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Morningstar | Northern Trust Still Feels Some Market Pain, but Core Business Remains Resilient

Wide-moat Northern Trust reported first-quarter results that were well within our expectations for the firm. Again, Northern Trust was not immune to the tougher market environment for the trust banks, but the bank’s fee income held up remarkably well. This resulted in overall revenues remaining essentially flat year over year, in contrast with its peers, which have had declines. Expenses were up 3%, leading to a decline in net income of 9%, with earnings per share down 6%. Again, these declines weren’t as bad as some peers. The bank's core business continues to generate organic growth, and fee pressures don't seem to be as bad, all encouraging signs. Because we incorporate this quarter’s results more fully into our model, we do not expect to make material changes to our current fair value estimate of $90 per share.

Northern Trust reported a return on average common equity of 14% in the quarter, slightly below the 16% level during the first quarter of 2018, and the 17% level just last quarter. Revenues were essentially flat, because net interest income increased 10%, while trust, investment and other servicing fees declined 1%. Net interest margins (on a full-time equivalent basis) increased to 1.58% in the quarter, up from 1.52% just last quarter, while average earning assets declined yet again, down 1% compared with the fourth quarter. Barring further rate hikes, we don’t expect much more net interest margin expansion. Net interest income growth will increasingly have to be driven by balance sheet growth.

Total C&IS fees were down 2% year over year, while wealth management fees were flat. Northern Trust continues to see less overall pricing pressure than peers, which is encouraging. We believe Northern Trust has a more advantageous business mix, focusing on more complex clients on the asset servicing side, as well as a focus on the high-net-worth and ultra-high-net-worth segment. Expenses were up 3% year over year, and the non-interest expense as a percentage of trust and investment fees metric did move against the bank in the quarter, increasing back to 111%. Management highlighted that, excluding the macroeconomic factors that went against the bank this quarter, this metric would have been about even with last quarter.

Assets under management were essentially flat year over year, with the corporate and institutional services segment down 1% while the wealth management segment saw an increase of 2%. There was a good rebound after the fourth quarter of 2018, and we also like that overall asset levels seem better insulated within the stickier wealth management segment. Because of the lagged pricing effects, if the market moves from flat to increasing levels, we should see some additional benefit in fees as the recovery in first quarter fully feeds through. Assets under custody and administration increased 1% for the year.