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Northern Trust Corporation’s (NTRS - Analyst Report) third-quarter 2013 earnings of 84 cents per share outpaced the Zacks Consensus Estimate of 78 cents. Moreover, this compared favorably with the year-ago earnings of 73 cents.

Better-than-expected results benefited from top-line growth, lower provision for credit losses and a strong capital position. Moreover, assets under management and assets under custody were on the upswing. However, rise in operating expenses and a persisting low-interest rate environment acted as the headwinds.

Net income was $206.5 million compared with $178.8 million in the prior-year quarter.

Performance in Detail

Total revenue came in at $1.05 billion in the quarter, up 8% year over year, reflecting a rise in non-interest income. Moreover, it came above the Zacks Consensus Estimate of $1.02 billion.

Non-interest income grew 11% from the year-ago quarter to $726.9 million, largely due to a rise in trust, investment and other servicing fees along with elevated foreign exchange trading income.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment augmented 8% year over year to $359.8 million in the quarter. Further, Wealth Management trust, investment and other servicing fees improved 8% from the last-year quarter to $288.2 million.

On the downside, Northern Trust reported net interest income (fully taxable equivalent) of $244.8 million in the third quarter, down 5% year over year. The downside was spurred by a fall in net interest margin (NIM), partially offset by elevated average earning assets.

NIM was 1.14%, down 7 basis points from 1.21% in the prior quarter. The decrease reflects lower yields on earning assets, partly mitigated by reduced cost of interest-related funds due to lower short-term interest rates.

Non-interest expenses totaled $740.7 million in the quarter, increasing 6% year over year. The rise was primarily attributable to higher equipment and software, outside services and compensation expenses.

Credit Quality

Northern Trust witnessed improvement in its overall asset quality during the quarter. Nonperforming assets declined 1.9% year over year to $284 million as of Sep 30, 2013. Provision for credit losses was $5 million in the reported quarter, down 50% year over year.

Further, net charge-offs was $8.3 million, down 30.3% year over year. Total allowance for credit losses were $317.5 million, down 3.2% year over year.

Assets Position

As of Sep 30, 2013, Northern Trust’s assets under management surged 13% year over year to $846.2 billion. Likewise, assets under custody rose 10% from the last-year period to $5.2 trillion. Moreover, average earning assets increased 1% year over year and stood at $85.5 billion.

Capital Position

Northern Trust’s risk-based capital ratios remained strong as of Sep 30, 2013, with tier 1 capital ratio of 13.6%, total capital ratio of 14.9%, and leverage ratio of 8.3%, 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 13.1%, up from 12.3% in the prior-year quarter.

During the quarter ended Sep 30, 2013, Northern Trust repurchased 1.7 million shares worth $97.3 million at an average price of $56.73 per share.

Our Viewpoint

We expect enhanced asset management and servicing fees for Northern Trust based on a significant equity markets improvement and higher volumes. However, thrust of banking regulations might act as deterrents to the company’s fundamentals. Further, increased expenses depict undisciplined expense management.

An investor with an appetite to absorb risks related to the market volatility should not be disappointed with an investment in Northern Trust over the long run. The company’s fundamentals remain highly promising with a diverse business model and a strong balance sheet. Northern Trust currently carries a Zacks Rank #3 (Hold).

Among major regional banks, Fifth Third Bancorp (FITB - Analyst Report) and BB&T Corporation (BBT - Analyst Report) are scheduled to report on Oct 17, while State Street Corporation (STT - Analyst Report) will report on Oct 22.

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