Company Reports

Wide-moat-rated Northern Trust reported a mixed start to 2024. First-quarter revenue of $1.65 billion missed the FactSet consensus estimate of $1.78 billion, but it is unclear to us how much of the consensus estimate captured the firm's securities losses related to repositioning during the period, which totaled $189 million. The company's GAAP EPS of $0.96 was in line with the consensus, while adjusted EPS excluding the repositioning was by our calculations $1.59, well above the FactSet consensus estimate of $1.45. Net interest income bounced back in the first quarter, but management is expecting a 3%-5% sequential decline, which likely disappointed investors (judging by the share price action on April 16). As we incorporate Northern Trust's latest results, we expect to maintain our $90 per share fair value estimate.

Northern Trust consists of two moaty segments: wealth management and a custody business known asset servicing (previously corporate and institutional services or C&IS). Both segments are supported by the firm’s asset-management capabilities.

Northern Trust consists of two moaty segments: wealth management and a custody business known asset servicing (previously corporate and institutional services or C&IS). Both segments are supported by the firm’s asset-management capabilities.

Wide-moat-rated Northern Trust reported OK core fourth-quarter results, in our view. Revenue of $1.56 billion missed the FactSet consensus estimate of $1.71 billion; however, excluding the $176 million loss from balance sheet repositioning, revenue would have been $1.74 billion. Overall, there was little in the firm’s fourth-quarter earnings release that would alter our long-term view of the firm, and we will maintain our $86 fair value estimate.

Wide-moat Northern Trust reported a mostly in-line third quarter. Revenue of $1.74 billion and EPS of $1.49 were roughly consistent with the FactSet estimates of $1.74 billion and $1.50. Net interest income continues to decline and offers limited visibility, a factor weighing on the stock. Still, we think investors should not overreact to a volatile revenue item; we believe the firm’s wealth-management franchise continues to hold up. As a result, we are maintaining our $86 fair value estimate and believe the shares are attractive.

The custody banks have gotten visibly cheaper in recent years, but we think investors need to be discerning. At the onset of COVID-19, lower interest rates weighed heavily on the banks' net interest income, or NII, and resulted in hefty money market fee waivers. However, higher interest rates were not the panacea many investors hoped for. The custody banks' asset-manager and asset-owner clients tend to be sophisticated, a fact that State Street mentioned multiple times on its most recent earnings call. While money market fee waivers have been eliminated, deposit betas over 100% for State Street and BNY Mellon have meant that these firms have had to rapidly increase the interest they pay on the deposits of these sophisticated clients. In addition, the inflationary environment has had a negative impact on expense growth, particularly at Northern Trust.

Northern Trust consists of two moaty segments: wealth management and a custody business known asset servicing (previously corporate and institutional services or C&IS). Both segments are supported by the firm’s asset-management capabilities.

Northern Trust reported a decent second quarter. Revenue of $1.77 billion was in line with the FactSet consensus estimate. EPS 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 net interest income in the third quarter, a result that is not as bad as the market feared following peer State Street’s results. We will maintain our wide moat rating and $86 fair value estimate for Northern Trust.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

Northern Trust consists of two moaty segments: wealth management and a custody business known asset servicing (previously corporate and institutional services, or C&IS). Both segments are supported by the firm’s asset-management capabilities.

Northern Trust reported an okay start to the year. Revenue of $1.76 billion and EPS of $1.51 was slightly below the FactSet consensus estimates of $1.78 billion and $1.52, respectively. However, net interest income fell sequentially which we think disappointed investors. Average interest-bearing deposits fell 2% sequentially and 9% from the year-ago period and the average non-interest-bearing deposit fell 9% sequentially and 46% from the year-ago period which resulted in average deposits declining 4% sequentially and 19% from the year-ago period to $112.2 billion. Looking ahead, Northern Trust sees deposits averaging about $110 billion in April thus far and expects an incremental decline after tax season. As we trim our net interest income forecasts, we expect to lower our fair value estimate on Northern Trust’s shares by a single-digit percentage.

