Jan. 27 (Bloomberg) -- E*Trade Financial Corp., the online brokerage whose shares tumbled last year because of bad debt, said its fourth-quarter loss narrowed to $275.6 million because of smaller losses on mortgage loans.

The loss represents 50 cents a share, compared with last year’s record loss of $1.71 billion, or $3.98, the New York-based company said in a statement today.

Chief Executive Officer Donald Layton is grappling with mounting losses on E*Trade’s $23 billion portfolio of mortgages and home-equity loans. Layton has cut staff, sold assets and raised capital to help the company weather the worst financial crisis since the Great Depression. E*Trade said total losses on home-equity loans in the three-year period ending 2010 will be between 15 percent and 20 percent higher than its previous forecast of $1.8 billion, delaying a return to profitability.

“It’s very clear that the economy weakened in the fourth quarter and it was noticeable to us in the delinquencies of our loan portfolio,” Chief Financial Officer Bruce Nolop said in an interview. “The good news is that we generate enough capital through our base brokerage businesses that we can absorb the losses.”

E*Trade, which fell 1.8 percent to $1.10 on the Nasdaq Stock Market today before the results were released, rose to $1.12 at 6:44 p.m. in New York. The shares have gained 25 percent from their record low of 88 cents on Nov. 24.

Stock Retreats 87%

E*Trade stock has plunged 87 percent since Citigroup Inc. analyst Prashant Bhatia said in November 2007 that there was a 15 percent probability that the company would file for bankruptcy protection because of mounting loan losses. The report sparked customer defections that hobbled E*Trade’s brokerage division.

Net revenue increased 27 percent in the fourth quarter from a year earlier to $512.9 million. Last year, E*Trade recorded a $2.23 billion loss from the sale of asset-backed securities to hedge fund Citadel Investment Group LLC and BlackRock Inc.

Loan-loss provisions increased 24 percent from the third quarter to $1.08 billion, while charge-offs rose 9.7 percent to $306.5 million.

The company is looking to raise capital and has applied for as much as $800 million from the U.S. Treasury’s Troubled Asset Relief Program, Nolop said. He declined to say when the Treasury might resolve its application. E*Trade, which raised $754 million last year, could also sell assets.

“Anything that we would look to sell would be much smaller than what we did last year,” Nolop said.

Record trading and net new accounts at the brokerage unit helped mitigate losses in the fourth quarter. The company added 97,000 accounts, drawing $3.5 billion in net new assets, as it gained market share from full-service brokers.

Layton, who took the helm in March, plans to reduce marketing expenses and eliminate jobs in anticipation of a trading slowdown of 15 percent to 20 percent. He said loan-loss provisions must decline for E*Trade to become profitable.

“The big lever is going to be provisions, which it just too uncertain to predict with any accuracy in this kind of environment,” he told analysts today in a conference call. “In a very dark economy, we see a few glimmers of light for us.”

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: January 27, 2009 19:13 EST