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Morningstar | A Lot of Noise Present in 3Q Results for Northern Trust; Underlying Operations Appear Fine

Wide-moat Northern Trust reported decent third-quarter results that were well within our expectations for the firm. We have felt since the start of the year that share prices for Northern Trust had likely run a bit ahead of their intrinsic value, and the current decline in price was not entirely unexpected to us. We note that after this decline, shares are now looking fairly valued, trading in line with our maintained fair value estimate of $95 per share. This is 2.4 times book value as of September and 13.1 times our 2019 earnings estimate.

Northern Trust reported a return on average common equity of 15.1%, down from the 16.5% level we saw last quarter. Results had several onetime events, including an $8.1 million investment impairment and a $2.7 million charge related to severance and restructuring. Backing out all onetime charges, the return on equity would have been closer to the 16% we saw in previous quarters this year. We note that these are still exceptional results, ahead of what management previously expecting as a normalized return on equity range of 10%-15%. We also note that a number of other items that negatively affected this quarter’s results, such as currency movements and overall activity levels, can vary from quarter to quarter and aren’t necessarily a great indication of the strength of the underlying business.

Year-over-year growth for assets under custody/administration and assets under management were 12% and 4%, respectively. Assets under management levels for asset managers have generally been under more pressure lately as withdrawals and risk-off sentiment has entered the market, and we generally view these results as decent for Northern Trust given that context. Trust, investment, and other servicing fees were up 8% year over year, although noninterest income in total was down slightly quarter over quarter. Overall, core wealth management fees continue to increase at a healthy pace, even as Northern Trust faced some slight headwinds within the CI&S segment. Net interest income also generally stalled out during the quarter, after an exceptional second quarter. We note that Northern Trust has been swapping some of its net interest income for increased foreign exchange trading fees, therefore some of this lack of growth was offset by the growth within foreign exchange trading income. We were again pleased with the expense control, with total noninterest expenses up only 1% quarter over quarter and the ratio of noninterest expenses to trust and investment fees remaining roughly stable at 107%. We still expect efficiency gains from the bank’s current initiatives to help bring this ratio down a few more percentage points over time.