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WIKI ANALYSIS
Northern Trust Corporation (NYSE: NTRS) is the largest private bank trust company in the United States, providing investment management and comprehensive banking services for large institutions and affluent individuals. As of the end of 2007, the Corporation had $4.1 trillion in assets under custody and $757.2 billion in assets under management.[1] The Corporation's principal subsidiary and largest source of assets, revenue, and net income is the Northern Trust Company, an Illinois-based bank founded in 1889. [2]
Northern Trust is focused on wealth management, unlike other firms that also offer credit card and consumer retail banking services. The company maintains a conservative balance sheet, with the vast majority of its portfolio rated AAA. [3] The company has maintained positive net income growth in six of the last eight years.[4]
Due to the fee-based nature of Northern Trust's services and strong overseas growth, the company has been insulated from the economic downturn in the United States. [5] Despite the market turmoil that characterized the second half of 2007, Northern Trust's stock price increased 26.2% in 2007, compared with a 24.6% decline in the KBW Bank Index. [6] The company competes with other companies offering private banking services such as State Street (STT), Bank of New York Mellon Corporation (BK), and J P Morgan Chase (JPM).
Company Overview
| Cash Flow Growth | 2007 | 2006 | 2005 | 2004 |
| Non-interest Income ($M) [7] | 2,677 | 2,266 | 1,964 | 1,711 |
| Net Interest Income ($M)[8] | 833 | 729 | 659 | 561 |
| Total Net Revenue ($M) [9] | 5,395 | 4,473 | 3,554 | 2,829 |
| Total Net Income ($M) [10] | 728 | 664 | 581 | 504 |
Northern Trust Corporation organizes its services around two principal business units and several support units.
- Corporate and Institutional Services (57.8% of revenue, 72% of net income [12]): C&IS provides asset servicing and management services to large corporations and institutions such as public retirement funds, foundations, endowments, insurance companies, and government funds.[13] The unit provides asset custody services for clients, holding their assets and insuring against theft or loss.[14] C&IS has $3.8 trillion in assets under custody, which generated $615 million in custody fees in 2007, accounting for 52% of C&IS fee-based revenue.[15] Custody fees are largely priced using asset values at the start of each quarter.
- C&IS's asset services include investment management, securities lending, and other support services. The unit has $608.9 billion in assets under management. [16] In 2007, C&IS reported $290.6 million in investment management fees, which are generally based on market asset values, and $207.1 million in securities lending fees, which are based on market asset values, demand for securities, and interest rate spreads. Other services C&IS provides include benefits payments, portfolio performance analysis, and electronic fund delivery. [17]
- In 2007, C&IS reported $2.1 billion in revenue and $526 million in net income. [18]
- Personal Financial Services (42.2% of revenue, 47% of net income [20]): Northern Trust provides personal banking services to high net worth individuals, families, and established privately-owned businesses. The unit is one of the largest providers of personal trust services in the US, with $332.3 billion in assets under custody and $148.3 billion in assets under management at the end of FY2007. [21] Approximately 20-25% of the Forbes 400 list of wealthiest American families employ Northern for asset management or administration. [22] About half of the millionaires in the U.S. are located within a half-hour drive of a Northern Trust branch. [23] The company capitalizes on the needs of successive generations of client families, broadening its client base among affluent individuals. PFS clients are mostly domestic and divided into four tiers:
- Private clients: Households with at least $1 million in assets
- Wealth advisory business: Households with $5 million to $50 million in assets
- Family advisory services: Households with $50 million to $200 million in assets. This relatively new service tier provides the services of a full-time family office who do not want to establish the infrastructure themselves. The company is expanding its presence in the this tier, particularly in wealthier markets in Silicon Valley, LA, New York, Chicago, Miami, and Dallas. [24]
- Wealth Management Group: Households with more than $200 million in assets. This tier has traditionally been Northern Trust's strength, providing dedicated family offices to serve a single household and resulting in strong client loyalty across generations. [25] The Wealth Management Group served about 390 families at the end of 2007, with an average custody portfolio of $500 million. [26]
- Other Support Units (-19% of net income [27]): Northern Trust's other business units provide support services to the two principal business units.
- Northern Trust Global Investments provides portfolio management, brokerage, and securities lending services to both C&IS and PFS. Its revenues and expenses are allocated to C&IS and PFS. NTGI holds the assets under management of C&IS and PFS.
