Northern Trust Corporation’s (NTRS) second-quarter 2011 earnings of 70 cents per share outpaced the Zacks Consensus Estimate by a penny per share.
The increase was marked by higher net interest income, growth in assets under management and an improved client network.
In the second quarter of 2011, earnings per share were impacted by restructuring, acquisition, and integration-related expenses. The related pre-tax expense came to $22.6 million ($18.8 million after tax, or 8 cents per common share).
In the prior quarter and prior-year quarter, the company reported a profit of 59 cents and 78 cents per share, respectively. Operating income was $170.8 million, compared with a net income of $191.6 million in the prior-year quarter and $144.6 million in the prior quarter.
Performance in Detail
Net interest income (fully taxable equivalent) totaled $256.6 million in the quarter, up 5.9% year over year. However, Net Interest Margin (NIM) was 1.23%, down from 1.47% in the prior-year quarter. NIM continues to be impacted from balance sheet growth, which primarily consists of a lower yielding investment securities portfolio resulting from ongoing weakness in loan demand due to major funding generated from interest-bearing sources, primarily non-U.S. office deposits.
In the second quarter of 2011, non-interest income inched down 4% year over year to $698.7 million, due to the decrease in treasury management fees and foreign exchange trading income. These decreases were partially offset by an increase in security commissions and trading income and other operating income.
Total revenue reported was $944.8 million in the quarter, below the Zacks Consensus Estimate of $948.0 million, attributable to lower non-interest income.
Trust, investment and other servicing fees from the Corporate and Institutional Services segment inched down 2% year over year to $308.5 million in the quarter, driven by a decrease in securities lending revenue, partially offset by higher custody and fund administration fees.
Trust, investment and other servicing fees from the Personal Financial Services segment climbed 10% year over year to $249.3 million. The increase in PFS fees primarily reflects higher markets and new business.
Non-interest expenses totaled $705.3 million in the quarter, up 15% 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 second quarter of 2011. Provision for credit losses was $10.0 million in the quarter, down from $50.0 million in the prior-year quarter. Moreover, Northern Trust witnessed an improvement in asset quality as nonperforming assets declined to $359.1 million from $389.8 million in the prior-year period.
Furthermore, net charge-offs plummeted to $15.0 million from $38.3 million in the prior-year quarter. Reported provision levels reflect continuing weakness in residential and commercial real estate loans in certain markets.
Assets Position
AUM witnessed an increase of 3% sequentially and 13% year over year to $684.1 billion. Assets under custody inched up 1% sequentially and 24% year over year to $4,415.9 billion. Increase in assets reflected continued business growth.
Average earnings assets of $83.7 billion jumped 27.0% 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 June 30, 2011, with Tier 1 capital ratio of 12.8%, total risk-based capital ratio of 14.5%, and leverage ratio of 7.7%. Each exceeded 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 12.3%, down from 13.2% in the prior-year period.
Considering Northern Trust’s peer group, JPMorgan Chase & Co. (JPM), reported second-quarter earnings per share of $1.34, substantially ahead of the Zacks Consensus Estimate of $1.21. Considering nonrecurring items, JPMorgan reported net income of $5.4 billion or $1.27 per share compared with $4.8 billion or $1.09 per share in the year-ago quarter. The stellar numbers were primarily supported by a substantial slowdown in provision for credit losses and higher net revenue, which were more than offset by an increase in non-interest expense and lower net interest income.
Our Take
In June 2011, Northern Trust completed the acquisition of Bank of Ireland Securities Services (BoISS) from Bank of Ireland Group for €60 million ($82 million) as announced in February 2011. Through this acquisition, Northern Trust expects to combine the fund administration business with the existing activities in Ireland and provide outstanding consumer service and solutions to clients. The acquisition will improve and expand Northern Trust’s Global Fund Service capabilities, particularly in the fund administration and ETFs.
In May 2011, Northern Trust agreed to acquire Omnium LLC, a leading hedge fund administrator, from Citadel. The acquisition of Omnium, which has around $70 billion in assets under administration, will enhance Northern Trust’s capabilities and create an industry-leading hedge fund administration platform for institutional investors. The deal is subject to regulatory approvals and customary closing conditions, and is expected to close by the third quarter of 2011.
Moreover, Northern Trust announced the expansion of its services in Australia during the quarter. The company incorporated Unit Registry solutions to improve its fund administration capabilities in Australia. Northern Trust has signed an agreement with Computershare to provide such services combining local expertise with a wide range of worldwide capabilities.
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 a strong financial position of the company. The company is also poised to benefit from the growth in client network. However, the continuing low interest environment and a slow economic recovery 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 its Zacks #3 rank, which translates into a short-term “Hold” rating. Moreover, considering the fundamentals, we maintain our long-term ‘Neutral’ recommendation on the stock.
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