It has been about a month since the last earnings report for Northern Trust CorporationNTRS . Shares have lost about 1% in the past month, outperforming the market.
Will the recent negative trend continue leading up to its next earnings release, or is NTRS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Northern Trust's Q4 Earnings Rise, Records Tax Benefit
Driven by top-line strength, Northern Trust's fourth-quarter 2017 adjusted earnings per share of $1.51, compared favorably with $1.11 recorded in the year-ago quarter. Results include tax benefits and other one-time items. The Zacks Consensus Estimate was $1.30.
Higher revenues and credit provisions were positives. In addition, the quarter witnessed a rise in assets under custody as well as assets under management. Moreover, credit metrics marked a significant improvement. However, escalating operating expenses remained a major drag.
Net income came in at $356.6 million compared with $266.5 million recorded in the prior-year quarter.
For full-year 2017, net income was $1.2 billion or $4.92 per share compared with $1.03 billion or $4.32 per share in the previous year. The Zacks Consensus Estimate was $4.69.
Margins & Revenues Improve, Costs Escalate
For full-year 2017, revenues on a fully taxable equivalent basis were $5.42 billion, up 9% from $4.99 billion in 2016. Additionally, the figure surpassed the Zacks Consensus Estimate of $5.38 billion.
Total revenues of $1.44 billion surpassed the Zacks Consensus Estimate of $1.41 billion. Results also improved 16% year over year.
On a fully-taxable equivalent basis, net interest income of $396 million was up 20% year over year. This was driven by elevated levels of average earning assets and higher net interest margin.
Net interest margin (NIM) was 1.39%, up 19 basis points from the prior-year quarter. The increase chiefly reflected higher short-term interest rates and reduced premium amortization. The positives were partially mitigated by an unfavorable balance-sheet mix shift.
Non-interest income advanced 14% from the year-ago quarter to $1.04 billion. Rise in trust, investment and other servicing fees, along with foreign exchange trading income, other operating income, security commissions and trading income, were the primary reasons for this upswing. These were partially offset by lower treasury management fees and investment security losses.
Non-interest expenses flared up 15% year over year to $1 billion in the quarter. The rise was mainly driven by an elevation in mostly all components of expenses.
Improvement in Assets Under Management and Custody
As of Dec 31, 2017, Northern Trust's total assets under custody increased 20% from the prior-year quarter to $8.08 trillion, while total assets under management rose 23% to $1.16 trillion.
Credit Quality Improved
Total allowance for credit losses came in at $153.8 million, down 20% year over year. Net charge-offs were $6.6 million, down 39% from the year-ago quarter figure. Also, credit provision was $13 million in the quarter compared with $22 million reported in the prior-year quarter.
Further, non-performing assets decreased 6.1% year over year to $155.3 million, as of Dec 31, 2017.
Strong Capital Position
Under the Advanced Approach, as of Dec 31, 2017, Tier 1 capital ratio, total capital ratio and Tier 1 leverage ratio came in at 14.8%, 16.7% and 7.8% compared with 13.7%, 15.1% and 8%, respectively, in the prior-year quarter. All ratios exceeded the regulatory requirements.
Capital Deployment Update
During 2017, Northern Trust repurchased 5.8 million shares for $523.1 million, at an average price of $90.25 per share. Notably, during the reported quarter, the company repurchased 1.81 million shares for $170.6 million at an average price of $94.11 per share. This includes shares related to share-based compensation.
Management currently expects ongoing effective tax rate to be approximately 23-24%.
Beginning with 2018, premium amortization is expected to be within $10-$12 million range. In first-quarter 2018, the company will adopt a new method with one-time true-up to align the remaining amortization. Management currently expects this one-time true-up to result in additional amortization of $10-$13 million, bringing the overall expected premium amortization in the first quarter within a range of $20-$25 million.
Based on a portfolio of initiatives, management anticipates realizing $250 million in expense run-rate savings by 2020. Over the last three quarters, the company has taken severance and restructuring charges of $47 million. On a combined basis, these charges will create approximately $35 million in annualized net savings and these savings are expected to be fully realized by the first quarter of 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to three lower.
Northern Trust Corporation Price and Consensus
At this time, NTRS has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was also allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our style scores.
Estimates have been broadly trending downward for the stock, the magnitude of the revision is net zero. Notably, NTRS has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.