Northern Trust Corporation’s (NTRS - Analyst Report) third-quarter 2012 earnings of 73 cents per share lagged the Zacks Consensus Estimate. The results were in line with the prior quarter’s earnings. Net income was $178.8 million versus $179.6 million in the prior quarter.
Overall, results were adversely impacted by lower top line, partially offset by decline in non-interest expenses. Though the shrinkage in expenses reflects prudent expense management by the company, deteriorating credit quality was a negative for the quarter.
Performance in Detail
Total revenue reported was $972.5 million in the quarter, slightly down by 2% sequentially, reflecting lower non-interest and net interest income. Moreover, revenue was below the Zacks Consensus Estimate of $985.0 million.
Net interest income (fully taxable equivalent) totaled $256.9 million in the quarter, down 3% sequentially. The downside was spurred by lower net interest margin (NIM), partly offset by escalated average earning assets.
NIM was 1.21%, down from 1.28% in the prior quarter. Declined NIM reflects decreased spread between foreign currency denominated earning assets and interest-bearing deposits.
Non-interest income dipped 1% sequentially to $726.9 million, primarily due to a fall in foreign exchange trading income and securities lending revenue. These decreases were partially offset by higher other operating income to a certain extent.
Trust, investment and other servicing fees from the Corporate and Institutional Services segment declined 1% sequentially to $334.4 million in the quarter. Moreover, Trust, investment and other servicing fees from the Personal Financial Services segment remained stable approximately at $267.5 million.
Non-interest expenses totaled $696.4 million in the quarter, dipping 3% sequentially. The decline in expenses was primarily attributable to a decrease in employee benefits expenses, lower equipment and software expenses along with reduced outside services expenses. These declines were partially offset by higher occupancy expenses.
Overall, credit quality waned in the third quarter of 2012. Net charge-offs substantially surged to $11.9 million from $3.2 million in the second-quarter 2012.
Further, nonperforming loans and leases edged up 12% sequentially to $269.0 million from $239.8 million. Provision for credit losses was $10 million in the quarter, up from $5 million recorded in the prior quarter. Northern Trust witnessed deterioration in asset quality as nonperforming assets increased to $289.6 million from $265.1 in the last quarter.
During the quarter ended September 30, 2012, Northern Trust repurchased 1.1 million shares worth $49.6 million at an average price of $46.45 per share. Moreover, the company’s common stock repurchase authorization was replaced in March 2012, under which, up to $140 million worth of common stock can be repurchased after September 30, 2012 through March 2013.
Assets under management inched up 6% sequentially to $749.7 billion. Likewise, assets under custody rose 4% sequentially to $4.8 trillion. Average earnings assets of $84.5 billion, also surged slightly on a sequential basis.
Capital Ratios Evaluation
Northern Trust’s risk-based capital ratios remained strong as of September 30, 2012, with Tier 1 capital ratio of 12.8%, total risk-based capital ratio of 14.3%, and leverage ratio of 8.1%, 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 12.3%, down from 12.4% in the prior quarter.
We expect enhanced asset management and servicing fees based on expected equity markets improvement and higher volumes. Though lower expenses depict better expenses management, reduced revenues remain a matter of concern. However, the Dodd-Frank Act will bring in numerous regulatory changes over the next several years, which might act as deterrents to the company’s fundamentals.
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. Northern Trust’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.
Northern Trust currently retains a Zacks #3 rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.
Among Northern Trust’s peers, Fifth Third Bancorp (FITB - Analyst Report) will be releasing its third-quarter 2012 earnings on October 18, while SunTrust Banks, Inc. (STI - Analyst Report) will come up with its results on October 22.