- Worldwide Operations and Technology provides processing, operations, and IT support services to all segments.
- Corporate Financial Management is responsible for Northern Trust's accounting and finances.
- Treasury and Other: This accounting unit includes income and expense associated with wholesale funding activities and the company's investment portfolio. Also includes income and expense not associated with other business units as well as executive compensation. FY2007 includes a $150 million expense resulting from the class action lawsuit brought against Visa. Northern Trust, as a member institution, is obligated to share in Visa's indemnification.
Key Trends and Forces
Fast Growing Market of Wealthy Individuals
Looking forward, Northern's target market sector of wealthy individuals is poised to grow 3-9% over the next few years, compared to a 1% projected growth rate for the general U.S. population.[28]
Economic, Market, and Monetary Policy Risks from Credit Market Turmoil and Broader US Slowdown
The volatility of equity and futures prices, capital markets and interest rates, exchange rates, and inflation all have an impact on Northern Trust. Greater international currency volatility has resulted in increased revenue in foreign exchange trading and driven new client volumes. For first quarter 2008, FX trading income in C&IS reached a record $112.0 million, up 70% year-over-year. [29] A slowing of any of these trends would adversely affect Northern Trust's growth prospects.
In the United States, interest rates are influenced by credit conditions and the federal funds rate set by the Federal Reserve. From August 2007 to April 2008, the Fed made aggressive cuts in the key federal funds rate to 2.00%. Lower interest rates result in a higher net interest margin for banks and securities dealers. The Fed seems poised to raise rates by the end of 2008, which would cut into Northern's lending profit margins.
Northern Trust less susceptible to market fluctuations as three-quarters of its revenue is attributable to fee-based services.[30] Despite the market turmoil in the second half of 2007, Northern Trust's stock price increased 26.2% while the KBW Bank Index declined by 24.6%.[31]
Northern Trust maintains asset quality through rigorous credit review procedures and a conservative balance sheet. [32] However, since Northern Trust's asset-servicing and asset-management fees tend to be tied to the level of assets under administration or management, a broader market downturn would cut into the company's revenue growth. [33]
Strong Overseas Growth
Northern Trust generates roughly half of its securities servicing revenue overseas, making it the most international among securities servicers. [34] The company has profited from globalization of investment activity and pension reform in many countries that has resulted in more assets needing management and servicing.[35] Global custody assets increased 23% to $2.1 trillion in 2007 as a result of strong international growth.[36]
In 2005, Northern Trust acquired the Financial Services Group Limited (FSG) from Baring Asset Management Holdings Limited, which expanded C&IS to include institutional fund, hedge fund and private equity administration.[37] In addition, the acquisition gives Northern Trust a broader window into European private banking, with new offices in London and Guernsey. [38]
Northern Trust projects positive impact from new Basel II rules
In the United States, Northern Trust and its banking subsidiaries are subject to regulation by the Federal Reserve Board of Governors, the Comptroller of the Currency, FDIC, and various other federal and state regulatory agencies. [39] Effective April 1, 2008, a new set of rules were adopted by US regulatory authorities implementing the "Basel II" framework agreed upon by the G10 countries. Under the Basel II framework, Northern Trust is classified as a "core" banking organization and required to use advanced, more rigorous approaches for calculating credit and operational risk. According to the company's 10-K, the new rules should have a positive impact on the Corporation's reported capital ratios. [40]
Competition
The corporation maintains its competitive advantage by focusing on established institutions and affluent individuals. Northern Trust is one of a few bank holding companies in the United States to generate most of its revenue from fee-based services. [41]
Competitors
- State Street Corporation (STT): Founded in 1792, State Street surpasses Northern Trust in both age and assets under management. As of December 31, 2007, State Street had $14.9 trillion in assets under custody and $2 trillion in assets under management in assets globally, making it the world's largest institutional asset manager. [42] State Street competes primarily with Northern Trust C&IS for institutional investors.
- Bank of New York Mellon Corporation (BK): The result of the July 2007 merger of Bank of New York and Mellon Financial, Bank of New York Mellon is a competitor for both institutional and individual investors. As of December 31, 2007, the company had more than $1.1 trillion in assets under management. [43]
- J P Morgan Chase (JPM): JP Morgan Chase & Co is one of the largest financial institutions in the United States in terms of market capitalization and assets under custody. JP Morgan's business is widely diversified, however, and its 2006 trade of its corporate trust business in exchange for Bank of New York's retail banking network suggests the company's management places less emphasis on asset servicing and management. As of December 31, 2007, the asset management division had $1.6 trillion in assets under management, accounting for 13% of JP Morgan's net income. [44]
Northern Trust's conservative balance sheet and trademark stability can be found in its relatively high capital ratios against its competitors.
