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Northern Trust Trips Up

By Shubh Datta | More Articles
August 3, 2011 | Comments (0)




NTRSNorthern Tru

CAPS Rating 2/5 Stars.


$36.28 $-0.09 (-0.25%)



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Northern Trust's (Nasdaq: NTRS ) second-quarter profits plunged 24% as a result of higher expenses and low interest rates. Here's what you need to know about what's going on with the bank.

A look at the numbers
Revenue for the quarter fell marginally from $964.2 million to $944.8 million, off 2%. A 30% plunge in foreign-exchange trading income, fueled by volatile market conditions, wounded the bank's top line.

On the bottom line, higher costs associated with acquiring Bank of Ireland's (NYSE: IRE ) fund administration business took their toll. Net income dropped to $152 million, from $199.6 million a year ago.

Institutional assets under custody did grow 25%, to a record-breaking $4 trillion, thanks higher fixed income, a favorable currency, and new business accounts. But unlike some of its peers, Northern Trust hasn't yet been able to translate that asset growth into earnings growth.

Rival trust banks such as State Street (NYSE: STT ) and BNY Mellon (NYSE: BK ) both posted strong second-quarter earnings on the back of higher fee revenues and an increase in assets resulting from acquisitions. Northern Trust has fallen behind in this department.

Credit quality and capital base
As market conditions showed signs of improvement, Northern Trust trimmed its provision for loan losses to $10 million, from $50 million a year ago. In addition, asset quality improved in the last year: Non-performing assets inched down to $359 million. Though Northern's Tier 1 capital ratio declined to 12.8% from 13.7% a year ago, that's still a strong capital position.

The Foolish bottom line
Northern Trust numbers don't make for pretty reading, though the company's capital position seems strong enough. To combat rising expenses, the bank plans to cut 270 Irish jobs from Bank of Ireland's fund administration business.

However, the bank will need to come up with more effective ways to generate profits, too. For now, as the economy slowly recovers, low market interest rates will continue to weigh on Northern Trust's margins. For the time being, Fools should wait and watch this bank, rather than jumping in.