Bank stocks aren't doing well these days. All it took was a "little" mortgage meltdown and suddenly the entire industry is on shaky ground. Washington Mutual (Nasdaq:WM) recently announced that it would lose $1.1 billion in the first quarter of 2008 due to its customer's inability to make their mortgage payments. Further, it will set aside $3.5 billion to cover those bad loans, which is 1.4% of the total value of mortgages outstanding. It seems like a small number until you consider that there are other banks in the exact same position.
The question to answer at this stage is just how deep this crisis will cut before the punishment ends. That's no easy task. In the meantime, financial stocks continue to have a rough go of it. In the last twelve month's the SPDR Financial Sector ETF (AMEX:XLF) is down 28% and almost 14% year-to-date. It appears potential investment candidates in the banking sector are slim to none, right?
Not So Fast
If you listen closely, you can hear the beating heart of a champion. I speak of Northern Trust (Nasdaq:NTRS), who has been providing financial services to wealthy individuals and corporations for over a century. This Chicago-based bank has a history dating back to 1891, and a profitable one at that. Today, it has assets under its custody of $4 trillion, with $2 billion of it held outside the United States. In addition, it has a loan portfolio of $26.8 billion and directly manages $780 billion in assets. In 2006, it was the 33rd biggest bank in the U.S. in terms of assets. There's more.
Music To Your Ears
Northern Trust's first-quarter earnings report was a strong one. It had a one-time gain of $153.5 million due to a mandatory sale of Visa (NYSE:V) stock from the credit card company's IPO. As a result, any numbers I mention exclude this gain unless noted otherwise. Total revenue was $978.1 million, up 19% from 2006 and operating earnings were $231.7 million, up 24.1% from 2006. Total assets under custody grew 6%, global assets an even healthier 12%, and assets under administration grew by 3%. Net interest and non-interest income both grew more than 16% year-over-year.
In the quarter, the company made a $20 million provision for credit losses on its commercial mortgage portfolio due to a weak market. When you consider it has almost $27 billion in mortgages and loans, the amount is insignificant. That's as bad as the news gets for shareholders. It was the 13th consecutive quarter of double-digit operating earnings per share growth. Nonperforming assets were 0.12% of all the outstanding loans, much less than the Top 20 bank average of 0.87%. It was a good three months. (To learn how to decipher these confusing documents, read Analyzing A Bank's Financial Statements.)
Is The Price Right?
Beauty is in the eye of the beholder. In 2007, the company repurchased over 900,000 shares of its stock at an average price of $70.22. That's almost $2 more than its price at the time. Either management feels the stock is undervalued or they had nothing better to do with the profits. In my opinion, the first statement is likely more accurate. Year-to-date the stock is down 10%, which is in stark contrast to its annual return of 13% since 2002. Something has to give.
In the past 10 years, Northern Trust increased operating earnings and revenue at a compound annual growth rate of 10%. Amazingly, so did its stock. What do the next 10 years hold? Given the company is growing internationally, combined with the fact 50% of millionaires in America live within a 45-minute drive of one of its offices, I believe it's ideally situated to at least duplicate the results of the last 10 years. You can take this to the bank.