Northern Trust Corp
Question 1
The table below contains the calculations of the performance matrix of the Northern Trust Corporation.
| (in millions) | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 |
| Revenue | 4856 | 4512 | 4311 | 4193 | 4169 | 4025 | 4193 | 5734 | 5395 | 4473 | 3791 |
| Net Income | 973.8 | 811.8 | 731.3 | 687.3 | 603.6 | 669.5 | 864.2 | 794.8 | 726.9 | 665.4 | 584.4 |
| Annual average holding period returns | 0.86 | 0.76 | 0.73 | 0.69 | 0.66 | 0.81 | 1.05 | 1.06 | 1.13 | 1.17 | 1.18 |
| P/E Ratio | 18.3 | 20.57 | 20.99 | 17.78 | 15.39 | 20.17 | 16.6 | 14.95 | 23.61 | 20.88 | 20.11 |
| Dividend Yield | 1.96 | 2 | 2.39 | 2.82 | 2 | 2.14 | 2.15 | 1.46 | 1.65 | 1.78 | 1.66 |
| Period 1 | Period 2 | ||||||||||
| C1 | SP1 | XLF1 | C2 | SP2 | XLF2 | ||||||
| Annualized Return | 23.38% | 7.74% | 1.46% | 0.0675 | 0.1344 | 0.1106 | |||||
| Annualized Std | 16.24% | 7.67% | 11.70% | 0.1892 | 0.1271 | 0.1705 | |||||
| Annualized Sharpe | 1.2546 | 0.6641 | -0.09 | 0.2177 | 0.8391 | 0.489 | |||||
| Treynor Ratio: | 0.42 | 0.05 | -0.01 | 0.04 | 0.11 | 0.07 | |||||
| Beta: | 0.49 | 1.00 | 1.16 | 1.04 | 1.00 | 1.22 |
Discussion
From the above table the revenues of the company as from the year 2005 increased up to 2008 after which it had a sharp decline from 2008 to the year 2010 then it started increasing from there up to 2015. The net income also has the same trend. The main reason for the decline in these periods was because of the financial crisis in the year 2008. The recovery from this shock started in the year 2010. The corresponding net income connotes that the company’s operation costs increased in a non proportionate stance with the revenues and the sales for the year. This notion has been strengthened by the low price earning ration for the year 2008. Comparisons of the period before and after the crisis, the price earnings ratio for the period before the crisis were quite higher than those of the recent years. The main reason for this advent was because the process of recovery takes a longer time and hence the volatility of the share prices of this company is quite higher in the periods after the crisis than the past periods when the trading ambience was not quite volatile. The high volatility is shown by the higher beta in the second periods than the first period all these systematic risks have been escalated by the financial crunch of 2008.
Question 2
Cumulative return graph for the two periods
A closer look at the above cumulative graph, it is evident that the in periods 1, the rates of returns were on the rise for the company until the credit crunch occurred in the 2008 when the rates declined. In the first period, the rate of return for the company was below that of the sp500 stock while it was above the XLF stocks. In the second when the return rates started recovering, the company gained more than those of the SP500. This notion was because the Northern Trust had gained momentum to increase its stock prices in the market and therefore its returns.
