News Column

Fitch: Northern's Earnings Performance Remains Constrained in 2Q'14

July 16, 2014



CHICAGO--(BUSINESS WIRE)-- Northern Trust Corporation (Northern) second quarter 2014 (2Q'14) net income of $181.9 million was flat relative to the sequential quarter and down compared to the year-ago quarter. It is noteworthy, however, that Northern's 2Q'14 earnings did include a pre-tax charge of $42.3 million for severance costs and software write-offs, as Northern continues to look for incremental ways to reduce costs amidst the challenging operating environment.

These stated results equated to a 9.18% return on average equity (ROE) in 2Q'14, compared to 9.28% in the sequential quarter and 10.2% in the year-ago quarter. Fitch continues to note that these results remain satisfactory from a credit perspective, but below the company's long-term averages and Fitch's estimate of Northern's long-term cost of equity.

Northern's total revenue was up 4% versus to the sequential quarter and 6% relative to the year-ago quarter as growth in fee income from higher equity markets globally and some new business wins were offset by continued weakness in market-based revenue such as foreign exchange (FX) trading and securities lending income. Fitch had expected this given still strong equity markets and very low volatility in foreign exchange markets.

The company's expenses for 2Q'14 climbed 6% sequentially and 11% from the year-ago quarter, indicating some negative operating leverage in both periods. The higher level of expenses has been primarily driven by higher compensation expense and increased technology expense. As a result, Fitch is not overly surprised by the pre-tax charge noted above, since as long as the interest rate environment remains low Northern may have to become more aggressive in managing its expense base.

Northern's net interest income (NII) remains a key component of the company's earnings profile at 23% of overall revenue in 2Q'14. Given the company's conservative posture and short balance sheet duration, the company's net interest margin (NIM) declined to 1.04% in 2Q'14. This is largely due to incremental deposit balances being placed at the Federal Reserve, which earn a mere 25 basis points.

Fitch believes that in a rising short-term interest rate environment, whenever that may occur, Northern's NII has the potential to expand significantly and therefore drive earnings growth. In this type of scenario NII should become a much bigger piece of the overall revenue profile as well.

Fitch continues to view Northern's credit quality as sound, but does note that credit metrics are likely at a cyclical trough. Over time, Fitch would expect some reversion in these metrics but given Northern's conservative underwriting, would expect its credit metrics to remain well below industry averages.

Fitch continues to view Northern's funding profile and capitalization as sound. Deposits now constitute 67% of Northern's total liabilities and the company's Basel III Tier 1 common equity ratio under both the standardized and advanced approach was 12.7% at 2Q'14. Fitch views this strong capital position, combined with the company's relative low risk balance sheet, as key differentiators that support Northern's high ratings.

Additional information is available at www.fitchratings.com

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Justin Fuller, CFA, +1 312-368-2057

Senior Director

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

Source: Fitch Ratings


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