Helping Northern Trust (NTRS) revenue grow despite rising costs

Northern Trust Company NTRS is well positioned to maintain its organic growth in the days ahead, supported by the economic recovery. However, rising costs due to inflation and personnel could affect the bottom line.

Organic growth is Northern Trust’s core strength, as evidenced by its revenue and lending growth. NTRS revenue has grown at a compound annual growth rate (CAGR) of 2.7% over the past four years (2018-2021), while loans and leases have grown at a CAGR of 13.5% over the past four years (2018-2021). for the last three years (ending in 2021).

The company appears increasingly confident of organic growth in the corporate and institutional services (C&IS) and wealth management (WM) segments based on a likely strong pipeline over the coming quarters. We believe the company is well positioned to maintain organic growth in the days ahead, supported by the economic recovery and rising rates.

The company’s innovative technology-driven hedge fund administration capabilities, brought to market through Northern Trust Hedge Fund Services, provide an attractive proposition to clients. It is also considering opportunities to expand its private capital space.

The implementation of the Target2-Securities strategy to provide better services to its clients is commendable. Northern Trust continues to diversify across geographic and customer channels. This will help the company navigate macroeconomic headwinds.

NTRS’ liquidity also looks strong. As of December 31, 2021, the company’s long-term debt of $1.14 billion has been declining in recent quarters. Additionally, cash and bank claims of $1.24 billion remained volatile over the same period. It maintains investment grade senior debt ratings of A+/A2/A+ and a stable outlook from Fitch, Moody’s and S&P Global, respectively.

Given Northern Trust’s strong liquidity position, manageable level of indebtedness and strong credit profile, the company will be able to consistently meet its short-term obligations, even if the economic situation deteriorates.

Additionally, NTRS’ capital deployment activities look impressive, backed by its liquidity. The company increased its quarterly dividend by 17% in July 2019. In addition, it had implemented a share buyback program which was suspended in mid-March 2020, following the coronavirus crisis. Following Federal Reserve approval to repurchase shares in December 2020, the company undertook share repurchases in 2021. Northern Trust repurchased $1.8 million worth of shares in the fourth quarter of 2021 .

Despite the successful implementation of expense reduction initiatives, costs have increased due to continued investments in technology, compensation and equipment, and software spending. Non-interest expense has grown at a CAGR of 4.1% over the past four years (2018-2021). The company expects spending to increase in 2022 due to inflation and competition in the job market. We believe an upward trend in spending will remain a barrier to earnings growth.

As Northern Trust operates a global business, changes in global financial market conditions and general economic conditions could affect the operations of the business. Weak economic conditions affected wealth creation, investment preferences, business activities and savings patterns, which in turn negatively impacted demand for trust products and services and of investment. In a context of equity market volatility, a reduction in trading volumes could affect earnings in the coming quarters.

Shares of NTRS have gained 10.5% over the past year versus industryan increase of 3.5%.

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The company currently carries a Zacks Rank #3 (Hold). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Actions to Consider

Some top-ranked stocks in the banking space are Bank of Hawaii BOH, First business financial services FBIZ and Wells Fargo and company WFC. Currently, BOH, FBIZ, and WFC each carry a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Over the past six months, BOH shares have gained 4.3%, while FBIZ and WFC shares have risen 16.5% and 11.6%, respectively.

Over the past 30 days, the Zacks consensus estimate for current-year earnings for First Business and Wells Fargo has been revised slightly higher, while the same for Bank of Hawaii has remained constant.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.