Neutral on Northern Trust

We are reiterating our Neutral recommendation on Northern Trust Corporation (NTRS - Analyst Report) based on the company’s focus on continuing profit improvement initiatives and initiation of new businesses with the addition of both personal and institutional clients and assets. However, third-quarter 2012 earnings lagged the Zacks Consensus Estimate by a penny.

Overall, results were adversely impacted by lower top line, partially offset by decline in non-interest expenses. Though the shrinkage in expenses reflects prudent cost management by the company, deteriorating credit quality was a negative for the quarter.

Against the backdrop of macroeconomic headwinds such as very low interest rates and a slow global economic recovery, Northern Trust focused on initiating new businesses in the third quarter of 2012 with increased aggression. Moreover, the company’s innovative technology-driven hedge fund administration capabilities brought to the marketplace via Northern Trust Hedge Fund Services clearly provides an attractive proposition to the clients.

With the objective of supporting new investment activities, management is taking steps to tackle expense growth and reinstate operating leverage to the company over the upcoming quarters. Management plans to meet its cost saving targets by streamlining its processes, increasing technological efficiency and corporate initiatives including office space consolidation. Moreover, Northern Trust’s profit improvement initiatives are anticipated to benefit annual pre-tax income by approximately $250.0 million by the end of 2013.

On the flip side, low short-term interest rates along with persistent narrow spreads at the short end of the yield curve continue to adversely affect net interest income and money market mutual fund fees. Based on the current economic scenario, we expect the low-interest environment to linger.

Moreover, risks and ongoing concerns regarding the debt crisis in Europe had a negative impact on the global economic recovery, which dampened consumer confidence and spending.

We believe that the risk-reward profile of Northern Trust is currently balanced and hence, we have reiterated our Neutral recommendation on its shares.

Northern Trust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Huntington Bancshares Inc. (HBAN - Analyst Report) is another Zacks #3 Rank in the same industry.