Northern Trust Corporation
) second-quarter 2012 earnings of 74 cents per share lagged the
Zacks Consensus Estimate by a penny. However, the results compared
favorably with the prior quarter's earnings of 67 cents.
Overall, positive results on a sequential basis were marked by
higher non-interest income and strong new business. Moreover,
decline in non-interest expenses and improved credit quality were
the positives for the quarter. The fall in net interest income
acted as headwind for the company.
Including the pre-tax restructuring, acquisition and integration
related charges of $3.6 million ($2.3 million after tax, or 1 cent
per share), the company generated $179.6 million or 73 cents per
share as net income in the quarter under review.
Performance in Detail
Total revenue reported was $988.5 million in the quarter, slightly
up by 2% sequentially, reflecting higher non-interest income.
However, revenue was below the Zacks Consensus Estimate of $997.0
Net interest income (fully taxable equivalent) totaled $264.3
million in the quarter, down 1% sequentially. The downside was
spurred by a fall in average earnings assets, partially offset by
an increase in net interest margin (NIM).
NIM was 1.28%, up from 1.24% in the prior quarter. Improved NIM
reflects lower cost of funding, partly offset by lower yields on
few earning assets.
Non-interest income climbed 4% sequentially to $734.4 million,
primarily due to a rise in trust, investment and other servicing
fees. These increases were partially offset by lower foreign
exchange trading income to an extent.
Trust, investment and other servicing fees from the Corporate and
Institutional Services segment rose 7% sequentially to $338.4
million in the quarter. Moreover, Trust, investment and other
servicing fees from the Personal Financial Services segment
accelerated 4% sequentially to $267.4 million.
The rise in fees was mainly due to new business and positive impact
of equity markets on fees. Additionally, the improvement in PFS
fees primarily reflects lower waived fees in money market mutual
Non-interest expenses totaled $717.3 million in the quarter,
dipping 1% sequentially. The decline in expenses was primarily
attributable to a decrease in compensation and employee benefits
expenses and other operating expenses. These declines were
partially offset by higher equipment and software expenses along
with elevated occupancy and outside services expenses.
Overall, credit quality marked an improvement in the second quarter
of 2012. Net charge-offs substantially plummeted to $3.2 million
from $5.8 million in the first-quarter 2012.
Further, nonperforming loans and leases edged down 9% sequentially
to $239.8 million from $262.1 million. Provision for credit losses
was $5 million in the quarter, in line with the prior quarter.
Northern Trust witnessed an improvement in asset quality as
nonperforming assets declined to $265.1 million from $284.5 in the
During the first half of 2012, Northern Trust repurchased 1.1
million shares worth $50.4 million at an average price of $44.67
per share. Moreover, the company's common stock repurchase
authorization was replaced in March 2012, under which up to 9.2
million shares have been authorized for buyback after June 30,
Assets under management inched down 2% sequentially to $704.3
billion. Assets under custody likewise fell 1% sequentially to $4.6
trillion. Average earnings assets of $83.2 billion, also inched
down 3% sequentially.
Capital Ratios Evaluation
Northern Trust's risk-based capital ratios remained strong as of
June 30, 2012, with Tier 1 capital ratio of 12.9%, total risk-based
capital ratio of 14.4%, and leverage ratio of 8.0%, 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 12.4%, up from 11.9% in the prior
Overall, results were marked by higher non-interest income and a
strong new business. Improved credit quality and an increase in net
interest margin acted as positives for the company. Moreover, a
fall in non-interest expenses reflects better expense management.
Further, we expect increased asset management and servicing fees
based on expected equity markets improvement and higher volumes.
However, the Dodd-Frank Act will bring in numerous regulatory
changes over the next several years, which might act as deterrents
to the company's fundamentals.
An investor with an appetite to absorb risks related to the market
volatility should not be disappointed with an investment in
Northern Trust over the long run. Northern Trust's fundamentals
remain highly promising with a diverse business model and a strong
Furthermore, from the risk perspective, as Northern Trust cleared
the most difficult stress test, it is for certain the company would
be able to withstand another financial crisis as it has cleared the
most difficult stress test.
Moreover, one can consider a company like Northern Trust as value
investment due to its steady dividend-yielding nature. The company
announced about a 7% hike in its quarterly dividend to 30 cents per
share in March 2012 and maintained the same level in the reported
Northern Trust currently retains a Zacks #3 Rank, which translates
into a short-term Hold rating. Considering the fundamentals, we
also maintain a long-term Neutral recommendation on the stock.
Among Northern Trust's peers,
) will be releasing its second-quarter 2012 earnings on July 19,
) will come out with its results on July 25.
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