Chicago, Illinois – Northern Trust Corporation, a custody bank based in Chicago, has faced challenges in recent times due to declining underlying profitability affecting its investment returns. The company’s stock has delivered a disappointing five-year total return of about 10%, lagging behind peers like State Street and BNY Mellon.

Northern Trust has struggled to grow earnings, with net income available to common shareholders being sluggish even after adjusting for one-time charges. This has led to a decrease in the return on tangible common equity, prompting the market to devalue the stock from 2.2x to approximately 1.65x over the past five years.

Despite these challenges, there is a silver lining for investors. The stock now appears more reasonably priced, offering potential high single-digit annualized returns if the bank can maintain its current profitability and achieve modest earnings growth. However, given the headwinds facing the company, some caution is advised, and a larger margin of safety may be necessary before considering an investment.

Northern Trust operates differently from traditional banks, relying heavily on asset servicing and wealth management fees for revenue. While assets under custody/administration have increased significantly over the past five years, fee margins have come under pressure from industry trends like the rise of passive investment solutions, impacting the bank’s revenue growth.

The company’s wealth business presents a bright spot, especially in the Global Family Office segment, where fee income has been growing steadily. Additionally, Northern’s conservative loan book and history of prudent dividend management during economic downturns set it apart from other banks, making it an attractive option for conservative investors.

Looking ahead, Northern Trust is well-positioned to continue returning cash to shareholders through dividends and buybacks. With a stable outlook and a reasonable valuation, the stock offers potential for modest returns without the need for significant growth to justify its current price.

In conclusion, Northern Trust’s struggles with fee margin pressure and operating leverage have impacted its share price and shareholder returns. While the stock is not aggressively valued and offers potential for high single-digit annualized returns, investors should exercise caution due to the company’s long-term headwinds. A larger margin of safety may be necessary before considering an investment in Northern Trust.