Northern Trust Corporation 's ( NTRS )
third-quarter 2012 earnings of 73 cents per share lagged the Zacks
Consensus Estimate. The results were in line with the prior
quarter's earnings. Net income was $178.8 million versus $179.6
million in the prior quarter.
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Overall, results were adversely impacted by lower top line,
partially offset by decline in non-interest expenses. Though the
shrinkage in expenses reflects prudent expense management by the
company, deteriorating credit quality was a negative for the
Performance in Detail
Total revenue reported was $972.5 million in the quarter, slightly
down by 2% sequentially, reflecting lower non-interest and net
interest income. Moreover, revenue was below the Zacks Consensus
Estimate of $985.0 million.
Net interest income (fully taxable equivalent) totaled $256.9
million in the quarter, down 3% sequentially. The downside was
spurred by lower net interest margin (NIM), partly offset by
escalated average earning assets.
NIM was 1.21%, down from 1.28% in the prior quarter. Declined NIM
reflects decreased spread between foreign currency denominated
earning assets and interest-bearing deposits.
Non-interest income dipped 1% sequentially to $726.9 million,
primarily due to a fall in foreign exchange trading income and
securities lending revenue. These decreases were partially offset
by higher other operating income to a certain extent.
Trust, investment and other servicing fees from the Corporate and
Institutional Services segment declined 1% sequentially to $334.4
million in the quarter. Moreover, Trust, investment and other
servicing fees from the Personal Financial Services segment
remained stable approximately at $267.5 million.
Non-interest expenses totaled $696.4 million in the quarter,
dipping 3% sequentially. The decline in expenses was primarily
attributable to a decrease in employee benefits expenses, lower
equipment and software expenses along with reduced outside services
expenses. These declines were partially offset by higher occupancy
Overall, credit quality waned in the third quarter of 2012. Net
charge-offs substantially surged to $11.9 million from $3.2 million
in the second-quarter 2012.
Further, nonperforming loans and leases edged up 12% sequentially
to $269.0 million from $239.8 million. Provision for credit losses
was $10 million in the quarter, up from $5 million recorded in the
prior quarter. Northern Trust witnessed deterioration in asset
quality as nonperforming assets increased to $289.6 million from
$265.1 in the last quarter.
During the quarter ended September 30, 2012, Northern Trust
repurchased 1.1 million shares worth $49.6 million at an average
price of $46.45 per share. Moreover, the company's common stock
repurchase authorization was replaced in March 2012, under which,
up to $140 million worth of common stock can be repurchased after
September 30, 2012 through March 2013.
Assets under management inched up 6% sequentially to $749.7
billion. Likewise, assets under custody rose 4% sequentially to
$4.8 trillion. Average earnings assets of $84.5 billion, also
surged slightly on a sequential basis.
Capital Ratios Evaluation
Northern Trust's risk-based capital ratios remained strong as of
September 30, 2012, with Tier 1 capital ratio of 12.8%, total
risk-based capital ratio of 14.3%, and leverage ratio of 8.1%, each
exceeding the regulatory requirements of 6%, 10%, and 5%,
respectively. This classifies Northern Trust as a well-capitalized
The ratio of Tier 1 common equity to risk-weighted assets, a
non-GAAP financial measure, was 12.3%, down from 12.4% in the prior
We expect enhanced asset management and servicing fees based on
expected equity markets improvement and higher volumes. Though
lower expenses depict better expenses management, reduced revenues
remain a matter of concern. 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
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
Among Northern Trust's peers, Fifth Third Bancorp
( FITB ) will be releasing its third-quarter 2012
earnings on October 18, while SunTrust Banks, Inc.
) will come up with its results on October 22.