Headquartered in Chicago, Northern Trust Corp. (NASDAQ: NTRS) is a premier financial services company that provides institutions and individuals with asset management and fund administration capabilities in addition to fiduciary and banking solutions. The bank’s Corporate & Institutional Services segment offers asset servicing, brokerage, banking, and related services to retirement plans, foundations, endowments, insurance companies, as well as sovereign wealth funds. Its Wealth Management unit includes trust, investment management, custody, financial consulting, brokerage, guardianship and estate administration. The company has flourished since its founding in 1889 by Byron Smith, who sought to provide the city’s prosperous citizens with trust and banking services.
Northern Trust is a unique, leading global financial franchise with a market value of $15 billion. The business exhibits attractive asset gathering capabilities and recurring revenues, which have been primarily organically grown. The bank is the most conservatively run of the trust banks, supporting its brand positioning and successfully navigating the 2008-2009 and 2020 crises without material issues. Northern Trust operates with several distinct competitive advantages that have driven the company’s strong historical performance. Deep brand strength, scale and high switching costs all contribute to the power of its business model.
Falling in Sympathy
The company has been caught up in the latest banking crisis, precipitated by the collapse of Silicon Valley Bank and First Republic Bank. A toxic combination of a concentrated deposit base, a mismatch of assets and liabilities, unrealized losses on the securities and loan books, a loss of confidence and fear of unrelenting interest rate hikes took down these institutions and has catalyzed our current environment. Several troubling trends such as deposit outflows and cash sorting, securities book losses, and net interest margin pressures affect Northern Trust to some degree but are well below the levels of stress found in the current battleground stocks and nowhere near the terminal levels at the failed banks. While these issues will strain profitability for a while, they should not pose the severe threats current market sentiment reflects.
Staying the Course
While Northern’s stock price reaction has been muted compared to the broader carnage in regional banking, shares have been weaker than the money center banks that we view as a more relevant comparison. We expect Northern’s diversified model to exhibit a relatively attractive level of stability and consistency more akin to the larger financial services firms and banks rather than the smaller regional banking complexes. The company has $1.3 trillion in assets under management and $11 trillion in assets under custody. As an industry leader with a solid management team and sustainable competitive advantages, we believe Northern Trust’s shares deserve a premium valuation. And yet, as of June 30, 2023, the stock traded at a 31% discount to our estimated PMV of $107.
On this page, we candidly discuss one company to illustrate our investment process. This company is a current holding of certain Funds. The information and our opinions were current as of June 30, 2023 but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased or sold to investors during the period. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.