We have downgraded our recommendation on Northern Trust Corporation (NTRS) to Underperform from Neutral, as the current operating environment is putting pressure on earnings.
Though we expect the company to benefit from rising interest rates, more visibility is needed to get positive on the stock.
In January, NTRS’s fourth-quarter earnings of 64 cents per share were below the Zacks Consensus Estimate of 71 cents. The decrease was due to a low interest rate, which in turn negatively affected net interest income and trust fees.
NTRS’s net interest margin (NIM) has been shrinking for the past eight quarters. NIM is expected to remain under pressure driven by the low interest rate environment amid weakening industry-wide credit trends. We also expect the company to suffer from weak loan demand in several of the markets in which it operates, including Florida, Arizona and Southern California.
Credit quality is a major concern for NTRS at this point. The company continues to suffer from the weakness in the broader economic environment. Credit metrics such as non-accrual loans, nonperforming assets and net charge-offs have accelerated from 2009 levels. Reported credit metrics reflects continuing weakness in residential and commercial real estate loans in certain markets.
Low interest rates and spreads continued to have a negative impact on several revenue sources. Furthermore, interest rates remain near historic lows, which resulted in continued compression of the yield in the securities portfolio, as maturing investments have been reinvested at lower rates. These market factors, along with higher unemployment levels and other economic strains on both individuals and businesses add to the negative cross currents on operating revenue.
On the flip side, a sign of a broadening economic recovery is visible, which will have the eventual positive impact on GDP growth, unemployment rate, consumer confidence, and on short-term interest rates. Despite the current sluggish environment, NTRS has made further investments in businesses to continue to serve the clients in the US and around the world. In Personal Financial Services (PFS) division, the company announced the acquisition of Waterline Partners, a top ranked investment advisory firm based in Los Angeles in December, 2010. The company expects Waterline to work in conjunction with the client-focused strategy of NTRS, and strengthen the company’s presence on the west coast of the United States.
On February 24, 2011, NTRS announced the acquisition of Bank of Ireland Securities Services (BOISS) for $82 million (€60 million). The acquisition is expected to close in the second quarter of 2011, depending on applicable regulatory approvals and other customary closing conditions.
Through this acquisition, NTRS anticipates to combine the fund administration business with existing activities in Ireland and continue to provide outstanding consumer service and solutions to clients. The acquisition will improve and expand NTRS’s Global Fund Service capabilities, particularly in the fund administration and ETFs.
The recent acquisitions depict strong financial position of the company. Moreover, the company is also poised to benefit with the growth in client network. However, the Dodd-Frank Act will ring in numerous regulatory changes over the next several years, which might act as a deterrent to the company’s fundamentals.
NTRS currently retains its Zacks #3 rank, which translates into a short-term ‘Hold’ rating. NTRS’s peer – The Bank of New York Mellon Corporation (BK) also retains a Zacks #3 Rank (a short-term ‘Hold’ rating).
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NORTHERN TRUST (NTRS): Free Stock Analysis Report
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