Northern Trust Misses Estimates

Northern Trust Corporation’s (NTRS - Analyst Report) second quarter earnings of 72 cents per share were below the Zacks Consensus Estimate of 84 cents. Last year, the company reported a loss of 56 cents per share. Net income was $187.9 million versus a net loss of $148.3 million last year.

Net interest income totaled $248.2 million, down 7.0% year-over-year. Net interest margin (NIM) equaled 1.54% in the quarter, 8 basis points lower than that of last year. The decrease in NIM and net interest income reflects the diminished value of non-interest-related funding sources resulting from significant interest rate cuts over the past year.

Non-interest expenses totaled $599.2 million in the reported quarter, down 48.0% year over year due to a fall in Visa indemnification charges. Non-interest income increased 1% year over year to $679.4 million.

Provision for credit losses was $60.0 million versus $25.0 million in the year earlier period, reflecting continued weakness in the broader economic environment. Non-performing loans totaled $292.3 million versus $58.8 million in the prior-year period. Net charge-offs ballooned to $46.1 million from $0.3 million in the prior-year quarter. We believe that the competitive operating environment and a renewed weakness in the economy could result in higher-than-expected net charge-offs in the quarters to come.

Trust, investment and other servicing fees from the Corporate & Institutional Services (C&IS) segment increased 27.0% year over year to $310.2 million, primarily reflecting significantly lower market valuations, partially offset by securities lending results and new business. The largest component of the C&IS fees was custody and fund administration fees, which decreased 9.0% year over year to $150.4 million, driven primarily by declines in the equity markets. Securities lending fees totaled $82.0 million versus a negative $4.6 million in the prior year quarter. In this segment, assets under custody (AUC) totaled $3.2 trillion, which included $1.9 trillion of global custody assets, 11.0% higher year over year.

Trust, investment and other servicing fees from the Personal Financial Services (PFS) segment in the reported quarter decreased 8.0% year over year and totaled $212.9 million. The decrease in PFS fees resulted from significantly lower market valuations, offset in part by strong new business. In this segment, AUC totaled $355.4 billion, up 1.0% year over year, and assets under management (AUM) totaled $610.5 billion, down 6.0% year over year.

Average earning assets of $64.1 billion were 3.0% lower year over year, driven by a decrease in average money market assets, partially offset by an increase in the U.S. government sponsored agency securities and corporate debt.

Northern Trust’s risk-based capital ratios remained strong, with the company’s Tier 1 capital ratio of 13.2%, total risk-based capital ratio of 15.7% and leverage ratio of 9.0%.

The quarter reflected continued weakness in the broader economic environment. Credit metrics remain negatively expanded. Its loan loss provision has also shown a substantial increase. Due to the overall stress in the banking sector, we expect Northern Trust’s net interest margin to remain compressed. However, the company’s sound capital structure and diversified business operations will help it to emerge unscathed from the current crisis.