Northern Trust is on course to set the wrong kind of record this year.
Waivers of fees normally charged to investors parking cash in the bank's money-market mutual funds are on track to well exceed $200 million in 2021. That would easily best the peak waiver total for Chicago's largest locally headquartered bank in the aftermath of the Great Recession.
In 2014, the last round of waivers peaked at $130 million. In 2021, Northern is projected to lose out on $250 million in money-market fees if short-term interest rates stay about where they are now. To put that amount in perspective, it's about 4 percent of Northern's $6.14 billion in revenue last year.
Northern Chief Financial Officer Jason Tyler disclosed that jarring bit of bad news on an April 20 earnings call with analysts.
Northern, like other big banks catering to wealthy individuals and institutional investors, doesn't collect the fees on the low-return funds because interest rates are so low that, if a fee were added, investors would have to pay to park their cash. Longer-term interest rates have begun to lift from ultra-low levels last year and early this year, but short-term rates haven't followed suit, Tyler said.
"It's a very, very difficult dynamic we're facing," he said. "As much as we've seen the 1-year, 5-year, 10-year up, we've seen overnight repo at (extremely low rates), and that's very difficult for a $275 billion pool of money-market funds."
Northern waived $50 million in money-market fees in the first quarter. In future quarters, at current rates, that will increase to between $65 million and $70 million, Tyler said.
Northern's chief competitors, Boston-based State Street and New York-based Bank of New York Mellon, are suffering the same effects. They reported first-quarter earnings this month and saw their stock prices drop meaningfully in response to the high level of fee waivers.
Northern's stock price, on the other hand, closed up 1.1 percent April 20 on a down day for the market.
Investors seemed more prepared for Northern to report bad news on money-market fees. And other aspects of Northern's quarter were more positive.
It added back to earnings $30 million it had previously reserved for future loan losses. That helped blunt the impact of the $50 million in fee waivers.
Most banks that had set aside substantial amounts for loan losses during the early stages of the pandemic have been pleasantly surprised at how little in bad loans they've had to write off.
Likewise, Northern laid off hundreds in the first quarter, reducing employee-compensation expenses—something investors applauded. At the time, CEO Michael O'Grady cited the revenue pressures tied to rock-bottom interest rates.
The bank also resumed share repurchases, buying back $136 million of its own stock.
Revenue was flat compared with the same quarter last year despite double-digit increases in assets that Northern either manages or holds and processes for investors. Ordinarily, a robust stock market means higher fees for Northern, but the fee waivers helped negate that. Net income rose 4 percent to $375 million. Earnings per share rose 9 percent, thanks to the buybacks.