Investment Thesis
Northern Trust (NASDAQ:NTRS) continues to be a financial stalwart and delivers consistent earnings and dividends for shareholders. I view this bank as incredibly stable and resilient even during economic shocks, as people still use their services consistently. With continuous awards for excellent customer service and a steadily growing AUM, this bank has a good record and trades at a fair price, leading me to rate shares as a hold for now.
Company Overview
Northern Trust is a bank that is a "leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals" according to the annual report. The company primarily does business through asset servicing and wealth management, and has successfully grown its business serving "the world's leading corporations" according to their website.
Asset servicing refers to "custody; fund administration; investment operations outsourcing; investment management" and other back-office type operations. They serve clients from pension funds, investment funds, and foundations with their asset servicing solutions. In essence they handle most of the behind the scenes back-office operations to help their clients run their businesses smoothly with peace of mind.
Wealth management refers to "trust, investment management, custody, and philanthropic services; financial consulting" and other investment consulting for high net-worth people and families. Northern Trust's wealth management segment has a significant AUM, of $402.5 billion as of December 31, 2023 according to the annual report. Overall, Northern Trust as an entire company has AUM of $1.4 trillion according to their website, demonstrating their leadership in the financial industry.
I see Northern Trust as a stalwart with growing presence with a lengthy track record of building trust with their clients. Many of their services seem to be sticky as the AUM seems to grow steadily through the ups and downs of the economy. Asset servicing and wealth management in my opinion have services that are hard to switch from due to the constant dependence on quality service customers are looking for. Thus, I think Northern Trust benefits from sticky clients that depend on Northern Trust for timely advice and service that helps them do better business.
A Steady, Consistent Earner
Q1 2024 earnings were announced on April 16, 2024. The quick summary according to the transcript,
This morning, we reported first-quarter net income of $215 million, earnings per share of $0.96, and our return on average common equity was 7.3%.
See AlsoCarleigh Dunn on LinkedIn: #compassion #empathy #leadership #connection #leaders #challenges3 Dangerous Stocks You Should Sell ASAP in JuneImmuron CEO, Steven Lydeamore to present at the Emerging Growth ConferenceActive listening: building trust and trust | Carleigh Dunn posted on the topic | LinkedInExcluding notable items in all periods, revenue was up 6% on a sequential quarter basis and 5% on a year-over-year basis.
Net interest income on an FTE basis was $535 million, up 7% sequentially and down 2% from a year ago.
Overall, the earnings report shows me the consistent steadiness of the business and leads me to believe many of the services Northern Trust provides are sticky, meaning clients find it hard to switch away from. Their assets under custody and management continue to grow steadily as the reputation and trust helps the company attract more business. Management also attributes an increase in assets under custody and administration from "strong underlying equity markets and new business activities" in their earnings transcript.
Capital adequacy ratios continue to remain strong, with CET1 ratio at over 11% as of Q1 earnings. In order to maintain their leadership position as a trusted name in financial services, I think investors and clients need to see a strong financial strength which Northern Trust evidently has. I believe the company will continue to exhibit solid capital adequacy due to their consistent earnings and trustworthy position which allows them to keep and attract business.
Higher interest rates seems to be mixed for Northern Trust in terms of increasing deposits, but decreasing net interest income. According to the transcript,
Moving to Page 7, and our balance sheet and net interest income trends. Our average balance sheet increased 6% on a linked quarter basis, primarily due to higher deposit levels.
Our net interest income is highly sensitive to deposit levels and will continue to be driven largely by client deposit behavior. Assuming a stable rate environment, minimal incremental pricing pressure and some variability in deposit volume, we currently expect a 3% to 5% sequential decline in NII.
Despite increasing deposits as depositors are attracted to higher rates on their savings, Northern Trust may have some difficulty in managing their NIM going forward as they indicate a "decline in NII" assuming stable rates. My belief is that even if rates stay stable the NIM should remain around 1.5-1.6%, which shouldn't hurt profits that much. Therefore, investors shouldn't be too concerned about interest rate movements as the impact on NII seems to be minimal, with a slight decline at most in my opinion.
Overall, this quarter demonstrates the resilient financial strength of Northern Trust and highlights their increasing AUM as a continuous indicator of their reputation and trust in the industry. I expect this to continue as clients keep their money with Northern and the business continues to earn attractive profits. Return on average equity has risen from 4% to 7.3% quarter over quarter, showing profitability is improving and should return to historical levels of double-digits in my opinion. So, there's still some upside as management works out profitability and I believe shares are correctly pricing in continued improvement in the financials.
