Bucking a trend among trust banks that ended up in the doghouse after missing expectations, Northern Trust Corp.'s fourth-quarter profits more than doubled.
The Chicago provider of private banking, investment management, and global custody services said Wednesday that its net income increased 174% from a year earlier, to $342.3 million.
Analysts said the strong results could position Northern Trust to make an acquisition, though large deals have been rare for the company. "They could make a small deal to complement some of the product capability, but deals have always been few and far between for Northern, and they have always been small," Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, said.
Northern Trust made one acquisition last year, when it bought Lakepoint Investment Partners LLC, a Cleveland developer of portfolios made from large-cap growth stocks and investment-grade fixed-income securities. The deal was announced in June and closed in September.
Steven L. Fradkin, an executive vice president at Northern Trust and its chief financial officer, said during its earnings call that the Lakepoint acquisition was "well timed" and allowed his company to "bolster its position in Ohio."
Currently the "pipeline for acquisition opportunities is stronger than we typically see, and pricing has degraded a lot" Nevertheless, "we are a 120-year-old organic growth company that has really avoid large acquisitions," he said. "It is really status quo at Northern Trust, though the shopping list is longer. … I don't think we are going to change our stripes" on the acquisition front.
Looking ahead, Mr. Fradkin said Northern is "optimistic about its business model but guarded about the broader economic environment in the near term."
Analysts said trust and custody banks like Northern Trust, State Street Corp., and Bank of New York Mellon Financial Corp. were once considered impervious to a lot of problems that hampered commercial banks, because they avoided the subprime mortgage mess and did not rely on lending.
But Tuesday, State Street's stock sunk 59%, after the company reported that some off-balance-sheet conduits could force it to raise more capital, which would dilute the current shares. Bank of New York Mellon's stock fell 25%. The company moved up its earnings announcement by two days and reported late Tuesday that its fourth-quarter net income fell 88.3% from a year earlier, to $61 million, or 2 cents a share.
Northern Trust's results included a $30 million gain from the reversal of a third-quarter Visa Inc. settlement related to an escrow account. Revenue rose 18%, to $1.15 billion, boosted by a doubling of foreign exchange trading income, to $234.6 million.
Analysts on average had expected Northern Trust to report earnings of 92 cents a share on revenue of $968 million, according to Thomson Reuters.
Mr. Fradkin said, "Our track record of managing through stock market gyrations and … volatility has been extremely strong on average over time. Our results are a testament to our fund strategies and our strong positioning."
Mr. Fitzgibbon said that Northern Trust's strategy of maintaining the most conservative balance sheet of all the trust banks is finally paying off.
"It is really interesting because Northern used to always get beaten up by investors and analysts at their analyst days, because their securities portfolio had a lower yield than most of its competitors," he said. "People were upset because they felt Northern was leaving money on the table. Now, today, this conservative title is serving them well."
Northern's stock rose 23.5% by late afternoon Wednesday, to $54.24. Bank of New York Mellon's increased 15.3%, to $21.62, and State Street's rose 15%, to $17.13.
Mr. Fitzgibbon said Northern Trust is not "immune" from market conditions. Its loan-loss provision more than doubled from the third quarter, while nonperforming loans increased 63%. Net chargeoffs rose more than sixfold, to $15.8 million.
To raise capital, Northern Trust announced in November that it would sell $1.5 billion of preferred stock and warrants to the federal government. Last month it announced plans to eliminate 450 positions, or roughly 4% of its work force, to cut costs.
"This market will have ripple effects, but Northern has been conservative and positioned itself as the best capitalized of the trust institutions," Mr. Fitzgibbon said.
Analysts said they expect Bank of New York Mellon to be more acquisitive than Northern Trust or State Street in the next couple years. "Bob Kelly [Bank of New York Mellon's chairman and chief executive officer] has said in the past that there are acquisition opportunities, and he wants to be opportunistic," Mr. Fitzgibbon said. "He has lots of experience in completing deals both at Bank of New York Mellon and during his time at Wachovia."
According to analysts, Bank of New York Mellon moved up its earnings announcement after its stock price fell Tuesday. "There was a lot of concern yesterday when the stock fell and Bank of New York Mellon and they felt like they have a good quarter and they wanted to get news out to the marketplace as quickly as possible," said Mr. Fitzgibbon, who upgraded Bank of New York Mellon's stock to "buy," from "hold."
Northern Trust's assets under custody fell 27.3% from a year earlier, to $3 trillion, and assets under management fell 24%, to $575.5 billion. Mr. Fradkin said it had strong growth in its personal financial services business, despite difficult market conditions. Assets under management in the personal financial services business fell 11%, to $132.4 billion.
"We have seen a steady improvement in PFS for several years, and clearly 2008 was a banner year," Mr. Fradkin said. "We definitely benefited from dislocations in the market and challenges that others experienced. Our product set, our credibility, our stability, and our investment performance on a relative basis were strong. We want to capitalize on the position we have and grow our business."
