Balanced Risk-Reward for Northern Trust - Analyst Blog

On Jun 2, 2014, we issued an updated research report on Northern Trust Corporation NTRS. This regional bank recently reported dismal first-quarter 2014 results. Lower-than-expected results were mainly due to a rise in operating expenses, partially offset by top-line growth. However, a strong capital position as well as rise in assets under management and assets under custody were the positives. Though the company shows stability in its fundamentals, we remain cautious due to the current economic uncertainty across the industry.

Northern Trust reported first-quarter 2014 earnings of 75 cents per share, missing the Zacks Consensus Estimate by 3.85%. However, it was up 5.6% year over year. Net income for the quarter came in at $181.4 million, up 11% year over year.

Northern Trust remains focused on managing its capital levels efficiently. This is well evident from the clearance of the 2014 stress test. Following the Federal Reserve's approval of the capital plan, in Apr 2014, the company increased its quarterly common stock dividend by 6.5% to 33 cents per share. Moreover, in first-quarter 2014, the company repurchased common stock at a cost of $163 million and paid common stock dividends worth $75 million, representing a dividend payout ratio of 41.3%.

Northern Trust successfully executed the Driving Performance initiatives and contributed about $270 million in pre-tax profit improvements in 2013, surpassing the goal of $250 million. In 2014, the company established internal productivity targets on both the revenue and expense side. Management expects this next round of productivity efforts to continue to improve the financial performance in a sustainable way, with other factors remaining constant. The ultimate measure of the success of these efforts will be the company's ability to consistently achieve its financial target of a return on equity between 10% and 15%.

Despite strong fundamentals, we believe there are certain issues that may create pressure on the company's financials in the near term. These include a declining net interest margin due to low interest rate environment and the prevailing stringent regulatory landscape.

Further, the Zacks Consensus Estimate over the past 60 days declined 2.9% to $3.32 per share for 2014. Also, for 2015 it decreased 2.1% to $3.77 per share, over the same time frame. Northern Trust currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked finance stocks include BofI Holding, Inc. BOFI, CVB Financial Corp. CVBF and Western Alliance Bancorporation WAL. All these 3 stocks carry a Zacks Rank #1 (Strong Buy).