Higher Costs Drag on Northern Trust Earnings - Analyst Blog

Higher expenses led Northern Trust Corp. NTRS to report first-quarter 2014 earnings of 75 cents per share, missing the Zacks Consensus Estimate of 78 cents. However, this compared favorably with 71 cents (adjusted) earned in the year-ago quarter.

Shares of Northern Trust slid nearly 4% in the pre-market session, indicating that investors have been bearish on the results. Further, the price reaction during the trading session will give a better idea about the extent of disappointment among investors.

Our proven model predicted that Northern Trust may not post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank of #3 (Hold) or better. It had a Zacks Rank #3 (Hold), but the Earnings ESP was 0.00%.

Lower-than-expected results were mainly due to a rise in operating expenses, partially offset by top-line growth. However, a strong capital position as well as rise in assets under management and assets under custody were the positives.

Net income for the quarter came in at $181.4 million, up 11% year over year.  Notably, the prior-year quarter net income included certain non recurring expenses of $8.9 million on an after-tax basis.

Performance in Detail

Total revenue came in at $1.04 billion, missing the Zacks Consensus Estimate of $1.07 billion. However, the reported figure was up 7% year over year, driven by a rise in non-interest as well as net interest income.

Non-interest income grew 6% from the year-ago quarter to $794.8 million, largely due to a rise in trust, investment and other servicing fees, partially offset by lower foreign exchange trading income.

Moreover, on a fully taxable equivalent basis, Northern Trust reported net interest income of $254.4 million, up 9% year over year. This was driven by increased levels of average earning assets, partially offset by a decline in net interest margin NIM.

NIM was 1.12%, down 3 basis points from 1.15% in the prior-year quarter. The decline in NIM was primarily due to a fall in yields on earning assets, partially offset by lower funding costs.

Non-interest expenses totaled $768.0 million in the quarter, up 5% year over year. The rise was primarily owing to increase in costs related to compensation, outside services and equipment and software.

Credit Quality

Northern Trust witnessed improvement in its overall asset quality during the quarter. Provision for credit losses was $3 million, declining 40% year over year. Further, net charge-offs was $1.5 million, down substantially from the prior-quarter figure of $8.7 million.

Also, total allowance for credit losses were $307.9 million, down 4% year over year. However, nonperforming assets increased nearly 3% year over year to $269.7 million as of Mar 31, 2014.

Assets Under Management and Custody  

As of Mar 31, 2014, Northern Trust's assets under management increased 13% year over year to $915.4 billion. Likewise, assets under custody rose 15% from the last-year period to $5.8 trillion.

Capital Position

Northern Trust's risk-based capital ratios remained strong as of Mar 31, 2014, with Tier 1 capital ratio of 13.0%, total capital ratio of 15.5% and leverage ratio of 7.8%, each exceeding the regulatory requirement of 6%, 10%, and 5%, respectively.

During first-quarter 2014, Northern Trust repurchased more than 2.6 million shares worth $163.0 million at an average price of $62.10 per share.

During the quarter, the company successfully cleared the stress test and subsequently its capital plan got approved by the Federal Reserve under the 2014 Comprehensive Capital Analysis and Review (CCAR).

Under its 2014 capital plan, Northern Trust is allowed to hike its quarterly common stock dividend by 6.5% to 33 cents per share effective second-quarter 2014.

Also, the company got approval for share repurchase of up to $425 million of its common stock in the period between Apr 2014 and Mar 2015 through the open market or in a private platform.

Our Viewpoint

Though the company missed earnings, we remain encouraged owing to continued growth in assets under management and assets under custody, top-line growth and a better credit quality. Further, the stress test clearance and the approval of 2014 capital plan boosts investors' confidence.

However, the new banking regulations could pressure the company's fundamentals. Also, if the company fails to undertake efficient cost control measures, the mounting expenses will pose a threat to its profitability.

Performance of Other Major Banks

The first-quarter earnings season kick started with Wall Street biggies such as Wells Fargo & Co. WFC. The company achieved its seventeenth consecutive quarter of earnings growth by reporting earnings of $1.05 per share. Results improved from $1.00 earned in the prior quarter and 92 cents in the year-ago quarter. Also, the results beat the Zacks Consensus Estimate by 8 cents.

Further, following a disappointing second-half 2013, Citigroup Inc. C reported impressive first-quarter 2014 results in its latest release. Driven by prudent expense management, earnings per share came in at $1.30, outpacing the Zacks Consensus Estimate of $1.18. Moreover, earnings surpassed the prior-year period earnings by a penny.

Another major regional bank State Street Corp. STT will release its earnings report on Apr 25.