It has been about a month since the last earnings report for Northern Trust (NTRS). Shares have added about 3.7% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Northern Trust due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Northern Trust Q4 Earnings Top Estimates, Revenues Up
Reflecting top-line strength, Northern Trust fourth-quarter 2018 earnings per share of $1.82 outpaced the Zacks Consensus Estimate. The earnings figure also compares favorably with $1.51 recorded in the year-ago quarter.
Higher revenues and strong capital position were driving factors. Moreover, most credit metrics marked a significant improvement. However, escalating operating expenses acted as a headwind in the reported quarter.
Net income came in at $409.9 million, up 14.9% year over year.
For full-year 2018, net income was $1.6 billion or $6.64 per share compared with $1.2 billion or $4.92 per share in the previous year. The consensus estimate was pegged at $6.49.
Margins & Revenues Improve, Costs Escalate
For full-year 2018, revenues on a fully taxable equivalent basis, were $6 billion, up 11.1% from $5.42 billion in 2017. Additionally, the figure surpassed the Zacks Consensus Estimate of $5.96 billion.
Total revenues of $1.52 billion improved 5% year over year. Further, results surpassed the Zacks Consensus Estimate of $1.50 billion.
On a fully-taxable equivalent basis, net interest income of $430.1 million was up 9%. This was driven by higher net interest margin, partly mitigated by decreased earning assets.
Net interest margin (NIM) was 1.52%, up 13 basis points from the prior-year quarter. The increase chiefly reflects higher short-term interest rates. These positives were partially offset by an unfavorable balance-sheet mix shift and higher premium amortization.
Non-interest income advanced 4% from the year-ago quarter to $1.08 billion. Rise in trust, investment and other servicing fees, along with foreign exchange trading income, and other operating income, were the primary reasons behind this upswing. These were partially offset by lower treasury management fees, and security commissions and trading income.
Non-interest expenses jumped 2% year over year to $1.02 billion in the quarter. The rise was mainly due to an elevation in outside services, and equipment and software expenses. These increases were partly offset by lower compensation, employee benefits, occupancy and other expenses.
Assets Under Management and Custody Declined
As of Dec 31, 2018, Northern Trust’s total assets under custody decreased 6% year over year to $7.6 trillion, while total AUM declined 8% to $1.1 trillion.
Credit Quality: A Marked Improvement
Total allowance for credit losses came in at $138.2 million, down 10% year over year. Net recoveries were $1.7 million compared with provision of $6.6 million in the year-ago quarter.
Further, non-performing assets decreased 24.2% year over year to $117.7 million as of Dec 31, 2018. Credit provision was $4 million in the quarter compared with $13 million in the prior-year quarter.
Strong Capital Position
Under the Advanced Approach, as of Dec 31, 2018, Tier 1 capital ratio, total capital ratio and Tier 1 leverage ratio came in at 15.0%, 16.9% and 8.0%, compared with 14.8%, 16.7% and 7.8%, respectively, in the prior-year quarter. All ratios exceeded the regulatory requirements.
Return on average common equity was 17% compared with 15.1% in the prior-year quarter. Return on average assets was 1.34% compared with 1.16% in the year-ago quarter.
Capital Deployment Update
During 2018, Northern Trust repurchased 9 million shares for $924.3 million at an average price of $102.69 per share. Notably, during the reported quarter, the company repurchased 2.52 million shares for $234.6 million, at an average price of $92.97 per share. This includes shares related to share-based compensation.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Northern Trust has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Northern Trust has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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