Northern Trust Is a Banking Buy - Barron's

Feb.21.09 | About: Northern Trust (NTRS)

With losses growing and balance sheets crumbling, investors and customers have fled from some of the nation's biggest banks. But according to Barron's Dimitra Defotis, the outlook for Northern Trust (NASDAQ:NTRS) is promising and shares could rally 20% in the next year.

Trading around $56, shares are off about 37% from a September high, and Northern Trust accepted around $1.6B of TARP funds, partly to offset losses on securities lending. Even so, the bank's balance sheet is in better shape than most of its peers. Its client base is expanding, helped by some big client wins overseas (about 50% of the bank's revenue is non-U.S., mostly from Europe and major Asian cities). The bank has mostly managed to avoid housing financing, and more than half of its revenue comes from fee income. CEO Frederick Waddell says half the new business comes from existing clients, explaining "you take really good care of them, and they buy more products."

Given current economic conditions, analysts expect a 20% drop in 2009 earnings, but a 12% gain in 2010. Waddell maintains a positive outlook for the company: "Unless you think the world is going to disappear in the next five years, our position as the leading wealth manager in the United States should serve us well as the U.S. market recovers."

Northern Trust, which specializes in trust services for wealth clients and custodial services for institutions, trades for 14 times 2009 estimates and has long commanded a premium compared to other trust banks. The bank's $31B loan portfolio makes up only a small part of the business and investors should take further comfort in knowing just 0.33% of the holdings were non-performing in 2008. Its Tier 1 ratio as of Dec. 31 was a healthy 13.1%.

  • Murali Gopal, of Keefe, Bruyette & Woods, recently downgraded Northern Trust to Market Perform but has maintained a $66/share target.

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  • Northern Trust: Q4 EPS of $1.39 beats by $0.47. Revenue of $1.15B (+18.2%) vs. $968.2M. (PR)
  • Barron's highlighted Northern Trust in January as a standout in the battering banking industry.