(NTRS) Northern Trust Analyst Stays Neutral on Shares

We are maintaining our Neutral recommendation on Northern Trust Corporation (NTRS) based on favorable acquisition spree and global expansions of the company.

In May 2011, Northern Trust agreed to acquire Omnium LLC, a leading hedge fund administrator, from Citadel. The acquisition of Omnium, which has around $70 billion in assets under administration, will enhance Northern Trust’s capabilities and create an industry-leading hedge fund administration platform for institutional investors. The deal is subject to regulatory approvals and customary closing conditions, and is expected to close by the third quarter of 2011.

Northern would pay at least $100 million for this acquisition. Omnium will be integrated into Northern Trust’s Corporate & Institutional Services business unit as Northern Trust Hedge Fund Services, LLC. It will provide comprehensive administrative and middle office services including trade processing, valuation, real-time reporting, cash management, accounting, collateral management and investor servicing to hedge funds and large institutional investors.

Moreover, Northern Trust announced the expansion of its services in Australia. The company incorporated Unit Registry solutions to improve its fund administration capabilities in Australia. Northern Trust has signed an agreement with Computershare to provide such services combining local expertise with a wide range of worldwide capabilities.

In June 2011, Northern Trust completed the acquisition of Bank of Ireland Securities Services (BoISS) from Bank of Ireland Group for €60 million ($82 million) announced in February 2011. Through this acquisition, Northern Trust expects to combine the fund administration business with the existing activities in Ireland and provide outstanding consumer service and solutions to clients. The acquisition will improve and expand Northern Trust’s Global Fund Service capabilities, particularly in the fund administration and ETFs.

Despite the current sluggish environment, the company has made further investments in businesses to continue to serve the clients in the U.S. and around the world.

In April, Northern Trust reported first-quarter 2011 earnings of 59 cents per share, which was below the Zacks Consensus Estimate of 65 cents. The decrease was attributable to low interest rate environment, which in turn, negatively affected net interest margin. In the reported quarter, earnings per share benefited from the reduction of an indemnification liability related to Visa Inc. (V). The related pre-tax expense reduction summed up to $10.1 million ($6.4 million after tax, or 2 cents per share).

In the first quarter of 2011, equity markets improved for the third consecutive quarter. Moreover, increased PFS fees reflected an improvement of 10.5% in equity markets. Therefore, the improvement in the equity markets is expected to continue to have a beneficial effect on the company’s assets under management (AUM) and assets under custody (AUC) in the forthcoming quarters.

On the flip side, Northern Trust’s net interest margin (NIM) has been shrinking for the past eight quarters, while improved sequentially in the reported quarter. NIM was 1.32% in the first quarter, slightly up from 1.30% in the prior quarter, but down from 1.44% in the prior-year quarter. NIM is expected to remain under pressure due to 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.

Moreover, credit quality is still a concern for Northern Trust at this point. The mixed trend of metrics continued in the first quarter of 2011. Though provision for credit losses, non-performing loans and net charge-offs decreased, as expected, Northern Trust continued to experience asset quality pressure. Further, nonperforming residential real estate loans also increased in the quarter, representing 49% of total nonperforming loans. Therefore, though credit metrics are improving, continuing weakness is still reflected in residential real estate loans in certain markets thus increasing our concern.

Northern Trust currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Northern Trust’s peer – Huntington Bancshares Inc. (HBAN) retains a Zacks #2 Rank (a short-term Buy rating).

HUNTINGTON BANC (HBAN): Free Stock Analysis Report

NORTHERN TRUST (NTRS): Free Stock Analysis Report

VISA INC-A (V): Free Stock Analysis Report

Zacks Investment Research

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