E*Trade, which the market seems to believe will fall to insolvency at some point, while its brokerage unit continues to generate solid profits to buffer against chronic loan losses.”
Last month, U.S. banking regulators launched a “stress test” program to determine whether banks needed more capital from the new Capital Assistance Program for government preferred stock investments that can be converted into common equity.
Lately, brokerages have been conducting their own such tests to look into the capital adequacies of the banks they cover. (Reporting by Anurag Kotoky in Bangalore)