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Northern Trust (NTRS) Q2 Earnings Rise on Solid Revenues

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Driven by top-line strength, Northern Trust Corporation’s NTRS second-quarter 2018 adjusted earnings per share of $1.72 surpassed the Zacks Consensus Estimate of $1.63. Earnings compared favorably with $1.12 recorded in the year-ago quarter. Results exclude certain one-time items.

Higher revenues and strong capital position were positives. In addition, the second quarter witnessed a rise in assets under custody, as well as assets under management. Moreover, mostly credit metrics marked a significant improvement. However, escalating operating expenses remained an undermining factor.

Including severance-related and restructuring charges, along with acquisition-related integration and transaction costs, net income came in at $390.4 million or $1.68 per share.

Margins & Revenues Improve, Costs Escalate

Total revenues of $1.51 billion outpaced the Zacks Consensus Estimate of $1.49 billion. Results also improved 14% year over year.

On a fully-taxable equivalent basis, net interest income of $422.6 million was up 21% year over year. This was driven by elevated levels of average earning assets and higher net interest margin.

Net interest margin (NIM) was 1.48%, up 20 basis points from the prior-year quarter. The increase chiefly reflected higher short-term interest rates. The positives were partially mitigated by an unfavorable balance-sheet mix shift.

Non-interest income advanced 12% from the year-ago quarter to $1.09 billion. Rise in trust, investment and other servicing fees, along with foreign exchange trading income, security commissions and trading income, were the primary reasons for this upswing. These were partially offset by lower treasury management fees and other operating income.

Non-interest expenses flared up 6% year over year to $997.4 million in the quarter. The rise was mainly driven by an elevation in mostly all components of expenses.

Improvement in Assets Under Management and Custody

As of Jun 30, 2018, Northern Trust’s total assets under custody increased 10% year over year to $8.1 trillion, while total assets under management rose 12% to $1.1 trillion.

Credit Quality: A Mixed Bag

Total allowance for credit losses came in at $149.2 million, down 17% year over year. Net charge-offs were $0.1 million, down 97% from the year-ago quarter figure. Further, non-performing assets decreased 20.7% year over year to $132.2 million as of Jun 30, 2018.  

However, provision was $1.5 million in the quarter compared with $7 million credit provision reported in the prior-year quarter.

Strong Capital Position

Under the Advanced Approach, as of Jun 30, 2018, Tier 1 capital ratio, total capital ratio and Tier 1 leverage ratio came in at 14.5%, 16.4% and 7.7%, compared with 14.5%, 16.5% and 8.1%, respectively, in the prior-year quarter. All ratios exceeded the regulatory requirements.

Return on average common equity was 16.5% compared with 11.6% in the prior-year quarter. Return on average assets was 1.26% compared with 0.91% in the year-ago quarter.

Capital Deployment Update

During the reported quarter, the company repurchased 1.79 million shares for $190.6 million, at an average price of $106.63 per share. This includes shares related to share-based compensation.

Recently, following the Fed’s approval for the company’s 2018 Capital Plan, Northern Trust announced an increased quarterly common stock dividend of 55 cents per share on its common stock, up 31% from the prior payout. The new dividend will be paid on Oct 1, to shareholders of record as of Sep 14, 2018.

Further, the company’s board of directors has approved a new common stock repurchase authorization of up to 25 million shares, replacing the authorization approved in July 2017.

Our Viewpoint

Results of Northern Trust display a decent performance in the April-June quarter. Continued growth in assets under custody, revenues and an improving credit quality is expected. Furthermore, positive impact of rising rates is likely to continue. Though escalating expenses might pose a threat to the company’s profitability, benefits of tax reform are anticipated to act as a tailwind.

Northern Trust Corporation Price, Consensus and EPS Surprise

Northern Trust Corporation Price, Consensus and EPS Surprise | Northern Trust Corporation Quote

Currently, Northern Trust carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Driven by top-line strength, Citigroup C delivered a positive earnings surprise of 5.2% in second-quarter 2018. Earnings from continuing operations per share of $1.62 for the quarter easily outpaced the Zacks Consensus Estimate of $1.54. Also, earnings were up 28% year over year. Overall high revenues were reflected, driven by elevated banking, equity markets and consumer banking revenues, along with loan growth. Moreover, expenses remained stable. However, fixed income market revenues disappointed.

Wells Fargo WFC recorded negative earnings surprise of 3.6% in second-quarter 2018. Adjusted earnings of $1.08 per share missed the Zacks Consensus Estimate of $1.12. Results came in line with the prior-year quarter earnings. Notably, results exclude net discrete income tax expense of 10 cents per share. Including non-recurring items, net income came in at $5.2 billion or 98 cents per share compared with $5.9 billion or $1.08 per share in the prior-year quarter.

Higher-than-expected trading revenues and rise in demand for loans drove JPMorgan’s JPM second-quarter 2018 earnings of $2.29 per share, which outpaced the Zacks Consensus Estimate of $2.22. The figure was up 26% from the prior-year quarter. Unexpected improvement in trading activities, mainly driven by escalating trade war tensions between the United States and China, boosted JPMorgan’s markets revenues. Fixed income trading and equity trading revenues were up 7% and 24%, respectively.

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