Note: leverage ratios are a measured of a company's debt load. "Well capitalized" is as defined in Section 131 of the FDICIA.[49]
References
- ↑ Northern Trust 2007 Financial Annual Report pg. 4
- ↑ NTRS 2007 10-K, Item 1: Business, page 2
- ↑ Morningstar Analyst Report: NTRS. July 18, 2007.
- ↑ Northern Trust Financial Reports 2007, 2006, 2005, 2004, 2003
- ↑ Morningstar Analyst Report: NTRS. July 18, 2007.
- ↑ NTRS 2007 Annual Report to Shareholders pg. 3
- ↑ 2007, 2006 Financial Annual Reports p. 39 and 35
- ↑ Reuters
- ↑ Standard and Poor's Stock Report: Northern Trust Corp. 23 June 2008
- ↑ Reuters
- ↑ NTRS 2007 Financial Annual Report, pages 12, 15
- ↑ NTRS 2007 Financial Annual Report, "Corporate and Institutional Services Results of Operations," page 12
- ↑ NTRS 2007 10-K, Item 1: Business, page 2
- ↑ Taylor, Ganson, & Perrin, LLP, "Custody of Assets"
- ↑ NTRS 2007 Financial Annual Report, "Corporate and Institutional Services Results of Operations," page 13
- ↑ NTRS 2007 10-K, Item 1: Business, page 2
- ↑ NTRS 2007 Financial Annual Report, "Corporate and Institutional Services Results of Operations," page 13
- ↑ NTRS 2007 Financial Annual Report, "Corporate and Institutional Services Results of Operations," page 12
- ↑ NTRS 2007 Financial Annual Report, pages 13
- ↑ NTRS 2007 Financial Annual Report, "Personal Financial Services Results of Operations, page 15
- ↑ NTRS 2007 10-K, Item 1: Business, page 2
- ↑ Financial Times (June 2, 2008). Potter offers Windy City an English Education.
- ↑ Deutsche Bank Global Markets Research: Northern Trust p.5
- ↑ "Northern Trust courts the slightly less wealthy" Chicago Tribune, June 20, 2008
- ↑ "Northern Trust courts the slightly less wealthy" Chicago Tribune, June 20, 2008
- ↑ Northern Trust Q4 2007 Earnings Call Transcript, page 2
- ↑ NTRS 2007 Financial Annual Report, "Treasury and Other Results of Operations, page 17
- ↑ Deutsche Bank Global Markets Research: Northern Trust p.5
- ↑ NTRS 2008 Q1 10-Q, Business Unit Reporting, page 31
- ↑ Morningstar Analyst Report: NTRS. July 18, 2007.
- ↑ NTRS 2007 Annual Report to Shareholders pg. 3
- ↑ NTRS 2007 10-K, Item 1: Business, page 4
- ↑ NTRS 2007 10-K, Item 1A: Risk Factors, page 26
- ↑ Deutsche Bank Global Markets Research: Northern Trust p.3
- ↑ NTRS 2007 10-K, Item 1A: Risk Factors, page 25
- ↑ Northern Trust 2007 Financial Annual report pg. 4
- ↑ Standard and Poor's Stock Report: Northern Trust Corp. 23 June 2008
- ↑ Deutsche Bank Global Markets Research: Northern Trust p.5
- ↑ NTRS 2007 10-K, Item 1: Business, page 6
- ↑ NTRS 2007 10-K, Item 1: Business, page 8
- ↑ NTRS 2007 10-K, Item 1: Business, page 4
- ↑ STT 2007 10-K, Item 1: Business, page 1
- ↑ BK 2007 10-K, Item 1: Business, page 1
- ↑ JPM 2007 10-K, Management's discussion and analysis, page 27
- ↑ NTRS 2007 10-K, Item 1: Business, page 7
- ↑ JP Morgan
- ↑ STT 2007 10-K
- ↑ BK 2007 10-K
- ↑ Federal Reserve Bank of Atlanta "Definition of Well-Capitalized"
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