DBRS Comments on Northern Trust Corporation’s 4Q12 Earnings – Senior at AA (low)

DBRS, Inc. (DBRS) has today commented on the 4Q12 earnings of Northern Trust Corporation (Northern Trust or the Company). DBRS rates the Company’s Issuer & Senior Debt at AA (low) with a Stable trend. The Company reported net income of $167.7 million in the fourth quarter, down from $178.8 million in 3Q12, but up from $130.2 million a year ago.

Highlights of the quarter include continued strong new business wins for both PFS and C&IS and pipelines remains strong. Management noted that new business wins were broad and diversified across the Company’s businesses, services and geographies. For the year, both businesses had record new business wins.

During the quarter, assets under custody (AUC) increased 1% to $4.8 trillion, while assets under management (AUM) also increased 1% to $758.9 billion. Although asset levels were relatively stable on the institutional side of the business, DBRS notes that PFS delivered strong growth with AUC increasing 4% and AUM up a robust 7%.

Total consolidated revenue was relatively stable sequentially at $969.7 million, down modestly from $972.5 million with higher noninterest income offset by lower net interest income. Noninterest income of $735.5 million comprised a high 75.1% of total revenues and increased by $8.6 million, or 1%. Trust, investment and other servicing fees, which are primarily derived from AUM and AUC increased $20.7 million, or 3% to $622.6 million. Meanwhile, net interest income (FTE) declined by $13.3 million, or 5%, to $243.6 million reflecting lower average earning assets of $1.6 billion and continued net interest margin pressure with the core margin compressing two basis points to 1.17%.

Securities lending revenues and foreign exchange trading income remain weak by historical standards. Indeed, securities lending revenues were down 3.5% sequentially to $20.3 million driven by lower spreads and lower volumes. Meanwhile, foreign exchange trading income declined by 7% to $40.8 million reflecting lower volatility.

Money market fee waivers totaled $15.3 million, an improvement from $16.8 million in 3Q12 and from $33.6 million a year ago.

Expenses increased more than DBRS anticipated. Excluding restructuring, acquisition and integration related charges, expenses increased a high 5.7% to $733.3 million primarily reflecting higher outside services and other operating expenses. Management indicated that the higher expenses were related to investments in the businesses for growth and seasonality. However, adjusted expenses increased 1% from 4Q11 with Northern Trust benefiting from its Driving Performance initiative. Indeed, the Company achieved another $50 million in pre-tax benefits under this initiative in 4Q12 bringing the total for FY12 to $160 million (split roughly between 40% revenue enhancements and 60% expense savings); $35 million more than promised at the outset of the initiative. Management noted the Company remains well on track to achieve a $250 million pre-tax benefit by the end of 2013.

Asset quality remains strong and continues to improve. Nonperforming assets (NPAs) declined by 5% during the quarter to $275.1 million, or 0.93% of NPAs to loans and leases and OREO. Meanwhile, net charge-offs (NCOs) totaled $5.4 million, or just 0.07% of average loans and leases (annualized). DBRS notes that NCOs benefited from larger recoveries as gross charge-offs remained relatively stable at $16.1 million. Overall, residential real estate accounted for 69% of total nonperforming loans at December 31, 2012. As a result of improving asset quality and relatively stable loan balances, the Company was able to lower the provision to $5 million from $10 million in 3Q12.

Capital remains strong and helps underpin the Company’s conservative balance sheet. Specifically, Northern Trust’s tier 1 common equity ratio remained stable at 12.4% during the quarter. Moreover, Northern Trust’s estimated Basel III tier 1 common ratio was a very strong 13.1%, which easily exceeds all anticipated regulatory requirements. During the quarter, the Company repurchased $62.9 million of common stock. Under its current capital plan, Northern Trust can repurchase up to $77.1 million in shares in 1Q13. Through dividends and share repurchases, the Company returned $449.8 million to shareholders in 2012.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]