Question 3 the credit rating
| Northern Trust Corporation | |||
| Standard & Poor’s Moody’s Fitch Ratings 2015 | |||
| Standard & Poor’s | Moody’s | Fitch | |
| Commercial Paper | A-1 | P-1 | F1+ |
| Senior Debt | A+ | A2 | AA- |
| Subordinated Debt | A | A2 | A+ |
| Preferred Stock | BBB+ | Baa1 | BBB |
| Trust Preferred Capital Securities | BBB+ | A3 | BBB+ |
| Outlook | Stable | Stable | Stable |
| Short-Term Deposit | A-1+ | P-1 | F1+ |
| Long-Term Deposit/Debt | AA- | Aa2 | AA |
| Subordinated Debt | A+ | A2 | A+ |
| Outlook | Stable | Stable | Stable |
| Northern Trust Corporation | |||
| Standard & Poor’s Moody’s Fitch Ratings 2007 | |||
| Standard & Poor’s | Moody’s | Fitch | |
| Commercial Paper | A+ | P-1 | F1+ |
| Senior Debt | A+ | A2 | AA- |
| Subordinated Debt | A+ | A2 | A+ |
| Preferred Stock | BBB+ | Baa1 | BBB |
| Trust Preferred Capital Securities | BBB+ | A1 | BBB+ |
| Outlook | Stable | Stable | Stable |
| Short-Term Deposit | A-1+ | P-1 | F1+ |
| Long-Term Deposit/Debt | AA- | A1 | AA |
| Subordinated Debt | A+ | A2 | A+ |
| Outlook | Stable | Stable | Stable |
From the table above the it is evident that although the general ratings were stable for the company, the individual components of the measures of ratings for the company as depicted by the three credit rating companies has gone down tremendously. For example, the commercial paper in the first period is rated highly than the second period. This means that at the time of financial crisis, the company borrowed much from the securities market and made sure that it gave much attention to the liquidity of the firm which was at stake by then. The transcending effect of this notion is that the company ability to pay back the commercial paper reduced making its rating to go down as depicted Standard and poor’s rating. Additionally, due to the constriction brought about by the credit crunch of the year 2008, it’s evident that the company is indeed having trouble in regaining the market share and the rise in stock prices has not reached its optimal since other market sectors are also affected by the liquidity problem which they are still recovering from.
On the account of the subordinate debt, the ratings have also reduced from period 1 to period 2 which simply means that the company is undergoing management problems as caused by the volatility of the market as a rippling effect of the 2008 global financial crisis. The general outlook of the company is stable for the two periods since the menace of credit crunch affected every single firm which means that the ratings were not heightened due to the conception that it affected the whole of the country and the globe at large. In order to recover from this instability, the company has tried to invest in short term instruments to allow it regain its liquidity and in the long run clear its debts in order to remain stable at the period of economic predicaments. In general the company is perceived by the credit rating companies to be one of the most stable due to the culture it has of maintaining its balance of the debts and equity. it does this by making sure that it gives much attention to the notion of moderate liquidity while meeting the long term goals of the firm.
Question 4
Financial statement analysis
In term of the asset composition, the company had more assets coming from the loans and leases that the financial institution has advanced to the various clients it have. The company is keen to advance almost 60% of its fund to the outside consumers and not the staff. This move is quite important in ensuring that they get the best interest in the market which is not discounted in any way. Additionally, the commercial loans are higher than the personal loans since the company has made it easier to acquire these commercial loans than the personal loans for the reason that the commercial loans have low risk of default thereby reducing the advent of the growth of nonperforming loans for the company. The major source of liquidity for this company is the deposits that the client saves with the company. It this prospect, the company has maintained a high level of rapport with its clients and therefore almost 80% of its liquidity is being fueled by the deposits that the company gets from the investors and the savers into the bank. The major of source of financing for this firm is the retained earnings and the additional paid capital. The common stock takes a smaller portion of around 7% of the totals source of finance.
The company has also borrowed extensively from the securities and bonds market which tends to fuel its activities at the times when it has liquidity problems. The transcending effect of this notion is that the company ability to pay back the commercial paper reduced making its rating to go down as depicted Standard and poor’s rating. Additionally, due to the constriction brought about by the credit crunch of the year 2008, its evident that the company is indeed having trouble in regaining the market share and the rise in stock prices has not reached its optimal since other market sectors are also affected by the liquidity problem which they are still recovering from. On the account of the subordinate debt, the ratings have also reduced from period 1 to period 2 which simply means that the company is undergoing management problems as caused by the volatility of the market as a rippling effect of the 2008 global financial crisis. The general outlook of the company is stable for the two periods since the menace of credit crunch affected every single firm which means that the ratings were not heightened due to the conception that it affected the whole of the country and the globe at large. In order to recover from this instability, the company has tried to invest in short term instruments to allow it regain its liquidity and in the long run clear its debts in order to remain stable at the period of economic predicaments.
Question 5
Stress test report
The recent stress report from the Federal Reserve website connotes that the company faces financial distress in the areas of liquidity. This has been evidenced by the huge borrowings the company has had in terms of short term securities. Due to this occurrence the company has uses a lot of funds in paying up the interest on the short term securities which are deemed to bring on board the advent of increase in the short term liabilities the main reason for the liquidity problem is because of the various increase in the nonperforming loans that makes the company allocate high funds as a provision for default in loans. The report also mentioned that the stock prices in the recent past has not been quite stable owing to the financial crisis that affected the banking and financial sector as a whole. On the account of the subordinate debt, the ratings have also reduced from period 1 to period 2 which simply means that the company is undergoing management problems as caused by the volatility of the market as a rippling effect of the 2008 global financial crisis. The general outlook of the company is stable for the two periods since the menace of credit crunch affected every single firm which means that the ratings were not heightened due to the conception that it affected the whole of the country and the globe at large.
