Northern Trust Lags Estimates - Analyst Blog

Northern Trust Corporation's (NTRS) fourth quarter earnings of 64 cents per share were below the Zacks Consensus Estimate of 71 cents per share. The decrease was attributable to low interest rate environment, which in turn, was negatively affected by net interest income and trust fees.

In the fourth quarter of 2010, earnings per share benefited from the reduction of an indemnification liability related to Visa Inc. (V). The related pre-tax expense reduction summed up to $20.3 million ($12.9 million after tax, or $.05 per common share).

Last year, the company reported a profit of 82 cents per share and 64 cents in the prior quarter.  Net income reported was $157.1 million compared with net income of $200.3 million in the prior-year quarter and $155.6 million in the prior quarter.

For fiscal 2010, the company reported earnings of $2.74 per share and were below the Zacks Consensus Estimate of $2.79 per share. Net income reported was $669.5 million compared with a net income of $864.2 million in the prior year.

Performance in Detail

Net interest income totaled $232.3 million in the quarter, down 5% year over year. Net Interest margin (NIM) was 1.30%, down from 1.43% in the prior-year quarter. The decline in NIM and the resulting impact on net interest income resulted from a significant drop in interest rates.

Further, the lingering low interest rate environment has resulted in condensed yields on the securities portfolio since maturing investments have been replaced by lower yielding assets. In addition, loan demand continued to weaken, limiting balance sheet growth.

For full year 2010, net interest income was $957.8 million, down 8% year over year.

In the fourth quarter of 2010, non-interest income declined 5% year over year to $674.1 million due to decrease in trust, investment and other servicing fees and treasury management fees. These decreases were partially offset by an increase in foreign exchange trading income, security commissions and trading income and other operating income. For fiscal 2010, non-interest income inched down 2% year over year to $2,729.0 million.

Total revenue reported was $906.4 million in the quarter, well below the Zacks Consensus Estimate of $923.0 million due to lower interest and non-interest income. For fiscal 2010, total revenue was $3,686.8 million, down from the Zacks Consensus Estimate of $3,708.0 million.

Non-interest expenses totaled $641.7 million in the quarter, up 3% year over year, mainly due to an increase in equipment and software expenses, compensation expenses and outside services expenses. For fiscal 2010, non-interest expenses were $2,497.9 million, up 8% year over year.

Provision for credit losses was $40.0 million in the quarter, flat year over year. As expected, Northern Trust continued to experience asset quality pressure witnessed by an increase in nonperforming assets, which totaled $378.5 million versus $308.1 million in the prior-year period.

Net charge-offs augmented to $44.0 million from $32.3 million in the prior-year quarter.  Reported provision and charge-off levels reflects continuing weakness in residential and commercial real estate loans in certain markets.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment decreased 18% year over year to $268.6 million in the quarter, led 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 increased 7% year over year to $236.0 million. The increase in PFS fees primarily reflects higher markets and new business.

Assets Position

AUM experienced a decrease of 2% sequentially but an increase of 3% year over year to $643.6 million. Assets under custody increased 4% sequentially and 12% year over year to $4,081.3 billion. Increase in assets reflected continued business growth.

Average earnings assets of $70.9 billion were up 5.0% on a year-over-year basis, driven by an increase in average securities balances, partially offset by decreases in average money market assets and loans and leases.

Capital Ratios Evaluation

Northern Trust's risk-based capital ratios remained strong as of December 31, 2010, with Tier 1 capital ratio of 13.6%, total risk-based capital ratio of 15.6%, and leverage ratio of 8.8%, 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 12.8% in the prior-year period.

In Northern Trust's peer group, JPMorgan Chase & Co. (JPM) reported fourth quarter earnings, which was substantially ahead of the Zacks Consensus Estimate. For full year 2010, net earnings surpassed the Zacks Consensus Estimate. The better-than-expected numbers were primarily supported by higher non-interest revenue and a slowdown in provision for credit losses, which more than offset by a rise in non-interest expense resulting from increased litigation reserves.

Our Take

We expect increased asset management and servicing fees based on anticipated improvement in equity markets and higher volumes. The company is also poised to benefit from the growth in client network.  However, low interest rates continue to restrain earnings, impacting net interest income and securities lending fees. Moreover, 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 Trustcurrently retains its Zacks #3 rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.

 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
NORTHERN TRUST (NTRS): Free Stock Analysis Report
 
VISA INC-A (V): Free Stock Analysis Report
 
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