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Balanced View on Northern Trust

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We are reiterating our Neutral recommendation on Northern Trust Corporation (NTRS - Free Report) , based on the company’s focus on profit improvement initiatives and initiation of new business with the addition of both personal and institutional clients and assets. Moreover, the completion of acquisitions in 2011 furnished Northern Trust with attractive clients coupled with innovative competencies that will help drive future new business.

Against the backdrop of macroeconomic headwinds such as very low interest rates and a slow global economic recovery, Northern Trust focused on initiating new business in the first quarter of 2012 with increased aggression. The acquisitions of Bank of Ireland Securities Services and Omnium hedge fund administration business, which closed in 2011, also contributed to the company’s revenue growth.

Moreover, Northern Trust’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.

In April 2012, Northern Trust’s first-quarter 2012 earnings of 67 cents per share surpassed the Zacks Consensus Estimate by a penny. Overall, results were marked by higher non-interest income, strong new business and improved equity markets. Moreover, decline in non-interest expenses and improved credit quality were the positives for the quarter. The fall in net interest income acted as a headwind for the company.

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 has dampened consumer confidence levels and spending. Notably, Northern Trust’s gross exposure in Portugal, Italy, Ireland, Greece and Spain, the Eurozone countries, totaled about $610 million as of March 31, 2012. We believe that continuing economic challenges in Europe and the related disruptions poses as risks for Northern Trust’s earnings.

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. One of Northern Trust’s peers – Huntington Bancshares Inc. (HBAN - Free Report) also retains a Zacks #3 Rank.

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