Banc of America Securities downgraded shares of online brokerage E-Trade Financial Corp., saying the company's brokerage business is too weak to offset deteriorating credit problems at its banking unit.
Analyst Michael Hecht cut his rating on the stock to "sell" from "hold," and gave the shares a 12-month price target of $2. In premarket trading, E-Trade shares lost 83 cents, or 18 percent, at $3.77 after closing Friday at $4.60. The stock was as high as $26.08 in the past year.
The analyst expects E-Trade will have to bolster its reserves by another $1 billion, in the best case, to shore up its $12 billion equity portfolio, which is flagging amid a spike in mortgage defaults.
"We no longer believe the value of the retail brokerage business, a dwindling asset, can offset negative value at the bank," Hecht wrote in a note to investors.
The firm typically relies on its brokerage business, where it earns fees when retail investors make stock trades, but E-Trade said last week it lost some 6,000 accounts in recent weeks as customers grew concerned the company would have to seek bankruptcy protection.
Depositors pulled about $14 billion worth of cash and assets from the brokerage as the New York-based firm reported massive losses in its $3 billion asset-backed securities portfolio, which was bleeding money as the value of its underlying assets faltered.
Although E-Trade received a reprieve last week, when hedge fund Citadel Investment Group bought the troubled portfolio for $2.5 billion, Hecht said the home equity portfolio remains vulnerable.
"Worst case is a continued fire sale of assets (to remove overhang that may drive additional retail brokerage attrition), resulting in an outright sale of the home equity portfolio (which we believe could be at about 70 cents on the dollar, an incremental $3.7 billion hit)," Hecht wrote.
