Northern Trust Misses Estimates - Analyst Blog


Northern Trust Corporation's ( NTRS ) fourth-quarter 2011 earnings of 67 cents per share missed the Zacks Consensus Estimate by a penny. In the quarter, earnings were impacted by restructuring, acquisition and integration related expenses, though partially offset by benefit from the reduction of an indemnification liability related to Visa Inc. ( V ).

The related pre-tax expense summed up to $61.0 million ($39.8 million after tax, or 17 cents per share), while the benefit was $13.0 million ($8.0 million after tax, or 3 cents per share). Overall, results were marked by higher net interest income, strong new business and improved credit quality. However, rise in non-interest expenses were on the downside.

In the prior quarter and prior-year quarter, the company reported a profit of 71 cents and 59 cents per share, respectively. Operating income reported was $162.0 million compared with a net income of $173.3 million in the prior quarter and $144.2 million in the prior-year quarter.

For the full year, operating income was $663.4 million or $2.72 per share, down 1% year over year. Results included restructuring, acquisition and integration related charges of $91.6 million ($59.8 million after tax, or 25 cents per share). However, earnings per share for full year surpassed the Zacks Consensus Estimate by 8 cents.

Performance in Detail

Total revenue reported was $965.0 million in the quarter, below the Zacks Consensus Estimate of $973.0 million, reflecting decline in equity markets.

For the full year, revenue was $3.8 billion, up 3% from $3.6 billion in 2010. Results were in line with the Zacks Consensus Estimate.

Net interest income (fully taxable equivalent) totaled $281.2 million in the quarter, up 6% sequentially. The improvement was driven by an increase in average earnings assets and an increase in net interest margin ( NIM ). NIM was 1.28%, up from 1.25% in the prior quarter. Moreover, net interest income also climbed 21% year over year, while NIM declined 2 basis points.

However, non-interest income dropped 4% sequentially to $683.8 million, primarily due to decrease in foreign exchange trading income and other operating income. These decreases were partially offset by higher security commissions and trading income. Yet, non-interest spiked 1% year over year.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment inched down 2% sequentially to $305.7 million in the quarter, mainly due to downturn in equity markets and increased money market mutual fund fee waivers. These declines were partially offset by recent acquisitions and new business. However, fees inched up 14% on a year-over-year basis.

Trust, investment and other servicing fees from the Personal Financial Services segment dropped 3.5% sequentially to $235.8 million. The decline in PFS fees primarily reflects lower markets and higher waived fees in money market mutual funds. However, fees were in line with the prior-year period.

Non-interest expenses totaled $771.7 million in the quarter, up 10% sequentially, mainly due to an increase in equipment and software expenses, employee benefits expenses, compensation expenses, occupancy expenses and outside services expenses. On year over year basis, expenses climbed 20%.

Credit Quality

Overall, credit quality marked an improvement in the fourth quarter of 2011. Provision for credit losses was $12.5 million in the quarter, down from $17.5 million in the prior quarter and $40.0 million in the prior-year quarter. Moreover, Northern Trust witnessed an improvement in asset quality as nonperforming assets declined to $314.9 million from $337.9 in the last quarter and $378.5 million in the prior-year period.

Further, net charge-offs plummeted to $18.2 million from $28.6 million in the third quarter 2011 and $44.0 million in the prior-year quarter.  Reported provision levels reflected continuing weakness in residential real estate loans in certain markets, though commercial and institutional and commercial real estate loans improved.

Share Repurchase

For the year ended December 31, 2011, Northern Trust repurchased 1.6 million shares worth $79.4 million at an average price of $49.63 per share.  Moreover, an additional 5.6 million shares are authorized for repurchase after December 31, 2011 under the current share buyback program.

Assets Position

AUM witnessed an increase of 3% both sequentially and year over year to $662.9 billion. Assets under custody inched up 2% sequentially and 4% year over year to $4,262.8 billion.

Average earnings assets of $87.2 billion jumped 3.0% sequentially, as higher demand deposits were reinvested in securities. Average earnings assets also increased 23.0% on a year-over-year basis.

Capital Ratios Evaluation

Northern Trust's risk-based capital ratios remained strong as of December 31, 2011, with Tier 1 capital ratio of 12.5%, total risk-based capital ratio of 14.2%, and leverage ratio of 7.3%, each exceeding the regulatory requirements of 6%, 10%, and 5%, respectively.

This classifies Northern Trust as a well-capitalized institution. The ratio of Tier 1 common equity to risk-weighted assets, a non-GAAP financial measure, was 12.1%, down from 13.0% in the prior-year period.

Our Take

We expect increased asset management and servicing fees based on equity markets improvement and higher volumes. Improved credit quality and increase in average earning assets act as positives for the company. However, the Dodd-Frank Act will ring in numerous regulatory changes over the next several years, which might thereby act as deterrents to the company's fundamentals.

Among Northern Trust's peers, Huntington Bancshares Inc. ( HBAN ) will be releasing its fourth-quarter 2011 earnings on January 19, while TCF Financial Corporation ( TCB ) will be releasing on January 24.

Northern Trust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain long-term Neutral recommendation on the stock.

HUNTINGTON BANC ( HBAN ): Free Stock Analysis Report
NORTHERN TRUST ( NTRS ): Free Stock Analysis Report

TCF FINL CORP ( TCB ): Free Stock Analysis Report
VISA INC-A ( V ): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: HBAN , NIM , NTRS , TCB , V

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