Northern Trust Corp. may be the smallest of the big custodial banks, but analysts say that this does not necessarily mean it must acquire to avoid being elbowed out by larger competitors.
The Chicago company, which announced its fourth-quarter earnings on Wednesday, sat on the sidelines last year while Bank of New York Mellon Financial Corp. completed its megamerger and Boston’s State Street Corp. bought Investors Financial Corp.
Analysts do not expect this to change anytime soon.
“It is highly unlikely that they will make an acquisition this year or next,” said Mark Fitzgibbon, the director of research at Sandler O’Neill & Partners LP. “Northern has been fond of saying that the best acquisitions that they’ve done are the ones that others did because they were able to poach a lot of business while others were distracted by integration.”
Steven L. Fradkin, Northern’s chief financial officer, said, “Generally, we like an environment where there is disruption because of other M&As. … The markets we are in are big, and we like the opportunities that are there.”
Gerard Cassidy, an analyst at Royal Bank of Canada’s RBC Capital Markets, said that Northern, like its larger competitors, will probably consider opportunistic dealmaking but feels no pressure to buy.
“As long as they keep delivering strong returns and earnings growth, they don’t need to make a deal,” he said. “When their earnings are negatively impacted because they don’t have the size that the others have, that is when they will need to sell themselves or go out and buy something. And there is not a single sign that Northern is at that point or approaching that point.”
But in this “never say ‘never’ ” environment, that does not mean Northern Trust under its new chief executive will not buy; it just appear rather unlikely. Frederick Waddell succeeded William Osborn as CEO on Jan. 1.
Mr. Cassidy said that Northern is always on the lookout for deals to enhance returns.
“Northern has a new CEO,” he said, “and new CEOs like to make their mark with a deal.”
“Northern Trust has the least amount of integration risk on their plate compared to BNY Mellon and State Street, which suggests that they could be more aggressive,” Mr. Cassidy said. “But that doesn’t mean they need to do a deal.”
Mr. Fitzgibbon pointed out that Mr. Waddell has worked at Northern since 1975 and has been its president and chief operating officer since February. He has been “one of the architects for their strategy, so I don’t expect a big departure.”
Northern’s fourth-quarter net income declined 26.6%, to $125 million, or 55 cents per share. It announced a $150 million writedown related to the $2.1 billion settlement in November between Visa Inc. and American Express Co. As a member of Visa’s banking network, Northern is obliged to pay a portion of the litigation-related loss.
In November, Northern warned that it expected to take a $50 million charge related to the litigation that would reduce earnings by 15 cents a share. Mr. Fradkin, the CFO, said he expects the proceeds from Visa’s initial public offering “will more than offset” the costs of the litigation.
Mr. Cassidy said that some banking companies accounted for these gains along with the writedown and “in all cases the gains have been two-to-one greater than the writedown.”
Excluding the charge, the company’s operating earnings grew 26%, to 97 cents a share. The average estimate of analysts surveyed by Thomson Financial was 92 cents per share.
Mr. Fitzgibbon said the bigger concern for Northern should be the fact that its assets under management fell 0.55% from the previous quarter, to $757.2 billion, and that assets under custody rose only 0.04%, to $4.12 trillion. “That doesn’t bode well for future revenue growth,” he said.
Mr. Fradkin said that, although market conditions affect Northern’s results, “the relation between market movement and Northern’s fees is not one-to-one.” According to Norther, a 10% movement in the equity market translates into a 2% impact on Northern’s revenue.
Year-over-year, assets under custody grew 17% and assets under management 9%.
