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Rating Action:

Moody's reviews E*TRADE for upgrade

10 Jan 2018

New York, January 10, 2018 -- Moody's Investors Service, (Moody's) today placed E*TRADE Financial Corp. (E*TRADE) and E*TRADE Bank ratings on review for upgrade.

RATINGS RATIONALE

Moody's said E*TRADE's credit profile has been benefiting from the rising interest rate environment as well as the firm's recent strategy to expand its balance sheet, funded with cash sweep deposits. E*TRADE is strongly positioned to continue benefiting from higher rates which helped the firm offset lower commission income following a pricing cut in early 2017. The rating agency also noted that E*TRADE's strengthened credit profile reflects the consistent execution of the firm's strategy to focus on growth at the brokerage firm.

Moody's also observed that E*TRADE's approach to the use of leverage in acquisitions and shareholder distribution policies will remain an important credit consideration. E*TRADE has acquired two companies in the past two years, the transactions were conservatively structured and funded with cash and newly issued preferred shares. Moody's expects E*TRADE to maintain a conservative risk profile and credit positive approach to inorganic growth.

In reviewing E*TRADE's ratings for upgrade, Moody's said it will assess a number of key credit challenges and considerations, including: the competitive dynamics around commission and deposit pricing; E*TRADE's organic revenue growth performance and prospects in relation to its pre-determined targets; the firm's financial policy with respect to inorganic growth as well as shareholder distributions; and E*TRADE Bank's funding profile and stability of its cash sweep deposits.

WHAT COULD CHANGE THE RATING UP?

E*TRADE's ratings could be upgraded should Moody's conclude that the impact of future competitive pressures on commission and deposit pricing would have manageable impact on profitability and that the firm's growth could result in further expansion of profit margins without increasing its risk profile.

WHAT COULD CHANGE THE RATING DOWN?

A shift in strategy to tolerate a significant increase in debt leverage driven by debt-funded shareholder distributions or M&A activity could result in downward rating pressure; especially if debt/EBITDA worsened to about 2.5x, and absent a clear and cohesive plan to return leverage to its pre-existing level in the near-term.

An increased tolerance for asset risk at E*TRADE Bank because it could lead to greater risk of unexpected losses and capital depletion.

A significant deterioration in franchise value, via a security breach of client accounts, a sustained service outage, or a significant legal or compliance issue resulting in reputational damage, loss of customers and litigation costs pressuring profit margins.

Moody's has taken the following rating actions:

On Review for Upgrade:

..Issuer: E*TRADE Financial Corp.

.... Issuer Rating, Placed on Review for Upgrade, currently Baa3, stable

....Preferred Shelf, Placed on Review currently (P)Ba2

....Senior Unsecured Shelf, Placed on Review for Upgrade, currently (P)Baa3

....Preferred Shelf non-cumulative, Placed on Review for Upgrade, currently (P)Ba3

....Subordinated Shelf, Placed on Review for Upgrade, currently (P)Ba1

....Pref. Stock Non-cumulative, Placed on Review for Upgrade, currently Ba3 (hyb)

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Upgrade, currently Baa3, stable

Outlook Actions:

..Issuer: E*TRADE Financial Corp.

....Outlook, Changed To Rating Under Review From Stable

On Review for Upgrade:

..Issuer: E*TRADE Bank

.... Adjusted Baseline Credit Assessment, Placed on Review for Upgrade, currently baa2

.... Baseline Credit Assessment, Placed on Review for Upgrade, currently baa2

.... Short Term Counterparty Risk Assessment, Placed on Review for Upgrade, currently P-2(cr)

.... Long Term Counterparty Risk Assessment, Placed on Review for Upgrade, currently Baa1(cr)

.... Issuer Rating, Placed on Review for Upgrade, currently Baa3, stable

.... Short Term Deposit Rating, Placed on Review for Upgrade, currently P-2

....Long Term Deposit Rating, Placed on Review for Upgrade, currently A3, stable

Outlook Actions:

..Issuer: E*TRADE Bank

....Outlook, Changed To Rating Under Review From Stable

The principal methodology used in rating E*TRADE Bank was Banks published in September 2017. The principal methodology used in rating E*TRADE Financial Corp. was Securities Industry Service Providers published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Fadi Abdel Massih
Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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