Northern Trust (NTRS) Q3 Earnings Miss on Elevated Expenses - Analyst Blog

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Higher expenses dragged results of Northern Trust Corporation ( NTRS ) and consequently it failed to deliver a positive earnings surprise in third-quarter 2014. Earnings per share came in at 84 cents, missing the Zacks Consensus Estimate of 87 cents. However, this compared favorably with 76 cents earned in the year-ago quarter.

Shares of Northern Trust slide over 4% in the begining of the trading session, indicating that investors have been bearish on the results. However, the price reaction during the full trading session will give a better idea about the extent of disappointment among investors.

Results were primarily affected by higher operating expenses. However, top-line growth, absence of provision for credit losses and rise in both assets under custody and assets under management were positives for the quarter.

Net income for the quarter came in at $204.5 million, compared with $206.5 million in the prior-year quarter. Notably, the prior-year quarter included a pre-tax gain on the sale of an office building property.

Northern Trust Corporation - Earnings Surprise | FindTheBest

Quarter in Detail

Total revenue came in at $1.08 billion, lagging the Zacks Consensus Estimate of $1.09 billion. However, the reported figure was up 3% year over year, driven by a rise in non-interest as well as net interest income.

Non-interest income grew 2% from the year-ago quarter to $829.6 million. Excluding the gain on the sale of an office building property, non-interest income increased 7% year over year. The rise was largely due to an improvement in trust, investment and other servicing fees, which came on the back of new business and strong equity markets. This was partially offset by lower foreign exchange trading income.

Moreover, on a fully taxable equivalent basis, Northern Trust reported net interest income of $256.2 million, up 5% year over year. This was driven by increased levels of average earning assets.

However, the headwinds for the quarter reflected a decline in net interest margin (NIM) and higher expenses.

NIM was 1.05%, down 9 basis points from 1.14% in the prior-year quarter. The decrease was primarily owing to a fall in yields on earning assets, partially offset by lower funding costs.

Further, non-interest expenses were up 5% year over year to $774.7 million in the quarter. The rise was primarily owing to increase in costs related to compensation, employee benefits and equipment and software.

Assets Under Management and Custody

As of Sep 30, 2014, Northern Trust's total assets under management increased 9% year over year to $923.3 billion. Also, total assets under custody rose 13% from the last-year period to $5.9 trillion.

Credit Quality

Northern Trust witnessed improvement in its overall asset quality during the quarter. There was no provision for credit losses in the quarter as against a provision of $5.0 million in the prior-year quarter. Further, net charge-offs were $5.2 million, down 37% from the prior-year quarter figure.

Also, total allowance for credit losses assigned to loans and leases were $269.4 million, down 6% year over year. Nonperforming assets fell 19% year over year to $231.2 million as of Sep 30, 2014.

Capital Position

Northern Trust's capital ratios remained strong as of Sep 30, 2014, with Tier 1 capital ratio of 13.6%, total capital ratio of 16.0% and leverage ratio of 7.9%, each exceeding the regulatory requirements.

Under the Advance Approach, common equity Tier 1 ratio and Tier 1 ratio stood at 12.7% and 13.4 %, respectively.

During the quarter, Northern Trust repurchased more than 1.1 million shares for $77.3 million at an average price of $67.76 per share.

Our Viewpoint

Results of Northern Trust do not reflect a strong quarter. If the company fails to undertake efficient cost control measures, the mounting expenses will continue to pose a threat to its profitability. Further, the new regulations could pressure the company's fundamentals. However, we remain encouraged owing to continued growth in assets under management and assets under custody, top-line growth and an improving credit quality.

Performance of Other Major Banks

Among other major regional banks, Citigroup Inc. ( C ) reported third-quarter 2014 adjusted earnings per share of $1.15, outpacing the Zacks Consensus Estimate of $1.12.

JPMorgan Chase & Company ( JPM ) posted third-quarter earnings of $1.62 per share, beating the Zacks Consensus Estimate of $1.39.

Wells Fargo & Company ( WFC ) earned $1.02 per share in third-quarter 2014, which came in line with the Zacks Consensus Estimate.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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