Some banks have hundreds, or even thousands, of retail branches and make their money on the back of their interest margins. Other banks have virtually no retail presence, and make their money on charging fees for custodial or management services of assets of pensions, unions, universities, and high wealth individuals and families. These are referred to as custodial, or trust banks.
The largest trust bank in the country is JPMorgan Chase and Company (JPM), but that bank has a full retail and commercial presence in addition to its custodial activities. I will look today at the country's three largest publicly traded "pure" trust banks. Two of these three banks, State Street Corp. (STT) and Bank of New York Mellon Corp. (BK) are large and more importantly, so entwined with other banks and the economy at large that they are both on the Financial Stability Board's list of 29 banks too big to fail. All these banks are struggling with this ultra low interest rate environment, as many institutional investors are simply utilizing cash rather than securities.
State Street Corporation
State Street is the nation's second largest custodial bank, and ninth largest bank overall by assets with about $216 billion. It also has $21.8 trillion under custody, and actively manages another $1.87 trillion. It does all this with two "branches" in this country, and another 11 overseas. State Street stock was trading recently at almost $39 per share. Its 52 week range is from $48.00 to $29.86, and it is trading at a price to earnings ratio of 10.2. It has a market capitalization of $18.8 billion, and pays a quarterly dividend of $0.18 per share, for an annual yield of 1.8%.
State Street managed despite headwinds to post a successful fourth quarter of 2011. Earnings for the quarter totaled $371 million, or $0.76 per share. This compared favorably with the fourth quarter of 2010, when State Street recorded $81 million, or 16 cents per share. On an operating basis, excluding a slew of one time charges in both quarters, earnings per share increased from $0.87 per share to $0.93 per share. For full year 2011, and looking at operating results only, per share earnings rose 23% versus 2010 to $3.79 per share.
As the world economy slowed, led by Eurozone troubles, so did State Streets revenues late in 2011. Typically, about 75% of State Street's revenues come from fees. Fees fell by 10% in the fourth quarter from the third quarter in 2011. State Street has invested heavily in technology and layoffs to reduce costs. Obviously, cost cutting to support earnings cannot go on forever. State Street has also been on a share buyback plan. State Street's capital levels are without equal among big bank stocks, and the bank has been under pressure to get its stock performing at better levels. I feel that will be impossible in the face of macroeconomic uncertainty, and view this not as a growth stock, but as a safe harbor for the most conservative of investors.
Bank of New York Mellon Corporation
BONY is the largest principally custodial bank in the country. It has custody of or administrative duty on $25.8 trillion, and actively manages over $1.26 trillion. On its own, it has $228 billion in assets, making it the seventh largest bank in the country by assets. All this, and BONY only has four domestic branch offices, though it also has 13 such offices overseas. BONY stock was trading recently at about $20 per share. Its 52 week range is from $32.32 to $17.10. Its price to earnings ratio is 10, and it has a market capitalization of $24.3 billion. It pays a quarterly dividend of $0.13 per share, for an annual yield of 2.6%.
BONY has been embroiled in multiple suits over currency rate issues. It was alleged BONY promised many customers the "best" exchange rates, when of course that is not possible. Rumors are that one of the most significant of the suits is ripe for settlement. If that and similar suits can be resolved, it will remove a long term black cloud. In its fourth quarter of 2011, BONY posted earnings of $505 million, or $0.42 per share, down 26% from the year ago $679 million, or $0.54 per share. The 2011 quarter had various one time charges and credits, by far the most significant being a $107 million charge for personnel layoffs.
I do not see much in BONY's future to feel good about, other than its quality balance sheet. The 4th quarter earnings were 21% below analysts' expectations, and I see a fairly neutral 2012. Your financial sector dollars can be spent better.
Northern Trust Corporation (NTRS)
Northern Trust is the nation's third largest primarily custodial bank. It has about $4.3 billion under custody or administrative duty, $663 million of assets under management, and nearly $100 billion of its own assets, making it the nation's 23rd largest bank. It has 15 domestic branches, catering to its wealth management and private banking activities, and another four overseas.
Northern Trust was recently trading at about $41 per share. Its 52 week range is from $54.90 to $33.20, and it has a price to earnings ratio of 16.67. It has a market capitalization of $9.9 million, and it pays a quarterly dividend of $0.28 per share, for an annual yield of 2.7%.
In the fourth quarter of 2011, Northern Trust reported earnings of $130 million, or $0.53 per share, down 17% from the $157 million, or $0.64 posted in the 4th quarter of 2010. The 2011 quarter was negatively impacted by a pre tax, $61 million dollar restructuring charge. Post tax, it was $0.17 per share. For all of 2011 Northern Trust earned $604 million, or $2.47 per share. The full year results were impacted a negative $0.25 per share by restructuring. In 2010, Northern Trust posted earnings of $670 million, or $2.74 per share.
Mean analyst estimates for 2012 are for profits of $2.96. That would give Northern Trust 10% earnings growth on an operational basis. That it turn leads to a PEG of a moderately bullish 1.67. Of these three banks, I believe Northern Trust is most likely to prosper in 2012 and beyond, but I still would rather invest in any of the several quality regional and money center banks out there.