DBRS: Northern Trust 4Q13 Solid Revenue Growth Marred by Legal Settlement & Higher Core Expenses

Summary:

• Results included a $19.2 million pre-tax charge related to a legal settlement, as well as generally higher core expenses.
• The Company exceeded its pre-tax benefit Driving Performance FY13 target by $20 million
• DBRS rates Northern Trust Corporation Issuer & Senior Debt at AA (low) with a Stable trend.

DBRS, Inc. (DBRS) considers Northern Trust Corporation’s (Northern Trust or the Company) 4Q13 results as solid; reflecting strong new business wins, the benefits of higher equity markets, and solid revenue growth. Nonetheless, core expense growth outpaced the revenue growth resulting in negative operating leverage sequentially, as the Company continues to make investments in the business and meet higher risk management, compliance, and regulatory requirements.

Northern Trust reported net income of $169.7 million in 4Q13, but results included a one-time $19.2 million pre-tax charge related to a legal settlement. Excluding this charge and the gain on the sale of an office building in 3Q13, core net income would have been $181.6 million, or down 2% sequentially.

Positively, the Company’s Driving Performance initiatives contributed approximately $80 million of pre-tax benefit to 4Q13. For the year, the initiatives provided a benefit of $270 million, or $20 million above Northern Trust’s stated goal.

The Company’s balance sheet remains strong and conservative, which supports the rating. Indeed, capital remains sound even with accelerating share repurchases and balance sheet growth that was primarily driven by an inflow of deposits. Meanwhile, Northern Trust’s assets remain high quality.

Overall, assets under custody grew 6% sequentially to $5.6 trillion, while assets under management grew 5% to $884.5 billion.

For FY13, operating leverage was basically neutral and ROE was 9.5%, which remains below Northern Trust’s target range of 10% to 15%. Management noted that they expect to achieve their target ROE in 2014.

DBRS rates Northern Trust Corporation Issuer & Senior Debt at AA (low) with a Stable trend.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]