Northern Trust misses estimate, stock plummets

person passing by Northern Trust
a businessman passing by Northern Trust bank

By Yifang(Evonne) Liu

Northern Trust Corp. stock dropped 4.7 percent after the company reported fourth-quarter net income of $1.11 per diluted share, compared with 99 cents in the prior year, missing analysts’ estimate of $1.13 compiled by Bloomberg.

Net income was $266.5 million, up 11 percent compared with $239.3 million in the prior-year quarter and up 3 percent compared with $257.6 million in the September quarter.

front gate of Northern Trust Bank
Northern Trust Corp. entrance on Monroe Street.

Chicago-based Northern Trust operates as a financial holding company that provides asset servicing, fund administration, asset management, fiduciary and banking solutions for corporations, institutions, families and individuals worldwide.

“Northern Trust’s revenue, which is driven by fees paid by their sticky clientele, is more stable than that of banks exposed to more cyclical businesses like trading or mortgage banking,” wrote Greggory Warren, senior equity analyst of Morningstar Inc. in his research note.

Revenue in the fourth quarter was $1.25 billion, up 7 percent compared with $1.22 billion last year.

The growth was mainly driven by stronger net interest income and increasing financial servicing fees, partially offset by higher operating expenses.

Net interest income grew 11 percent to $329.3 million.

“Net interest income outperformed and beat expectations with help from higher short-term rates, lower premium amortization and larger balance sheet,” wrote Ken Usdin, equity analyst at Jefferies LLC in his research note.

Increasing operating expenses is a great concern of analysts.

“Core revenues tracked modestly below our estimates while operating expenses came in above expectations,” said Gerard Cassidy, senior analyst at RBC Capital, in an email interview.

Non-interest expense in the fourth quarter was $873.9 million, up 6 percent year-over-year and up 4 percent compared with the September quarter.

“It’s a great disappointment to see a consecutive high expense this quarter that the bank is not able to cut off enough on their expenses,” said Marty Mosby, director of banking and equity strategies at Vining Sparks IBG, in a phone interview. “2017 will really be a big year when interest rates will move higher and there will also be some regulatory relief and hopefully we get some improvements in overall corporate tax rates. Those are factors that will drive the momentum and banks can benefit from those changes and overall operating environment,” he added.

Revenue from trust, investment and other servicing fees increased 6 percent year-over-year to $794.4 million, primarily due to new business and favorable equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates, according to the company’s press release.

“The currency shouldn’t disrupt the momentum they have and rising interest rates environment has a stronger impact on the market than the currency changes have,” Mosby said.

For the year 2016, the company reported net income of $1.03 billion, or $4.32 per diluted share, compared with $973.8 million, or $3.99 per diluted share in 2015.

Revenue was $4.99 billion, up 5 percent from $4.73 billion in 2015.

Return on average common equity improved to 11.9 percent in 2016 from 11.5 percent in 2015.

Photo at top: The main entrance of Northern Trust Corp. on LaSalle Street in Chicago. (Yifang (Evonne) Liu/MEDILL)