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Northern Trust's Revenue Growth on Track, Time to Hold?

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On Aug 23, 2016, we issued an updated research report on Northern Trust Corporation NTRS. Shares of this Chicago, IL-based asset manager have gained more than 15% over the past six months. We believe this growth story comes on the back of the company’s consistent focus on new business, strategic initiatives and maintenance of a strong capital position.

Amid a competitive business environment, the company continues to benefit from its robust wealth-management business with diversified geographic footprint. Organic growth remains a key strength as revenues grew at a CAGR of 5.2% over the last six years (2010–2015), with the trend continuing in first-half 2016 as well.

Further, management is taking steps to tackle expense growth with several technology and regulatory initiatives, in order to support the new investment activities. The company is particularly striving to improve the ratio of expenses to trust and investment fees as it is a key element in driving return on equity (ROE). Notably, the company recorded ROE of 11.82% as of Jun 30, 2016, within its target range of 10–15%.

Additionally, Northern Trust demonstrated its capital strength with the successful clearance of the 2016 Dodd-Frank Act Stress Test (DFAST). Moreover, it remains committed to enhance shareholders’ value. In Jun 2016, its capital plan received the Federal Reserve’s approval following which it raised its quarterly common stock dividend to 38 cents per share from 36 cents last month. The plan also includes a common share repurchase program of up to $275 million to be carried out in the period between Jul 2016 and Jun 2017.

Nevertheless, we remain cautious owing to several issues faced by Northern Trust that pose a threat to the company’s financials. Increasing risk and compliance requirements remain a concern for the company as regulatory costs continue to weigh on expense base.

Among other headwinds, margin compression amid slow rise in interest rates and global economic uncertainties are likely to curtail profitability.

Over the past 30 days, Zacks Consensus Estimate for 2016 remained stable at $4.22 per share, while it declined slightly to $4.54 for 2017.

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