Generating New Business
Northern Trust has been focusing on generating new business to stimulate some growth, but the results have yet to be seen. According to their transcript,
As we've discussed, our goal is to generate new business that is scalable. This means, a greater proportion of new mandates that require lower levels of incremental costs.
I think that management's strategy of finding new business that is "scalable" is the right focus but it may be difficult for them to pull off. Competition in wealth management is intense, and many players from JPMorgan (JPM) to Goldman Sachs (GS) also have very reputable wealth management businesses as well. My take is that investors shouldn't overly depend on new growth, as it is very hard to attract new clients with so many options out there. Therefore, it is safe to assume in my opinion that revenues will remain flattish, with the potential of significant increases if Northern Trust succeeds in generating new business.
Currently, Northern Trust has launched an initiative called "Secrets of Enterprising Families" which is accompanied with nationwide events that is designed to attract new lead flow, according to the transcript. Other new business initiatives include expanding globally and focusing resources and talent into overseas markets like the UK. The strategy looks sound and reasonable, and I will look forward to see if the future fundamentals reflect this focus.
All in all, it can be hard for such a giant financial conglomerate to enter a new growth phase, as the company may have trouble finding new sources of revenue. In my view, investors should expect a possible mid-single digit growth from these initiatives but nothing more. This mature financial stalwart is dependable for its dividends, but growth may be elusive for now.
Valuation - $80 Fair Value
I think the consistency and steady earnings make this company fairly valued at current prices, because of its predictability. I find it hard to believe the market is mispricing this one, because the market recognizes the durability and strength of this bank. Thus, earnings seem appropriately priced at the current valuation.
Using earnings estimates from Seeking Alpha, I believe EPS can reach at least $8 per share within three years, due to the reputation and sticky services Northern Trust provides to its clients. Apply a roughly 10x earnings multiple to $8 gets me a fair value of around $80 per share, which is around the stock price today.
In general, I find it hard to believe a bank like this one will ever get mispriced in the future due to the steady track record, and it is fair to assume the future will look relatively similar to the past in my opinion. So, I doubt investors will receive above average returns with Northern Trust because everything is likely already priced in.
With a P/B ratio of 1.5x, Northern Trust already has the deserved premium to the sector median of 1.11x, so any future upside is probably limited. I expect the stock to perform in-line with the SP 500 and therefore rate shares neutrally. It may be difficult for growth to kick in as assets under management have reached what seems to me peak levels, and new business initiatives have yet to be proven successful.
Risks
Equity markets can be a double edged sword as a bear market can decrease the amount of asset servicing and assets under custody/management Northern Trust has. A sharp drop in the stock market may significantly hurt revenues as clients have less business to bring in for Northern Trust.
Competition in this arena is very fierce as asset servicing solutions are becoming more commoditized and automated in my opinion. The typical back-office in the future may be entirely AI-driven and technology may make it so high tech driven competitors can poach business from Northern Trust. Management must maintain a technological edge to make the business competitive among disruptive technology that may change how asset servicing is done in the future.
Banks like Northern Trust must be careful to manage liquidity and their loan book in case of a classic bank-run. Rising interest rates can continue to cause NIM to decline, so overall macroeconomic weakness can hurt banks particularly because they are so interconnected with the financial system.
Hold Northern Trust
The story here is more of the same, as the consistent track record continues to show Northern Trust is a reliable earner in today's markets. I like the reputation, assets under management, and expect a steady climb as management finds new ways to acquire new business. Shares seem to already reflect this, pricing in a steady EPS increase so I think investors should continue to hold shares in this financial stalwart.
Bargain Buyer
Amateur value investor seeking bargains in any market, with a specific focus on emerging markets. Admires great investors such as Li Lu and Peter Lynch, and am not afraid to go against the grain. Willing to buy any company at the right price, and is looking for low-risk and high uncertainty bets. My purpose is to share investment ideas and to clarify my own thinking. It is good to keep an investment journal to monitor past successes and learn from failures. This is a good way to keep a scorecard and to make my ideas public for all to judge. Primarily adopts an owner-mindset, and largely ignores macro-environment noise. I'm an investor, not an economist. Investors make money, economists make forecasts.Graduated from NYU Stern, with a Bachelors in Business and a Concentration in Finance.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
