NTRS

Northern Trust Corporation (NTRS)

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Northern Trust (NTRS)

Q3 2012 Earnings Call

October 17, 2012 12:00 pm ET

Executives

Beverly J. Fleming - Senior Vice President and Director of Investor Relations

Michael G. O'grady - Chief Financial Officer and Executive Vice President

Analysts

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Lucas Montgomery

Presentation

Operator

Good day, everyone, and welcome to the Northern Trust Corporation Third Quarter 2012 Earnings Conference Call. Today's call is being recorded.

At this time, I'd like to turn the call over to Director of Investor Relations, Bev Fleming, for opening remarks and introductions.

Please go ahead.

Beverly J. Fleming

Thank you, Tim, and welcome to Northern Trust Corporation's Third 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 third 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 October 17 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through November 14. 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 2011 annual report and our periodic reports to the Securities and Exchange Commission for detailed information about 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

Thanks, Bev. And good morning, everyone, and welcome to Northern Trust Third Quarter 2012 Earnings Conference Call. This morning, we reported third quarter earnings per share of $0.73 and a return on equity of 9.6%. Our results were consistent with last quarter and improved over last year. We continue to see trends similar to previous quarters.

A few overview comments. First, the addition of new business is increasing our asset levels and trust fees. Winning mandates and gaining new clients is the primary driver of growth for Northern Trust over time and we continue to be successful at achieving this.

Second, the mixed macro environment continues to pose challenging operating conditions. The equity markets rebounded in the third quarter after having declined in the second quarter and are up strongly compared to this time last year. This benefited our client asset levels with assets under custody ending the third quarter at $4.8 trillion, up 4% sequentially and 14% year-over-year; and assets under management ending at $750 billion, up 6% sequentially and 16% year-over-year.

Given our trust and investment fees are generally calculated based on a lagged asset value, the weaker market performance in the second quarter generally had a dampening effect on third quarter fees. However, rising markets clearly impact us favorably over time.

Foreign exchange volatility and volumes deteriorated even further in the third quarter as evidenced by the significant drop in our foreign exchange trading income, which we'll discuss in more detail later.

Interest rates also declined further in the quarter with the European Central bank lowering its rates in July and the Federal Reserve announcing incremental quantitative easing initiatives in September, we saw short-term interest rates decrease in many markets around the world and across most currencies. Low short-term rates pressure our net interest margin and result in ongoing fee waivers in connection with our money market funds.

Third, through our Driving Performance initiative, we continue to focus on improving the profitability of our business and enhancing our capacity for investment in future growth regardless of the macro environment. We made further progress on this critical priority in the third quarter on both the revenue and expense fronts. By executing on our initiatives and managing costs closely, expense levels were lower both sequentially and year-over-year. As a result, our pretax margin increased to 28.2%, the highest level we have achieved since the second quarter of 2010.

Let's move to Page 2 and discuss the financial highlights of the third quarter. Net income of $179 million and earnings per share of $0.73 were unchanged sequentially and increased approximately 4% to 5% year-over-year. Compared to last quarter, revenues were down about 1% and expenses were down 3%.

Trust, investment and other servicing fees were down 1% for our Corporate & Institutional Services business due to the seasonal decline in securities lending and were flat to our -- for our Personal Financial Services business.

Lower foreign exchange trading income and net interest income were partially offset by higher other operating income, which included a $5.3 million gain related to hedges of certain investments in our foreign currency-denominated subsidiaries.

The 3% decline in expenses was primarily a result of lower outside services and the write-off of certain software in the previous quarter.

Our return on equity of 9.6% for the third quarter was lower than last quarter due to higher equity and was just below our long-term target range of 10% to 15%.

On a year-over-year basis, revenues were flat and expenses were down 1%. Trust, investment and other servicing fees, the largest component of revenues, increased 8%, but this growth was offset by lower foreign exchange trading income and net interest income. The decline in expenses was primarily the result of lower outside services.

I'll also note that we recorded restructuring, acquisition and integration charges of $2.9 million in the third quarter compared with $3.6 million last quarter and $4.2 million 1 year ago. We expect further charges in the fourth quarter as we complete the integration of the Bank of Ireland Securities Services and Omnium acquisitions and as we continue to execute on our Driving Performance initiatives.

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