Northern Trust (NTRS)

Q3 2011 Earnings Call

October 19, 2011 12:00 pm ET


Michael G. O'grady - Chief Financial Officer and Executive Vice President

Beverly J. Fleming - Senior Vice President and Director of Investor Relations

William Lind Morrison - President and Chief Operating Officer


Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

John Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division



Good day, everyone, and welcome to the Northern Trust Corporation Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to the Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Beverly J. Fleming

Thank you, Cindy. Welcome to Northern Trust Corporation's Third Quarter 2011 Earnings Conference Call. Joining me on our call this morning are Bill Morrison, Northern Trust President and Chief Operating Officer; Mike O'grady, Chief Financial Officer; Aileen Blake, Controller; and Allison Quaintance from our Investor Relations team.

For those of you who did not receive our third quarter earnings press release or financial trends report via e-mail this morning, they are both available on our website at In addition, this October 19 call is being webcast live on The only authorized rebroadcast of this call is the replay that will be available through November 16. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements, because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2010 annual report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results.

Thank you again for joining us today. Let me turn the call over to Bill Morrison.

William Lind Morrison

Thank you, Bev, and good morning, everyone. It's my pleasure this morning to introduce Northern Trust's new Chief Financial Officer, Mike O'grady. As we mentioned last quarter's conference call, Mike joined Northern Trust in mid August and assumed to CFO role on October 1, at which time I became President and Chief Operating Officer. Mike and I have worked together closely over the last 2 months, and his familiarity with Northern Trust is well in evidence. He's been a terrific addition to our leadership team, and I know you'll enjoy working with him in the years to come.

Before Mike reviews our third quarter performance, let me set the stage with a few themes that continue to be quite relevant to our performance this year. First, the challenging global economic environment continues to impact our results. Very low interest rates, difficult equity markets and a weak global economy have dampened our results and seem likely to persist. Second, though our profitability has been adversely impacted by these conditions, we continue to invest in our businesses for the future and in support of new and existing clients.

Against this backdrop of macroeconomic headwinds, we continue to focus even more aggressively on driving improved financial performance, returns and efficiencies. As Rick Waddell and I have previously mentioned, we'll discuss actions to position the company for better near-term performance and continued long-term success in our January earnings conference call.

The third theme is a positive one. Despite the environment, Northern Trust continues to win in the marketplace at a healthy and in some instances, a record pace. I'll provide some specifics on our new business success in my closing comments, but I'd ask you to please keep these 3 themes in mind as Mike discusses our third quarter results. Mike?

Michael G. O'grady

Thank you, Bill, and good morning, everyone. Let me join Bill in welcoming you to Northern Trust Third Quarter 2011 Earnings Conference Call. It's been a very busy and rewarding 2 months, and I'm delighted to be a member of the Northern Trust team. I look forward to meeting many of you in the coming months.

Earlier this morning, Northern Trust announced third quarter net income of $170 million, an increase of 10% over last year and 12% over last quarter. Earnings per share were $0.70, which is 9% better than the $0.64 last year and 13% better than the $0.62 last quarter.

Before getting into the details, let me make some summary comments regarding the third quarter. Despite the environment, we continue to grow revenues. There are several factors behind this. New business was strong as we continued to add both personal and institutional clients and assets. The acquisitions of Bank of Ireland Securities Services, which closed last quarter and the Omnium hedge fund administration business, which closed this quarter, also contributed to our revenue growth, adding $33 million in revenue in the quarter. Given that these acquisitions had an equal level of expense, there is no impact on the bottom line. Both acquisitions provide us with attractive clients as well as new capabilities that will drive future new business.

The equity markets were weak in the third quarter, generally dampening our market-based fees: the S&P 500 down 14% sequentially and the EAFE down 16%. As you recall, some of our custody and wealth management fees are calculated based on a one-quarter lag methodology. Given that markets were essentially flat in the second quarter, these fees were less impacted. Our PFS regions use a one-month lag methodology, and on that basis, equity markets were down 5% on a sequential quarter basis in the third quarter.

Low short-term interest rates coupled with persistent narrow spreads at the short end of the yield curve continue to negatively impact net interest income and money market mutual fund fees. For example, overnight interest rates in the U.S. averaged only 8 basis points in the third quarter, down from an already low 9 basis points in the second quarter. And 3-month LIBOR averaged 30 basis points, still very low by historical standards. Short-term interest rates for the sterling and the euro also remained low. As a result, net interest margin was stable but remains under pressure, and money market fee waivers were $29 million in the third quarter compared to $23 million in the second quarter and $13 million one year ago.

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