Fitch: Northern Trust's 1Q'14 Earnings Consistent with Prior Results

CHICAGO--()--Northern Trust Corporation (NTRS) reported modestly higher first quarter 2014 (1Q'14) earnings of $178.5 million, according to Fitch Ratings. This equates to a 0.73% return on average assets (ROA), which is modestly higher than the 0.68% ROA in the sequential fourth quarter of 2013 (4Q13) and unchanged relative to the year-ago first quarter of 2013 (1Q13) ROA of 0.73%. Additionally, the 1Q'14 results equate to a 9.28% return on average equity (ROE). Fitch views the ROSE as satisfactory from a credit perspective but below the company's long-term averages and Fitch's estimate of NTRS' long-term cost of equity.

NTRS' total revenue expanded 7% from the year-ago quarter and was flat relative to the sequential quarter. Fitch believes the year-over-year revenue expansion is largely reflective of higher equity markets over the course of the last 12 months, partially helped by some new business wins. The relatively flat sequential revenue Fitch views as largely due to flat markets over the first three months of 2013 as well as relatively higher money market fee waivers given the protracted low short-term interest rate environment.

NTRS net interest income (NII) grew 9% relative to the year-ago quarter given balance sheet growth amid continued deposit inflows over the course of the year. On a sequential basis NII declined 2% due to very modestly lower deposit levels and some continued compression on asset yields due in part to less of a benefit from slower premium amortization on mortgage backed securities (MBS). The company's net interest margin (NIM) of 1.12% was 3 basis points below the year-ago quarter's NIM and unchanged relative to the sequential quarter's NIM.

Fitch continues to view NTRS' low NIM as reflective of a very conservative balance sheet posture as the company continues to refrain from reaching for incremental yield in its large securities portfolio. However, this posture, while favorable from a credit perspective, also constrains the company's earnings performance. Fitch would not expect a meaningful pick-up in earnings growth for NTRS until short-term interest rates rise at some point, as this would improve the company's NII and also alleviate the money market fee waivers that are currently being incurred.

Non-interest expense grew 5% from the year ago quarter and declined 3% from the sequential quarter. The year-over-year growth is primarily due to higher compensation, benefits, outside services and equipment expenses. The sequential decline is more mixed as modest growth in compensation, benefits, and equipment expenses were offset by a reduction in other expenses, which was in part due to a $19.2 million litigation charge recorded in 4Q13.

As noted above, NTRS' low risk balance sheet continues to be one of the key factors for the company's strong ratings. This was also supported by the Federal Reserve recently not objecting to NTRS capital plan under CCAR, which included increasing the dividend to $0.33 per share from $0.31 per share and allowing for $425 million of share repurchases through March 2015.

Fitch views NTRS' capital position as sound, particularly given the company's balance sheet positioning noted above. NTRS estimates that its fully phased in Basel III Tier 1 Common (CET1) ratio as of the end of 1Q'14 would be 11.1% under the advanced approach and 11.7% under the standardized approach.

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Contacts

Fitch Ratings
Justin Fuller, CFA, +1 312-368-2057
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Christopher Wolfe, +1 212-908-1771
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Justin Fuller, CFA, +1 312-368-2057
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Christopher Wolfe, +1 212-908-1771
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com