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Morningstar | Northern Trust Reports a Solid 2Q; Expense Management Impresses

Wide-moat Northern Trust reported solid second-quarter results in a challenging environment. Total revenue came in at $1.51 billion, up 2% from the first quarter and flat year over year. The year-over-year comparison was weighed by foreign exchange trading income, which was weak as a result of subdued currency volatility. Northern Trust continues to manage expenses well, and excluding severance items, noninterest expenses were down 1% sequentially and up 1% year over year (about 2% excluding foreign exchange). Net income finished the quarter flat, and EPS increased 4% due to lower share count. The firm’s return on equity for was 15.9%, in between last quarter’s 14.0% and 16.5% in second-quarter 2018. Overall, nothing in the quarter materially alters our long-term view of the company, but after updating our model, we are raising our fair value estimate to $91 from $87.

Digging deeper into noninterest income, Northern Trust’s trust, investment, and other service fees were up 3% sequentially and 1% year over year. By segment, custody and institutional services’ trust, investment, and other servicing fees were down 1%, driven by weak securities lending revenue. Custody and fund administration fee revenue was up 2%. On the wealth management side, fee revenue was up 4%, with the firm’s East Coast market and global family office outperforming. Overall, markets continue to be a tailwind, with firmwide assets under custody/administration up 6% and assets under management up 3%.

Unlike peers BNY Mellon and State Street, Northern Trust did not see meaningful declines in net interest income, which was down just 1% sequentially and up 1% year over year as NIMs expanded to 1.61% from 1.48% a year ago though this was mostly offset by an 8% decline in average earning assets. Management expects third-quarter net interest income to see a 2% to 3% decline and then a flat to small decline in the fourth quarter based on a forecast of two Federal Reserve interest-rate cuts.

The firm’s non-interest-bearing deposits averaged $18 billion, flat quarter over quarter, which was welcome news given declines in recent quarters. Savings, money market, and other interest-bearing deposits will likely see an uptick as Northern Trust is moving its wealth management deposits on balance sheet from its sweep product of off-balance-sheet money market funds.

Noninterest expenses for the quarter were well controlled at about 92% of fee revenue and virtually flat year over year in every expense category.