Fee Headwinds And Market Shifts Will Shape Margins In Coming Quarters

Key Takeaways

• Margin gains from recent operational efficiencies may not be sustainable due to fee pressure, rising tech costs, and the shift towards passive investing.
  
• Expansion into alternatives and digital initiatives faces challenges from competition, regulation, technology disruption, and heavy reliance on global rate and market trends.
  
• Expansion in alternatives, operational automation, client diversification, and capital strength position Northern Trust for sustained margin growth, innovation investment, and competitive financial outperformance.

Catalysts

A financial holding company, provides wealth management, asset servicing, asset management, and banking solutions for corporations, institutions, families, and individuals worldwide.

• The company's recent organic growth and margin expansion are largely attributed to near-term operational efficiencies and balance sheet optimization (notably lower expense growth and improved operating leverage), yet investors may be overestimating the persistence of these improvements in light of ongoing industry fee pressure from the growing shift to passive investing and ETFs, which is likely to constrain long-term revenue growth and profit margins.
  
• Expectations for robust double-digit EPS growth and higher ROE targets appear to reflect optimism around continued operational streamlining and artificial intelligence initiatives, but the industry-wide need for substantial, ongoing technology investments may further increase costs, potentially offsetting margin gains and limiting future net income growth.
  
• The company's aggressive expansion in alternatives, private markets, and ETF offerings is positioned as tapping into client demand; however, heightened competition, regulatory risk, and client concentration (especially in ultra-high-net-worth and institutional segments) could make growth expectations for assets under management and fee-based revenue vulnerable to future market cycles and asset price volatility.
  
• Although recent growth in global wealth and institutional assets benefited Northern Trust's AuM/AuA, the business remains highly exposed to low or volatile global interest rates, with any sustained decline likely to weigh on net interest income and impair earnings momentum, especially given its reliance on spread income and current deposit mix trends.
  
• Despite initiatives in digitalization and next-generation asset servicing, the secular acceleration in financial data, fintech disruption, and industry consolidation raise the risk that Northern Trust's legacy trust bank model could be structurally disadvantaged in scaling new technology, pressuring long-term operating margins and overall valuation multiples if execution falters.

Northern Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northern Trust's revenue will decrease by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.0% today to 17.6% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $9.12) by about July 2028, down from $2.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, up from 11.5x today. This future PE is lower than the current PE for the US Capital Markets industry at 29.1x.
• Analysts expect the number of shares outstanding to decline by 3.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.45%, as per the Simply Wall St company report.

Northern Trust Future Earnings Per Share Growth

Risks

• The rapid expansion of private markets and alternatives-with assets expected to more than double public market growth over the next decade-positions Northern Trust's integrated alternatives platform (including 50 South Capital, advisory services, and asset servicing leadership) to capture outsized fee and assets under management growth, supporting sustained revenue and earnings expansion.
  
• Strategic investment in AI, technology automation, and operational restructuring (centralization, standardization, and automation of core processes) is delivering improved operating leverage, declining headcount, and margin expansion, thus bending the cost curve and freeing resources for growth investments-strengthening both net margins and profitability over time.
  
• Northern Trust's global leadership in core client segments (wealth management, asset servicing, capital markets, and family office) and targeted upmarket strategy (serving the world's largest, most complex clients) is driving organic growth, high win rates, improved client retention, and expansion into faster-growing international markets, which diversifies and grows revenue sources and reduces regional concentration risks.
  
• Industry trends toward ESG investing, demand for sophisticated outsourcing, and increased complexity of alternative asset servicing are fueling Northern Trust's ability to cross-sell high-margin products, deepen client relationships, and deliver enterprise-wide solutions-supporting both top-line growth and higher sustainable margins.
  
• Robust balance sheet strength, capital flexibility (demonstrated by meaningful share repurchases and rising dividends), and ongoing regulatory clarity bolster Northern Trust's ability to reinvest in innovation, weather economic cycles, and consistently deliver double-digit earnings per share growth and higher ROEs-making long-term financial outperformance more likely.

Valuation

• The analysts have a consensus price target of $117.786 for Northern Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $101.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $126.53, the analyst price target of $117.79 is 7.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.