Northern Trust Corporation’s (NTRS) third-quarter 2011 earnings of 71 cents per share outpaced the Zacks Consensus Estimate by 1 cent per share. The increase was marked by higher net interest income and improved client network.
In the third quarter of 2011, earnings per share were impacted by restructuring, acquisition, and integration related expenses. The related pre-tax expense summed up to $4.2 million ($2.9 million after tax, or 1 cent per common share).
In the prior quarter and prior-year quarter, the company reported a profit of 70 cents and 64 cents per share, respectively. Operating income reported was $173.3 million compared with a net income of $155.6 million in the prior-year quarter and $170.8 million in the prior quarter.
Performance
Net interest income (fully taxable equivalent) totaled $266.6 million in the quarter, up 10% year over year. The improvement was driven by an increase in average earnings assets, partly offset by a decline in the net interest margin (NIM). NIM was 1.25%, down from 1.44% in the prior-year quarter.
Non-interest income spiked 9% year over year to $714.7 million, primarily due to increase in trust, investment and other servicing fees and other operating income. These increases were partially offset by lower treasury management fees, a decrease in security commissions and trading income and reduced foreign exchange trading income.
Total revenue reported was $971.5 million in the quarter, above the Zacks Consensus Estimate of $964.0 million, attributable to higher net-interest and non-interest income.
Trust, investment and other servicing fees from the Corporate and Institutional Services segment inched up 6% year over year to $310.9 million in the quarter, driven by recent acquisitions, improved markets and new business. However, decrease in securities lending revenue was on the downside.
Trust, investment and other servicing fees from the Personal Financial Services segment climbed 8% year over year to $244.4 million. The increase in PFS fees primarily reflects higher markets and new business.
Non-interest expenses totaled $701.2 million in the quarter, up 13% year over year, mainly due to an increase in equipment and software expenses, employee benefits expenses, compensation expenses and outside services expenses.
Credit Quality
Overall, credit quality marked an improvement in the third quarter of 2011. Provision for credit losses was $17.5 million in the quarter, down from $30.0 million in the prior-year quarter.
Moreover, Northern Trust witnessed an improvement in asset quality as nonperforming assets declined to $337.9 million from $377.6 million in the prior-year period.
Further, net charge-offs plummeted to $28.6 million from $30.3 million in the prior-year quarter. Reported provision levels reflected continuing weakness in residential and commercial real estate loans in certain markets.
Assets Position
AUM witnessed a decrease of 6% sequentially and 2% year over year to $644.2 billion. Assets under custody inched up 7% sequentially but were down 6% year over year to $4,172.1 billion.
Average earnings assets of $84.4 billion jumped 26.0% on a year-over-year basis, driven by an increase in Federal Reserve deposits and short-term securities.
Capital Ratios Evaluation
Northern Trust’s risk-based capital ratios remained strong as of September 30, 2011, with Tier 1 capital ratio of 12.2%, total risk-based capital ratio of 13.9%, and leverage ratio of 7.5%, each exceeding the regulatory requirements of 6%, 10% and 5%, respectively.
This classifies Northern Trust as a well-capitalized institution. The ratio of Tier 1 common equity to risk-weighted assets, a non-GAAP financial measure, was 11.8%, down from 12.7% in the prior-year period.
What we think?
In the reported quarter, Northern Trust completed the acquisition of Omnium LLC, a leading hedge fund administrator, from Citadel. The acquisition of Omnium, which has around $70 billion in assets under administration, will boost Northern Trust’s capabilities while creating an industry-leading hedge fund administration platform for institutional investors.
Omnium will be integrated into Northern Trust’s Corporate & Institutional Services business unit as Northern Trust Hedge Fund Services, LLC. It will provide comprehensive administrative and middle office services including trade processing, valuation, real-time reporting, cash management, accounting, collateral management and investor servicing to hedge funds and large institutional investors.
Despite the current sluggish environment, the company has made further investments in businesses to continue to serve the clients in the U.S. and around the world.
We expect increased asset management and servicing fees based on improvement in equity markets and higher volumes. The recent acquisitions depict strong financial position of the company. The company is also poised to benefit from the growth in client network.
However, continuing low interest environment and slow recovery in economy is expected to affect the results in the upcoming quarters. Further, the Dodd-Frank Act will ring in numerous regulatory changes over the next several years, which might act as a deterrent to the company’s fundamentals.
Northern Trust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we are maintaining our long-term Neutral recommendation on the stock. Moreover, Northern Trust’s closest competitor – Huntington Bancshares Inc. (HBAN) also retains a Zacks #3 Rank.
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