Northern Trust Acquires Waterline - Analyst Blog

Chicago-based Northern Trust Corporation (NTRS) has acquired Los Angeles-based Waterline Partners, LLC, an investment advisory firm, catering to the needs of high profile clients. The company, however, did not disclose any financial terms of the transaction.

The acquired firm will be integrated with Northern Trust's Personal Financial Services business unit and will boost the company's client servicing capabilities. The entire team of Waterline, including its chief investment officer and managing partner will be joining Northern Trust. Waterline has roughly $807 million in assets under management.

Northern Trust's Personal Financial Services business unit delivers customized investment management and trust services to high net worth individuals and families through a network of 81 offices in 18 states in North America. The unit accounted for 36% of total fees in the fiscal year 2009, while as of September 30, 2010, it had its total assets under custody (AUC) of $349.1 billion and total assets under management (AUM) of $148.6 billion.

Northern Trust Corporation with 18 U.S and 16 international offices, is a multi-bank holding company engaged in brokerage services, investment management, trust services and global investments. The company owns two investment management subsidiaries, Northern Trust Investments and Northern Trust Global Advisors Inc.

In the third quarter of 2010, the company's net earnings declined to 64 cents per share, versus 82 cents per share; reported both in the prior quarter and the prior-year quarter. Earnings were also below the Zacks Consensus Estimate of 72 cents per share, attributed to a low interest rate environment and lingering economic recovery.

Revenue also fell short of the Zacks Consensus Estimate of $921 million due to lower interest and non-interest income. AUM increased 9% sequentially and 8% year over year to $657.2 billion, while AUC soared 10% both sequentially and year over year to $3.9 trillion. The increase in assets reflected a continued business growth.

We believe, in the quarters ahead, Northern Trust will experience an increase in asset management and servicing fees based on anticipated improvement in equity markets and higher volumes. Moreover, benefits are expected from an expansion of client base.

However, low interest rates continue to restrain earnings, impacting net interest income and security lending fees. Moreover, there are lurking uncertainties related to regulatory changes over the next several years, which might act as a deterrent to the company's fundamentals. We currently maintain an Underperform recommendation on the stock.