Northern Trust gets boost from investment arms of wealthy families

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To offset a decline in interest income, Northern Trust has turned to a growing source of fees for its critical wealth management unit: family offices.

The $136.8 billion-asset custody bank reported a 12% year-over-year increase in fees from family investment offices to $71.8 million in the fourth quarter, according to its earnings release Wednesday. Northern Trust, in Chicago, has seen this revenue stream climb by 20% over the previous two years.

“That trend has been going on for a while, and it's attractive,” Northern Trust Chief Financial Officer Jason Tyler said about the growth in family office business on a call with analysts Wednesday.

Chairman and CEO Michael O’Grady said on the call that the bank has made it a priority to recruit more family office assets to manage. Northern Trust’s business model that shirks the riskier sides of the finance industry has proven to be attractive to conservative managers of family wealth.

“Dealing with large family offices, they are looking for safety and security, conservative, strong balance sheets,” O’Grady said. “And so, it's a part of the business strategy for us.”

Banks are relying more on fees as low borrowing costs have put a pinch on interest income. Northern Trust reported $430 million in net interest income for the fourth quarter, which was flat year over year. Analysts at Keefe, Bruyette & Woods said in a research note Wednesday they expect net interest income at Northern Trust to fall between 2% and 4% in the first quarter compared with the previous three months.

Meanwhile, the bank’s “Trust, Investment and Other Servicing Fees,” which include its family office revenue, increased 6% from the fourth quarter of 2018 to $992 million.

Northern Trust’s net income declined 9% from the previous year to $371.1 million; one of the culprits was a $20.8 million pretax charge from the sale of its lease portfolio. Earnings per share of $1.70 fell short of the $1.73 mean estimate of analysts compiled by FactSet Research Systems.

Noninterest expense increased 5% year over year to a little more than $1 billion as the bank made more investments in technology and added 1,000 staffers. Executives said they expect operating expenses and capital investments to reach $1 billion in 2020 as well.

The bank’s stock fell 3.3% to $10.99 on Wednesday.

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Custody banks Family offices Fee income Net interest margin Northern Trust