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Northern Trust (NTRS)
Q4 2012 Earnings Call
January 16, 2013 12:00 pm ET
Beverly J. Fleming - Senior Vice President and Director of Investor Relations
Michael G. O'grady - Chief Financial Officer and Executive Vice President
Cynthia Mayer - BofA Merrill Lynch, Research Division
Alexander Blostein - Goldman Sachs Group Inc., Research Division
Howard Chen - Crédit Suisse AG, Research Division
Glenn Schorr - Nomura Securities Co. Ltd., Research Division
Luke Montgomery - Sanford C. Bernstein & Co., LLC., Research Division
Kenneth M. Usdin - Jefferies & Company, Inc., Research Division
Marty Mosby - Guggenheim Securities, LLC, Research Division
Brian Bedell - ISI Group Inc., Research Division
Betsy Graseck - Morgan Stanley, Research Division
Previous Statements by NTRS
» Northern Trust Management Discusses Q3 2012 Results - Earnings Call Transcript
» Northern Trust Management Discusses Q2 2012 Results - Earnings Call Transcript
» Northern Trust Management Discusses Q1 2012 Results - Earnings Call Transcript
Beverly J. Fleming
Thank you, Christie, and welcome to Northern Trust Corporation's Fourth Quarter 2012 Earnings Conference Call. Joining me on our call this morning are Mike O'grady, Northern Trust Chief Financial Officer; Rick Kukla, our Controller; and Allison Quaintance from our Investor Relations team.
For those of you who did not receive our fourth quarter earnings press release or financial trends report via e-mail this morning, they are both available on our website at northerntrust.com. In addition, and also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call.
This January 16 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through February 13. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2012 annual report and our periodic reports to the Securities and Exchange Commission for detailed information about the factors that could affect actual results.
Thank you again for joining us today. Let me turn the call over to Mike O'grady.
Michael G. O'grady
Thank you, Bev. I also welcome you to Northern Trust's Fourth Quarter 2012 Earnings Conference Call. We've organized today's call into 4 sections. I'll review both our fourth quarter and full year results, update you on Driving Performance and comment on our capital. Bev and I will then be pleased to answer your questions.
Starting with some overview comments on Slide 2. This morning, we reported fourth quarter earnings per share of $0.69 and a return on equity of 8.8%. This quarter closed the year of solid performance for the company. We achieved robust growth in both our personal and institutional businesses and improved our profitability against the backdrop of a challenging operating environment. Full year earnings per share of $2.81 and a return on equity of 9.3% were both higher than last year.
New business was excellent in the quarter and for the full year, increasing client asset levels and trust fees. The growth in clients is broad and diversified across our businesses, services and geographies. In our institutional business, for example, just last week, we announced that Bridgewater Associates, one of the world's largest hedge fund managers, appointed Northern Trust to independently replicate certain middle and back-office services for their approximately $140 billion in assets under management. In addition, in the fourth quarter, we finalized the implementation of our investment operations outsourcing relationship with Australia's Queensland Investment Corporation or QIC, capping off an on-boarding process that was first announced in March of 2011.
The fourth quarter was also strong for our personal business as we were well-positioned to provide Wealth Management and Asset Management solutions to new and existing clients that address the uncertainties presented by the changing tax and investment environment. Winning mandates such as these from new and existing clients is the primary driver of growth for Northern Trust over time.
The macro environment continued to pose mixed operating conditions. Equity markets in the U.S. and Europe were higher for the year, which supplemented our new business growth. Year-over-year, our client asset levels increased with assets under custody ending the year at $4.8 trillion, up 13%, and assets under management ending at $759 billion, up 14%. Client asset levels were also up 1% sequentially.
Currency volatility continued to deteriorate in the fourth quarter, negatively impacting our foreign exchange trading income for the quarter and the year. The low level of interest rates experienced throughout 2012 declined further in the fourth quarter. Low short-term rates pressure our net interest margin and result in ongoing fee waivers in connection with our money market mutual funds, although waivers declined in the quarter.
Finally, we successfully executed on the Driving Performance initiatives we announced a year ago, achieving in 2012 over half of the $250 million target we set for the end of 2013. Driving Performance, which is focused on fundamentally improving our productivity and profitability, also enhances our capacity for investment in future growth regardless of the macro environment. We made further progress on this critical priority in the fourth quarter and are on track for the current year.
Overall, although we are pleased with our performance in 2012, we are not satisfied with our returns and are focused on continuing to execute on our strategies in 2013.
Let's move to Page 3 and discuss the financial highlights for the fourth quarter. Earnings per share of $0.69 increased 30% year-over-year and were down 5% sequentially. We recorded restructuring and integration charges of $8.2 million in the fourth quarter compared with $61 million a year ago and $2.9 million last quarter. Excluding these charges and a Visa benefit of $13 million in the fourth quarter of 2011, earnings per share increased 6% year-over-year and declined 4% sequentially.
On a year-over-year basis, revenues were up 1% and expenses adjusted for charges in Visa were also up 1%. Trust, investment and other servicing fees, the largest component of revenues, increased a strong 15% due to new business and higher markets, but was offset by lower foreign exchange trading income and net interest income. The modest increase in adjusted expenses was primarily the result of investments in people and technology to support our growing business, offset by the benefits achieved through Driving Performance.
Year-over-year, our loan loss provision was lower as credit improved. Compared to last quarter, revenues were flat and expenses were up 6%. Trust investment and other servicing fees were up 3%, but again, this growth was offset by lower foreign exchange trading income, net interest income and other operating income. The 6% increase in expenses primarily reflects continued investments related to business growth, as well as certain expenses that tend to be higher in the fourth quarter than the third quarter. Our loan loss and tax provisions were lower in the fourth quarter sequentially. Our return on equity of 8.8% for the fourth quarter was higher than last year but lower than last quarter and below our long-term target range of 10% to 15%.