Northern Trust Bank

Northern Trust Bank[pic 1][pic 2][pic 3][pic 4][pic 5][pic 6][pic 7][pic 8][pic 9][pic 10][pic 11][pic 12]

FIN 4303 – Commercial Banking Assignment- Part 1 [pic 13]

  Return on equity (ROE) is the amount of net income returned as a percentage of shareholder’s equity. ROE measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Return on equity equals the product of the equity multiplier and return on assets. The equity multiplier (EM) reflects the amount of leverage the bank uses to finance its assets. Companies finance the purchase of assets either through equity or debt, so if a company has a high equity multiplier this indicates that a larger portion of their asset financing comes from debt.  As the multiplier increases the company becomes more of a risk to its long-term debt issuers. Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives us an idea of management’s efficiency at using assets to generate earnings on a per dollar basis. Return on assets is calculated by multiplying asset turnover and profit margin. Asset turnover measures how a company deploys its assets to generate revenue. Profit margin measures how much of a company’s revenue that a company actually keeps. When using these ratios to compare Northern Trust to the industry averages, you get a better picture of how they compare to their competitors especially over time.

Figure 1: Northern Trust

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Figure 2: Industry

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Figure 3: Ratio Analysis

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Interpreting the Trends:

        From 2000 to 2001 Northern trust generated profits at least 1.5% higher than the industry average. As in many of the other years we will compare, Northern Trust does not achieve this with their ability to use their assets. In these two years Northern Trust performs at just above or just below the industry when it comes to ROA, but is almost a half percentage point under in Asset turnover. These numbers are more or less on par with the industry averages, but Northern Trusts ability to manage its debt to produce income is very impressive. Although it has an equity multiplier almost 1.5 times as large as the industry average, which put them in a high risk position relating to their solvency, but its ROE was about 4.5% higher in 2000 and just over 6% higher in 2001 than the industry.

        After seeing decreases in profits margin and their asset and equity ratios in the following years, Northern Trust decided to cut 15% of its workforce in 2003. This helped them cut their operating costs and improve their profitability in the coming years. In 2007 they saw a minor decrease again, but by the following year, 2008, the financial crisis hit and Northern Trust saw its ratios go way up. They were one of only two banks that were able to maintain their dividend at the time. They were very successful in this year as many hedge funds decided to take their money and other assets out from banks like Merrill Lynch in favor of companies such as Northern Trust. Many companies believed Northern Trust to be a safer and much more transparent option. Their main branch of operations even claimed that in the first days of the financial crisis they saw their daily deposits jump from an average of 2 million a day to 90 million. During this time Northern Trust also relied less on debt as can be witnessed by their equity multiplier in the years during and after the crisis.

        Because of the fact that they began cutting their reliance on debt and equity their ROE decreased dramatically from 2008 to 2011. In this time there ROA and AU also decreased, but by 2012 they began to see increases in ROA, ROE, profit margin, and AU. In 2011 Northern Trust introduced FlexShares to its family of exchange-traded funds (ETFs). By February 2014 FlexShares had established itself as one of the fastest growing ETF families in the industry, with more than $7 billion in assets. In 2011 Northern Trust also expanded its global operations by acquiring Bank of Ireland Securities Services, which formed Northern Trust Securities Services (Ireland) Limited and Omnium LLC which later created Northern Trust Hedge Fund Services. From 2012 to 2014 Northern Trust outperformed the industry in ROE and AU, but was well under the industry averages for profit margin and almost on par for ROA. As banks caught up and began to repair themselves after the financial crisis, it became clear that this was a major reason as to why Northern Trust began to suffer a bit.

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Return on equity (ROE) is the amount of net income returned as a percentage of shareholder’s equity. Northern Trust has for the most part performed better than the industry in ROE other than two years 2003 and 2011. In every other year they were a fair percentage above the industry, especially during the first years of the financial crisis where there net income as it relates to shareholder’s equity, got to over 15% higher in 2008. After 2008, Northern Trust saw its ROE cut in half by the year 2011. After 2011 there ROE began to grow again at a rate similar to that of the industry.

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Northern Trust consistently has an equity multiplier much higher than the industries. What this means basically is that Northern Trust heavily relies on debt to generate profits. It also means that they have a higher solvency risk than there competitors. From 2007 to 2010 they have seen about a 500% decrease in their multiplier, which shows they were less willing to take on risk to reap the potential rewards, especially since we were in the middle of a major economic decline.

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This was the most interesting chart in our opinion in the sense that Northern Trust’s ROA has an inverse relation with the industry. When the industry increases, they decrease, and when they increase the industry seems to be declining. Other than during the height of the recession, where Northern Trust had a much higher ROA, the industry always performed better than them. What this shows is that Northern Trust is not very good at using their assets to produce, as they were only able to succeed at this when the economy was failing. In 2012 Northern Trust finally started to perform near the industry averages after they saw their ROA cut in half from 2008 to 2011.