Northern Trust Earnings: Net Interest Income Not as Bad as Feared, and Some Expense Improvement

Northern Trust Stock at a Glance

• Fair Value Estimate: $86.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide

Northern Trust Earnings Update

Northern Trust NTRS reported a decent second quarter. Revenue of $1.77 billion was in line with the FactSet consensus estimate. Earnings per share of $1.56 missed the consensus estimate of $1.61, but we note that severance-related charges and an investment write-off were a $0.23 drag in the quarter.

Net interest income was down 4% sequentially, driven by a decrease in both net interest margin and average assets. Deposit gathering continues to be competitive; non-interest-bearing deposits averaged 16.6% in the second quarter, down from 18.0% in the first quarter and 26.1% in the year-ago period. Northern Trust expects a 5% decline in NII in the third quarter, which is not as bad as the market feared following the results from peer State Street STT. We maintain our wide moat rating and $86 fair value estimate for Northern Trust.

Asset servicing fee revenue was up 3% sequentially but down 3% from the year-ago period, which was roughly in line with average assets under custody or administration growth of 3% sequentially and a 2% decline from the year-ago period. Wealth management fee revenue was up 3% sequentially, in line with growth in average assets under management.

Expense control continues to be a focus. Expenses in the quarter were $1.33 billion, up 4% sequentially and 9% from the year-ago period. Adjusted expenses were $1.27 billion, down 1% sequentially and up 5% from the year-ago period. The adjusted expenses/trust fees ratio was 115% by our calculations, down from 120% in the first quarter but up from 105% in the year-ago quarter (lower is better). Northern Trust expects further improvement, though we believe its goal of 105%-110% may prove difficult to achieve in the near term as inflation persists.