Northern Trust consists of two moaty segments: wealth management and a custody business known asset servicing (previously corporate and institutional services, or C&IS). Both segments are supported by the firm’s asset-management capabilities.

Northern Trust reported a mixed end to 2022. Revenue of $1.53 billion for the fourth quarter missed the FactSet consensus estimate of $1.75 billion, although revenue would have been in line excluding a $0.21 billion loss on available-for-sale securities. As interest rates rose, we saw similar securities repositioning at peer BNY Mellon. Excluding charges, earnings per share would have been $1.65, below the FactSet consensus estimate of $1.81. Expenses were $1.32 billion, up 13%. Even excluding some elevated severance and occupancy charges, expenses were still up 9% by our calculations. As we temper our operating income forecasts, we expect to lower our fair value estimate for wide-moat Northern Trust by 5%-15%.

Northern Trust consists of two moaty segments: wealth management and a custody business known as corporate and institutional services. Both segments are supported by the firm’s asset-management capabilities.

Northern Trust reported a mediocre third quarter. Northern Trust reported revenue of $1.77 billion and EPS of $1.80 which compares with the FactSet consensus of $1.77 billion and $1.84, respectively. Despite the benefit of higher rates, expense growth of 9% and market-related revenue headwinds meant that the firm saw its pre-tax margin decline to 30.4% from 31.0%. We will maintain our wide moat rating but expect to reduce our $108 fair value estimate on Northern Trust's shares by 5% to 15%. While we regard the firm's shares as undervalued, we believe peers State Street and BNY Mellon have a more compelling valuation.

Wide-moat-rated Northern Trust had a mixed second quarter. Revenue of $1.78 billion was roughly in line with the FactSet consensus of $1.76 billion while EPS of $1.86 was a bit below the consensus estimate of $1.93 amid a higher tax rate. On the positive side, higher interest rates drove a 21% increase in interest income with the firm’s net interest margin expanding to 1.35% from 1.05% in the prior year and 0.97% in the year-ago period. On the negative side, lower equity and fixed-income markets weighed on asset-based fees, and average deposits declined 7% amid quantitative tightening. We will maintain our $108 fair value estimate.

Many investment service firms (wealth managers, retail brokerages, custody banks, and asset managers) have material exposure to interest rates. Clients at wealth management firms and retail brokerages typically have 5%-20% of their account balance in cash that the financial institution sweeps into a bank subsidiary. The deposits are then used to make loans or invest in fixed-income securities. They may also earn asset management or distribution fees on client assets in money market funds.

We went into this year’s Federal Reserve bank stress tests expecting a bit more pressure on stress capital buffers as multiple banks had warned in the preceding quarter that their SCB was likely to increase. This is indeed what played out, as we estimate that roughly seven of the 20 U.S. banks we cover that participated this year are likely to see a higher SCB once the assigned SCBs become official. It appears that JPMorgan, Bank of America, and Citigroup are all likely to see increases to their SCBs of close to 1% each. The biggest increase seems likely to come from M&T Bank, which we expect to increase close to 2.2%, going from 2.5% to roughly 4.7%. Meanwhile, we expect the SCB for 11 of the 20 U.S. banks we cover to remain stable, including for Wells Fargo, which had previously warned that their SCB could go up, so this is a slight positive surprise for the bank in our view. Finally, we think Goldman Sachs could see a slight decrease to its current SCB of 6.2%, potentially declining to 6%, while Discover could see a more material decline, going from 3.6% to 2.5%.

Northern Trust consists of two moaty segments: wealth management and a custody business known as corporate and institutional services. Both segments are supported by the firm’s asset-management capabilities.

Wide-moat-rated Northern Trust started 2022 with healthy results. First-quarter revenue of $1.73 billion and EPS of $1.77 beat the FactSet consensus of $1.69 billion and $1.65, respectively. On the positive side, higher interest rates will help increase interest income and reduce money market fee waivers. On the negative side, lower equity markets will weigh on asset-based fees in future quarters. We will maintain our $107 fair value estimate.