Northern Trust Corporation’s(NTRS) third quarter earnings of 64 cents per share were below the Zacks Consensus Estimate of 72 cents per share, attributed to low interest rate environment and lingering economic recovery.
Last year, the company reported a gain of 77 cents per share and 82 cents in the prior quarter. Net income reported was $155.6 million compared with net income of $187.9 million in the prior-year quarter $199.6 million in the prior quarter.
Quarter in Detail
Net interest income totaled $243.0 million, down 2% year over year. Net Interest margin (NIM) was 1.44%, down from 1.54% in the prior-year quarter. The decline in NIM and the resulting impact on net interest income is a result of the significant drop in interest rates.
Non-interest income declined 3% year over year to $656.0 million due to decrease in trust, investment and other servicing fees, low foreign exchange trading income, treasury management fees and other operating income. These decreases were partially offset by an increase in security commissions and trading income.
Total revenue reported was $899 million, well below the Zacks Consensus Estimate of $921 million due to lower interest and non-interest income.
Non-interest expenses totaled $622.1 million, up 4% year over year mainly due to an increase in equipment and software expenses and outside services expenses.
Provision for credit losses was $30.0 million in the quarter versus $60.0 million in the year-ago period. As expected, Northern Trust continued to experience asset quality pressure witnessed by an increase in nonperforming assets, which totaled $377.6 million versus $301.5 million in the prior-year period. Net charge-offs shrunk to $30.3 million from $46.1 million in the prior-year quarter.
Trust, investment and other servicing fees from the Corporate and Institutional Services segment decreased 5% year over year to $293.2 million, led by a decrease in securities lending revenue, partially offset by higher fund administration fees.
Trust, investment and other servicing fees from the Personal Financial Services segment increased 6% year over year to $225.5 million. The increase in PFS fees primarily reflects higher markets and new business, partially offset by fee waiver for low interest rates.
Assets Position
AUM experienced an increase of 9% sequentially and 8% year over year to $657.2 million. Assets under custody increased 10% both sequentially and year over year to $3.9 billion. Increase in assets reflected continued business growth.
Average earning assets of $67 billion were up 4.0% on a year over year basis, driven by an increase in average money market assets and average investment securities.
Capital Ratios Evaluation
Northern Trust’s risk-based capital ratios remained strong at the end of the quarter, with Tier 1 capital ratio of 13.2%, total risk-based capital ratio of 15.3%, and leverage ratio of 9.3%, 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 12.7% in line with the prior-year period.
In Northern Trust’s peer group, JPMorgan Chase & Co. (JPM), The Bank of New York Mellon Corp’s (BK) and State Street Corporation (STT) reported impressive results with positive net income.
Our Take
We expect increased asset management and servicing fees based on anticipated improvement in equity markets and higher volumes. Additionally, the company is poised to benefit with the growth in client network. However, low interest rates continue to restrain earnings, impacting net interest income and securities lending fees. Moreover, the recent Dodd-Frank Act will bring in numerous regulatory changes over the next several years.
Northern Trust currently retains its Zacks #4 Rank, which translates to a short-term Sell rating. Considering the fundamentals, we are maintaining our Underperform recommendation on the stock.
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