It has been about a month since the last earnings report for Northern Trust (NTRS). Shares have added about 4.7% in that time frame, outperforming 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 drivers.
Northern Trust Q3 Earnings Miss Estimates on High Costs
Reflecting high costs, Northern Trust’s third-quarter 2018 earnings per share of $1.58 missed the Zacks Consensus Estimate of $1.60. Earnings compared favorably with $1.20 recorded in the year-ago quarter.
Escalating operating expenses acted as a headwind in the reported quarter. However, higher revenues and strong capital position were positives. Additionally, the third quarter witnessed a rise in assets under custody, as well as assets under management. Moreover, mostly credit metrics marked a significant improvement.
Net income came in at $374.5 million, up 25.5% year over year.
Margins & Revenues Improve, Costs Escalate
Total revenues of $1.48 billion improved 9% year over year. However, results lagged the Zacks Consensus Estimate of $1.51 billion.
On a fully-taxable equivalent basis, net interest income of $418.5 million was up 14% year over year. This was driven by higher net interest margin.
Net interest margin (NIM) was 1.47%, up 18 basis points from the prior-year quarter. The increase chiefly reflected higher short-term interest rates and reduced premium amortization. The positives were partially offset by an unfavorable balance-sheet mix shift.
Non-interest income advanced 8% from the year-ago quarter to $1.07 billion. Rise in trust, investment and other servicing fees, along with foreign exchange trading income, security commissions and trading income, were the primary reasons behind this upswing. These were partially offset by lower treasury management fees and other operating income.
Non-interest expenses flared up 7% year over year to $1 billion 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 Sep 30, 2018, Northern Trust’s total assets under custody increased 6% year over year to $8.2 trillion, while total assets under management rose 4% to $1.2 trillion.
Credit Quality: A Marked Improvement
Total allowance for credit losses came in at $140.5 million, down 19% year over year. Net recoveries were $0.3 million, down 81% from the year-ago quarter figure. Further, non-performing assets decreased 14.2% year over year to $124.9 million as of Sep 30, 2018. Credit provision was $9 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 Sep 30, 2018, Tier 1 capital ratio, total capital ratio and Tier 1 leverage ratio came in at 14.8%, 16.7% and 7.8%, compared with 14.6%, 16.4% and 8%, respectively, in the prior-year quarter. All ratios exceeded the regulatory requirements.
Return on average common equity was 15.1% compared with 12.2% in the prior-year quarter. Return on average assets was 1.22% compared with 0.98% in the year-ago quarter.
Capital Deployment Update
During the reported quarter, the company repurchased 2.17 million shares for $235.9 million, at an average price of $108.62 per share. This includes shares related to share-based compensation.
Based on a portfolio of initiatives, management anticipates realizing $250 million in expense run-rate savings by 2020. On a combined basis, these charges will create approximately $55 million in annualized net savings and these savings are expected to be fully realized by the first quarter of 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Northern Trust has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Northern Trust has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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