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On Sep 5, 2013, we maintained our long-term recommendation on Northern Trust Corporation (NTRS - Analyst Report) at Neutral based on its well-managed global franchise, strong capital base and expense reduction initiatives. However, regulatory issues coupled with fundamental pressures on the banking sector might act as deterrents to the company’s fundamentals.

Why Neutral?

Northern Trust reported its second-quarter 2013 earnings of 78 cents per share, lagging the Zacks Consensus Estimate by a nickel. However, this compared favorably with the prior-year quarter earnings of 73 cents per share.

Results benefited from top-line growth and a strong capital position on a year-over-year basis, partially offset by a rise in operating expenses. However, deteriorating credit quality was the headwind.

Northern Trust successfully executed the Driving Performance initiatives announced at the beginning of 2012, which contributed about $160 million in pre-tax profit improvements in 2012, split approximately 40–60 between revenue and expense items and boosted pre-tax margin by about 375 basis points. Moreover, the company remains on track to deliver $250 million of pre-tax benefits by the end of 2013, recording a benefit of $55 million and $65 million in the first two quarters of 2013, respectively.

However, low short-term interest rates along with persistent narrow spreads at the short end of the yield curve continue to negatively impact net interest income and money market mutual fund fees. Therefore, NIM reduced 13 basis points year over year to 1.13% in the first half of 2013. Though interest rates have started rising, attributed to lower yields on certain earning assets and reducing average earnings assets, NIM is expected to remain under pressure.

For Northern Trust, the Zacks Consensus Estimate for 2013 and 2014 remained stable at $3.05 and $3.47 per share, over the last 7 days. Hence, Northern Trust carries a Zacks Rank #3 (Hold).

Other Major Banks to Consider

Some major regional banks that are worth considering include BankUnited, Inc. (BKU - Analyst Report) with a Zacks Rank #1 (Strong Buy), while M&T Bank Corporation (MTB - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) carry a Zacks Rank #2 (Buy).

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