With banks' loan revenues sagging, some investors are turning their attention once again to banks that can count on a steady stream of fee income.
A good case in point is Northern Trust Corp., Chicago.
When many of the other bank stocks were surging this year, Northern Trust's shares lagged behind -- partly because it had sidestepped lending problems. So after the industry's loan woes peaked, then receded, Northern wasn't able suddenly to boost profit by cutting loss provisions.
Trust Banks' 'Disability'
Because they had less ability to "pop" their earnings after credit problems peaked, trust banks like Northern Trust, State Street Boston Corp., and Wilmington Trust Co. in Delaware were kept off the investment action lists of analysts during the past year.
But in May, analysts started cautioning that such leverage from lower provisions would not last forever.
Since then, Northern's fee-based income has started to look better. The company's stock has outperformed the industry since early May, rising 12% versus a 9% increase in the American Banker stock index.
More Reliable Profit Growth
Northern Trust's "emphasis on noncredit-related, fee-based businesses has and will continue to produce quality earnings growth at a rate both faster and more consistent than the typical bank," said Susan L. Roth, a bank analyst at Montgomery Securities, San Francisco.
Last week, Ms. Roth raised her earnings estimates for Northern Trust to $3.90, from $3.80 a share, for this year and to $4.45, from $4.35, for 1993.
Those estimates amount to year-over-year earnings growth of 14.4% in 1992 and 14.1% in 1993, she said. This will be "driven primarily by sustained growth in the trust and investment management business."
At Northern Trust, loans comprise 48% of average assets, as compared with 67% for banks generally, Ms. Roth said.
The fresh enthusiasm for Northern Trust's stock is occurring despite the fact that it was among the few banks in the country at midyear to post a second-quarter decline in net interest margin. The margin slipped 21 basis points, to 2.89%.
"This is a function of the bank's large base of noninterest-bearing demand deposits, which naturally are less profitable in a low interest rate environment," said Kenneth F. Puglisi, a bank analyst at Chicago Corp.
Double-Digit Fee Growth
Far overshadowing that, however; trust revenues grew at an impressive 22% rate, he said. The rate of growth in cash-management fees was nearly as good, at 18%. Such fees are helped by lower rates, which reduce earnings allowances for collected deposit balances.
The double-digit gain in trust fees was assisted by Northern's first-quarter acquisition of $4 billion of trust assets from Trust Services of America. But analyst Robert B. Albertson of Goldman, Sachs & Co. noted that, even excluding that deal, such fees grew 14% in the second quarter versus the same period of 1991.
Northern Trust does have some leverage available. Decreasing losses at small California and Texas subsidiary banks may allow provisions to be cut.
But Ms. Roth of Montgomery Securities said she sees that potential leverage "as a cushion" rather than as a means of boosting earnings.