Question 6
The Jensen factor
| SUMMARY OUTPUT | ||||||||
| Regression Statistics | ||||||||
| Multiple R | 0.8330758 | |||||||
| R Square | 0.6940152 | |||||||
| Adjusted R Square | 0.6885512 | |||||||
| Standard Error | 0.0167142 | |||||||
| Observations | 229 | |||||||
| ANOVA | ||||||||
| df | SS | MS | F | Significance F | ||||
| Regression | 4 | 0.1419342 | 0.035484 | 127.01563 | 1.97E-56 | |||
| Residual | 224 | 0.0625774 | 0.000279 | |||||
| Total | 228 | 0.2045116 | ||||||
| Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | |
| Intercept | -4.64E-05 | 0.0011123 | -0.04172 | 0.9667586 | -0.002238 | 0.0021456 | -0.002238 | 0.002146 |
| SP500-Rf | -0.235234 | 0.1682956 | -1.39774 | 0.1635733 | -0.566879 | 0.0964114 | -0.566879 | 0.096411 |
| Rut-SP500 | 0.0263399 | 0.1161374 | 0.2268 | 0.8207863 | -0.202522 | 0.2552015 | -0.202522 | 0.255202 |
| VIVIX-VIGIX | 0.0805885 | 0.1793094 | 0.449439 | 0.6535499 | -0.27276 | 0.4339375 | -0.27276 | 0.433938 |
| XLF-Rf | 1.1309603 | 0.1322349 | 8.552659 | 1.905E-15 | 0.8703767 | 1.3915439 | 0.8703767 | 1.391544 |
| Jensens Alpha | -0.24% |
From the calculation above, the Jensen factor of -0.024% accentuates that the portfolio has a negative correlation with the systematic risks such that the higher the volatility in the market prices (higher risks) the lower the profits. Additionally, this effect will not be adversely felt because of the diminutive value of the factor. To the SP500 stock, the company growth is negatively correlated with the SP500 since the risk coefficient is negative factor. The other three variables are positively correlated making the portfolio combination quite risky. In the event that the company is facing and systematic risks that would make it fall, then it will fall the same way as Rut-SP500, VIVIX-VIGIX and XLF rf. It is only with SP500 that will have profits at the time Northern Trust is facing high risk of loss. A closer look at the coefficient of determination, the regression equation formed to give the relationship between the company stock and the other stocks in this portfolio can depict the true results up to a tune of 69.4%. This means that the other 30.6% are not explained by the regression so far formed.
Question 7
From the analysis above, the company will deliver a positive alpha above the ETF because the company is seen to have a substantial increase in the returns of its stocks since the year 2008 as depicted by the cumulative graph and at the same time, the company has a string indicator of Jensen, Sharpe and Treynor ratio that is deemed to be quite essential in making it be at a competitive edge. Additionally, with the negative correlations with the SP500 stocks in terms of growth of returns, the company is expected to have high growth as explained by these economic indicators.
Works cited
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Anderson, Seth C, and Parvez Ahmed. Mutual Funds: Fifty Years of Research Findings. New York: Springer, 2005. Internet resource.
Bodie, Zvi, Alex Kane, and Alan J. Marcus. Essentials of Investments. , 2017. Print.
Brealey, Richard A, and Stewart C. Myers. Principles of Corporate Finance. Singapour: Mc Fraw-Hill, 2008. Print.
Israelsen, Craig L. 7twelve: A Diversified Investment Portfolio with a Plan. Hoboken, N.J: Wiley, 2010. Internet resource.
Kapoor, Jack R, Les R. Dlabay, and Robert J. Hughes. Personal Finance. Boston: McGraw-Hill, 2004. Print.
Watsham, Terry J, and Keith Parramore. Quantitative Methods in Finance. London [u.a.: Internat. Thomson Business Press, 2008. Print.