Northern Trust Downgraded – Analyst Blog

We have downgraded our recommendation for Northern Trust Corporation (NTRS) to “Underperform” from “Neutral”, given the low interest rate environment and the uncertain prospects related to changes within the financial services industry and the regulatory background.

 

Northern Trust’s second quarter earnings of 78 cents per share outpaced the Zacks Consensus Estimate by 4 cents, reflecting a somewhat improved market and new business.

 

However, the low interest rate continues to restrain Northern Trust’s earnings, impacting net interest income and securities lending fees. Net interest margin has shrunk over the past six quarters. As the low interest rate environment is expected to persist, we expect interest margin to remain under pressure.

 

Additionally, Northern Trust continued to experience asset quality pressure, witnessed by an increase in nonperforming assets. In fact, the company continues to suffer from a weakness in the broader economic environment and is expected to face a weak loan demand in several of the markets in which it operates, including Florida, Arizona and Southern California.

 

Moreover, the recent Dodd-Frank Act, which was signed into law in July 2010, will ring in numerous regulatory changes over the couple of years. Among other things, it may affect the company’s leverage limits and elevate risk-based capital and liquidity requirements, increase regulatory fees and deposit insurance assessments.

 

Nevertheless, we expect Northern Trust to benefit from increased asset management and servicing fees based on anticipated improvement in equity markets and higher volumes. Additionally, the company is poised to benefit with the growth in client network and solid capital levels.

 

However, Northern Trust currently carries a Zacks #4 Rank (Sell), implying a slight potential for downward pressure on the shares over the near term. Considering the negative arguments which have outweighed the positive ones, we have an Underperform recommendation on the stock.