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Will Low Fee Income Hurt Northern Trust's (NTRS) Q2 Earnings?

Northern Trust Corporation’s NTRS second-quarter 2020 results, scheduled for a Jul 22 release, are expected to reflect year-over-year declines in revenues and earnings.

Northern Trust uses a lag effect to calculate its corporate custody and investment management fees, i.e. the computations are based on the prior-quarter end valuations. Since the performance of equity markets was disappointing due to the virus outbreak in the first quarter, the company might have registered declines in custody, servicing and management fees during the second.

Notably, the company provides majority of its asset-management services through the C&IS unit, which generates more than 50% of total revenues. A fall in revenues in this segment is likely to have negatively impacted the company’s overall revenues.

Per the Zacks Consensus Estimate, the C&I segment’s custody and fund administration fees will likely go down 4.2% year over year to $369 million. Also, investment management revenues are likely to have declined 2.7% on a year-over-year basis. Yet, securities lending revenues are projected to be up 10.7%, year on year.

Therefore, with the disappointing performance of its components, total C&I trust, investment and other servicing fees are likely to have decreased 1.6% year over year to $540 million. Also, the Zacks Consensus Estimate of $1.49 billion for the to-be-reported quarter’s sales suggests a year-over-year decline of 1.2%.
 

Northern Trust Corporation Price and EPS Surprise

Northern Trust Corporation Price and EPS Surprise

Northern Trust Corporation price-eps-surprise | Northern Trust Corporation Quote

Here are the other factors that might have influenced the company’s quarterly performance:

Low Net Interest Income: The overall lending scenario remained decent during the April-June quarter, with commercial and industrial, along with real estate loan portfolios having offered significant support. Conversely, as consumer sentiment dipped amid the coronavirus concerns, the demand for consumer loans was hit hard.

With the central bank cutting interest rates to near zero in March to support the U.S. economy, Northern Trust’s net interest margin and NII are likely to have been adversely impacted. However, low deposit costs and higher average interest earning assets might have been offsetting factors.

The Zacks Consensus Estimate for average interest earning assets of $115.7 million for the quarter indicates a 14.9% year-over-year improvement, while the NII is expected to decline 11.3% to $377 million.

Low Foreign-Exchange Trading Revenues: Given the low foreign-exchange (“FX”) trading volatility in developing and emerging markets, along with decreased volumes during the April-June quarter as compared with the March peak, the company’s revenues from FX trading might have registered a decline. Moreover, the Zacks Consensus Estimate for income of $71 million for the quarter calls for a 20.2% sequential decline.

Controlled Expenses: Northern Trust’s expenses in the quarter are anticipated to have been under control aided by its continued cost-saving initiatives.

Let’s have a look at what our quantitative model predicts:

Northern Trust does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Northern Trust is 0.00%.

Zacks Rank: Northern Trust currently carries a Zacks Rank of 3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Banks Worth a Look

Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for CullenFrost Bankers, Inc. CFR is +6.27% and the stock carries a Zacks Rank of 3, at present. The company is slated to report second-quarter numbers on Jul 30. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huntington Bancshares Incorporated HBAN is set to release earnings figures on Jul 23. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +11.6%.

T. Rowe Price Group, Inc. TROW is scheduled to release quarterly results on Jul 29. The company has an Earnings ESP of +3.91% and currently sports a Zacks Rank of 1.

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