E*Trade Capital Efforts May Lead to Sale

(Adds E*Trade comments in 19th graph.)

E*Trade Financial's (ETFC Quote) recent efforts to shore up its struggling bank subsidiary could pave the way for a future sale of the company, some analysts say.

Matt Snowling, an analyst at Friedman Billings Ramsey, says investors should start buying shares of the company and raised his rating to outperform on Tuesday.

"We believe the worst is now behind E*Trade, as the nearly $2 billion of fresh equity capital at the company should alleviate regulators' concerns and take the worst-case scenario off the table," Snowling writes in a note. "As a result of still strong fundamentals, good cash flow, and increased probability of becoming an acquisition candidate, we believe patient investors will be rewarded for stepping into [E*Trade] at current levels."

The approximately $2 billion in fresh capital should be enough to support the bank's troubled mortgage portfolio and reduce E*Trade's large debt service costs, Snowling writes. He expects the firm to exchange between $800 million and $1.745 billion of debt for the newly convertible securities, depending on investor participation.

As banks including Citigroup (C Quote) and Bank of America (BAC Quote) received double doses of government aid in response to the financial crisis, E*Trade's now seven-month-old application for funding from the Troubled Asset Relief Program remains unanswered. This spring, in light of the continuing losses in E*Trade's roughly $23 billion loan portfolio, the Office of Thrift Supervision, its primary banking regulator, told the firm to raise capital quickly.

Last week E*Trade launched a common stock offering in which it said gross proceeds were expected to be $487.5 million.