After reporting a larger-than-expected third-quarter loss, Northern Trust Corp. said it is considering applying for a capital infusion from the Treasury Department.
Steven L. Fradkin, an executive vice president at the Chicago company and its chief financial officer, said during its earnings call Wednesday that it will probably submit an application for a capital infusion before the mid-November deadline, though he called its Tier 1 capital ratio of 9.2% as of Sept. 30 "well ahead" of the 6% minimum a financial institution needs to be considered well capitalized.
Northern Trust took its first quarterly loss since the fourth quarter of 1987. "This environment has provided formidable challenges for all sorts of businesses in the financial services industry and beyond, and Northern Trust is not immune to this," Mr. Fradkin said. "We want to navigate through these challenges … as we move beyond this period."
Analysts said other custody banks, including State Street Corp. and Bank of New York Mellon Corp., have also maintained strong capital positions, but both State Street and Bank of New York Mellon are participating in the Treasury's capital program. Bank of New York Mellon said last week that its Tier 1 capital ratio was 9.33% at Sept. 30, and this week it announced it would receive a $3 billion equity investment from the Treasury in the fourth quarter.
Mr. Fradkin said capital from the Treasury could help Northern Trust bolster its capital base. "We think it is an attractive program," he said. "In terms of some of other normal sources of capital they are, shall we say, limited. … We like the position we are in. … In this environment, having a very strong capital position is a good thing."
Northern Trust swung to a net loss of $129.4 million, or 58 cents a share, from a profit of $208.3 million, or 93 cents a share, in last year's third quarter.
The results included some charges Northern Trust announced last month to support its money market funds. It took charges of $1.46 a share to increase capital support for its money funds and to pay back investors who lost money in a securities lending program.
Revenue rose 5.2%, to $938.5 million, as Northern Trust earned 54% more from foreign exchange trading income. Fee-related income, which makes up nearly three-quarters of its revenue, rose 2%, to $672.8 million, from a year earlier but fell 14% from the second quarter.
Northern Trust's underlying asset management and asset custody businesses "remain sound," Mr. Fradkin said.
"We plan to continue to focus on the businesses that we know well," he said. "We believe that they have good long-term demographics."
Analysts polled by Thomson Reuters expected a net loss of 43 cents on revenue of $946 million.
Loan-loss provisions quadrupled from a year earlier and more than doubled from the second quarter, to $25 million. Nonperforming loans doubled from a year earlier while net chargeoffs were 0.01%, down from 0.03% a year earlier and 0.07% in the second quarter.
The company's institutional assets under custody fell 15%, to $3.2 trillion, and assets under management fell 17%, to $511.4 billion. Global asset under custody fell 15%, to $1.7 trillion. Assets under custody in the personal financial services business fell 5%, to $314.2 billion, and assets under management in that business fell 4%, to $141 billion.
Mr. Fradkin said the decline reflects difficult market conditions; the Standard & Poor's 500 index is down 24% over the past 12 months. He said that despite — or because of — those conditions there is more "money in motion" and Northern Trust's personal financial services business is generating "strong" new business, "but not enough to offset the weak market conditions."
He said the new business that Northern Trust has managed to attract likely shows a "flight to quality" — investors looking to work with more established wealth management providers as economic conditions remain rocky and consolidation continues in the financial services sector.
"We like our position in the personal financial services business," Mr. Fradkin said. "We have always competed well against the money-center banks. … In the world of big, big is getting very much bigger and that will be an advantage for our PFS business."
Northern Trust's noninterest expenses rose 98%, to $1.12 billion, but that included a previously disclosed charge of $561.5 million related to client support. Without that, noninterest expenses would have declined 1%, to $562.5 million, from a year earlier.
Compensation and employee benefit expenses fell 11%, to $282.7 million, but the full-time staff grew 14%, to 12,100, from a year earlier.
Mr. Fradkin said the company will carefully monitor its expenses the rest of this year and into 2009.
"We have to be very judicious about human capital growth," he said.
