Impacted by elevated expenses, Northern Trust Corporation NTRS posted a negative earnings surprise of 1% in the third quarter of 2015. Earnings per share came in at 96 cents, missing the Zacks Consensus Estimate by a penny. However, this was higher than 84 cents per share earned in the year-ago quarter.
Lower-than-expected results were impacted by higher non-interest expenses. However, higher revenues were a tailwind. A strong capital position, improved credit quality and rise in assets under custody were among other positives.
Net income for the quarter was $234.6 million, compared with $204.5 million in the prior-year quarter.
Performance in Detail
Total revenue for the third quarter was $1.16 billion, lagging the Zacks Consensus Estimate of $1.17 billion. However, the reported figure was up 7% year over year, driven by a rise in trust, investment and other servicing fees, foreign exchange trading income, and security commissions and trading income.
On a fully taxable equivalent basis, Northern Trust reported net interest income of $275 million, up 7% year over year. This was driven by increased levels of average earning assets.
Net interest margin (NIM) was 1.08%, up 3 basis points (bps) from 1.05% in the prior-year quarter. The rise was driven by reduced cost of interest-related funds, partially offset by lower yields on some earning assets.
Non-interest income grew 7% from the year-ago quarter to $886.6 million. The rise was largely due to an improvement in foreign exchange trading income, along with higher security commissions and trading income.
Non-interest expenses were up 5% year over year to $812.3 million in the quarter. Expenses were primarily impacted by elevated compensation, and equipment and software expenses, along with higher outside services.
Assets under Management and Custody
As of Sep 30, 2015, Northern Trust’s total assets under management decreased 4% year over year to $886.8 billion. However, total assets under custody rose 1% from the last-year period to $5.96 trillion.
Credit Quality
Northern Trust witnessed an improvement in credit quality metrics during the quarter. Provision for credit losses was a credit of $10 million in the quarter as against no provision in the prior-year quarter. Nonperforming assets fell 10% year over year to $207.5 million as of Sep 30, 2015. Also, total allowance for credit losses were $254.7 million, down 14.6% year over year.
Capital Position
Northern Trust’s capital ratios remained strong under advanced approach as of Sep 30, 2015. Tier 1 capital ratio was 13.0%, total capital ratio was 14.8% and leverage ratio was 7.8%, each exceeding the regulatory requirements. Under the Advanced Approach, common equity Tier 1 ratio stood at 12.4%.
During the reported quarter, the company repurchased 1.91 million shares for $140.5 million at an average price of $73.37 per share.
Our Viewpoint
Northern Trust delivered decent results in the quarter. We remain encouraged owing to continued growth in assets under custody, the top line and an improving credit quality. If the company fails to undertake efficient cost control measures further, an increase in expenses might pose a threat to its profitability. Further, new regulations could put pressure on the company’s fundamentals.
Currently, Northern Trust carries a Zacks Rank #4 (Sell).
Performance of Other Major Banks
Banking major JPMorgan Chase & Co. JPM, which had kick-started the third quarter, missed the Zacks Consensus Estimate. The bank reported adjusted earnings of $1.32 per share, delivering a negative surprise of 4.3%.
Driven by top-line growth, Wells Fargo & Company’s WFC third-quarter 2015 earnings of $1.05 per share beat the Zacks Consensus Estimate by a penny. Moreover, the figure was above the year-ago quarter level of $1.02.
Lower operating expenses and negligible legal costs drove Bank of America Corporation’s BAC third-quarter 2015 earnings of 37 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Further, the bottom line witnessed a significant improvement from a net loss of 4 cents incurred in the prior-year quarter.
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