Decline in Securities Lending Impacts Fees at Northern Trust in Q3

Third quarter securities lending revenue at Northern Trust decreased 27% compared to the prior quarter.

The decrease reflects lower spreads, primarily due to the international dividend season that occurred in the prior quarter, says Northern Trust. Year on year, securities lending revenue decreased 5%, primarily reflecting lower spreads in the current quarter, partially offset by higher volumes.

Net income was $206.5 million in the third quarter, an increase of 15% from $178.8 million in the prior year third quarter, and up 8% from $191.1 million in the prior quarter. Consolidated revenue of $1.05 billion in the third quarter was up $74.7 million, or 8%, from $972.5 million in the prior year quarter.

Northern Trust’s Corporate & Institutional Services (C&IS) fees fell 1% to $360 million in the third quarter of 2013, driven by the 27% quarter on quarter decline in securities lending offset by a 2% increase in custody fees to $239 million, driven by new business.

Foreign exchange trading income totaled $62.8 million, up $18.8 million, or 43%,
compared with $44.0 million in the prior year quarter. Bernstein Research says FX were both better than it expected, partially offset by higher-than-anticipated money market fee waivers.

Bernstein Research adjusted its EPS estimate to $3.45, up from $3.35. “Our revised 2014 estimate now includes the impact of the ATP and Bridgewater mandates, as well as higher than previously modeled client assets,” it says. The Bridgewater fund administration mandate was awarded in January this year, while the ATP mandate was awarded in April. Net income was $206.5 million in the current quarter, an increase of 15% from $178.8 million in the prior year third quarter, and up 8% from $191.1 million in the prior quarter. Core revenues declined 1% quarter on quarter and were up 4% year on year to $1.02 billion.

Client assets were up 5% quarter on quarter. Total custody assets rose 5% to $5,237 billion, driven by favorable equity market levels, partially offset by flattish fixed income market levels. C&IS custody assets rose 5% sequentially to $4,767 billion, reflecting favorable equity markets and currency translation, as well as new business.

Securities lending collateral rose 7% quarter-on-quarter to $105 billion, but management commented that demand remains depressed.

Looking forward, Bernstein Research, says it is adding the new Bridgewater and ATP mandates into its numbers. ATP’s (the largest pension fund in Denmark) mandate is for $106 billion in assets, which Bernstein is modeling to come on-line in fourth quarter of 2013 at a fee rate equal to Northern Trust’s current average. Bridgewater’s mandate is for $125 billion, which Bernstein includes starting in the second quarter of 2014 at an assumed fee rate of 5 bps. Bridgewater’s assets will not go into AUC, and rather will be counted as AUA (which the company does not disclose).

Net interest income rose 7% quarter on quarter to $245 million, driven by a 3% sequential increase in earning assets and a 4 basis point increase in net interest margin, to 1.14%. These trends were driven largely by lower premium amortization in the MBS portfolio, reflecting slower prepayment speed assumptions.