Standard & Poor’s Ratings Services has placed its ratings on E*Trade Financial Corp. and its subsidiaries, on CreditWatch with developing implications.

This is the result of E*Trade’s announcement confirming that it is engaged in discussions with TD Bank regarding a possible combination of E*Trade and TD’s retail securities brokerage subsidiary, TD Waterhouse. A CreditWatch listing with developing implications indicates that the ratings on E*Trade may be raised, lowered, or affirmed, depending on the outcome of the discussions and the financing details of the possible transaction.

“From a strategic point of view, the combination of TD Waterhouse and E*Trade would substantially increase E*Trade’s market share of online trading, transaction volumes, and customer accounts,” S&P notes. “Significant economies of scale leading to expense reductions would also be likely.”

“Nevertheless, the transaction also presents integration risk that, unless properly managed, could lead to an exodus of customer accounts,” it cautions. “A deal that involved significant leveraging of the balance sheet could be viewed negatively. Alternatively, a transaction financed largely with stock would be viewed in a more positive light,” S&P concludes.