Updated to include analyst interview comments, closing share price.

NEW YORK ( TheStreet) -- The talk about a hookup between E*Trade Financial ( ETFC) and TD Ameritrade Holdings ( AMTD) heated up again earlier this month, but Raymond James isn't buying it.

"We do not believe that recent chatter regarding the potential purchase of E*Trade by TD Ameritrade has any merit," the firm told clients in a note Tuesday. "In our opinion, E*Trade needs several more quarters to work through its loan loss provisions before another online brokerage firm could reasonably be anticipated to acquire it."

The note was more of a general call on the brokerage and exchange sectors, lowering earnings estimates on both groups to reflect weaker stock trading volumes of late. In addition to E*Trade and TD Ameritrade, the firm cut its views for the fourth quarter on Charles Schwab ( SCHW), Investment Technology Group ( ITG), Knight Capital Group ( NITE), Nasdaq OMX Group ( NDAQ), NYSE Euronext ( NYX), optionsXpress Holdings ( OXPS), Penson Worldwide ( PNSN), and TradeStation Group ( TRAD).

Raymond James is still relatively bullish on the online brokers for the long-term, however, calling an increase in interest rates -- whenever it occurs -- "a very powerful catalyst for future earnings growth" and citing strong cash positions and the prospect of share buybacks as other positives.

But the round of speculation prompted last week by pro-M&A comments from TD Ameritrade CEO Fred Tomczyck at a Reuters conference roused the firm to weigh in. Beyond the contention that the overhang from E*Trade's ongoing wind-down of its home loan portfolio was significant enough to stave off any suitors for months, Raymond James also took issue with valuation assumptions that have been floated for E*Trade.

"We also believe that, due to internal transfer accounting peculiarities, the value of E*Trade's brokerage unit is significantly less than may be commonly assumed," the note states.

"The way E*Trade reports net interest income shifts all of the company's loan risk to the bank operations referred to as the firm's Balance Sheet Management segment while still giving E*Trade's retail segment credit for the higher returns these risky assets provided," explained Patrick O'Shaughnessy, the lead analyst covering E*Trade at Raymond James, in an interview with TheStreet. "We feel this gives an inaccurate impression of the worth of the brokerage, and if the business were to be bought, another company probably wouldn't be able to achieve a similar yield. "

O'Shaughnessy is referring to the segment reporting treatment that E*Trade gives of its operations, where it records loan loss provisions as completely separate from its trading and investing activities. For example in the third quarter ended Sept. 30, it reported segment income of $202.5 million from trading and investing, but a loss of $276.1 million under that balance sheet management heading, including the company's total loan loss provision of $347.2 million.

"It makes it seem like they're getting a wider yield than anyone (other online brokers) else," he said.

Raymond James has a market perform rating on E*Trade, and a strong buy rating on TD Ameritrade. E*Trade shares closed 3 cents lower at $1.61 on Tuesday, while TD Ameritrade's stock finished down 1.6% at $19.91. At their session-low of $19.81, TD Ameritrade shares were off about 7% since reaching their 52-week high of $21.30 on Nov. 17.

For disclosure purposes, O'Shaughnessy noted Raymond James makes a Nasdaq market in E*Trade shares, and that it has received non-investment banking securities-related compensation from the company in the past 12 months.

A spokesperson for E*Trade declined comment on this story.

What E*Trade would be worth in a buyout is, of course, up for debate, and much would depend on the condition of the loan portfolio when the terms were being hammered out, seemingly months from now. David Trone, an analyst at Fox Pitt Kelton Cochran Caronia Waller, estimated in a note last week that E*Trade's online brokerage business was worth about $5.6 billion. He also said a deal between the company and TD Ameritrade, or anyone else, wasn't likely until mid-2010 at the earliest.

>>>Click here for more insight into why an E*Trade-TD Ameritrade merger may make sense.

Written by Michael Baron in New York.

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