DBRS: Northern Trust’s 1Q14 Results Reflect Positive Operating Leverage Both QoQ & YoY

Summary:
• Excluding 4Q13’s legal settlement, net income was relatively stable at $181.4 million.
• Even with the continued low interest rate environment, Northern Trust was able to generate positive operating leverage both QoQ and YoY on an adjusted core basis.
• 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) 1Q14 results as solid reflecting positive operating leverage, continued new business wins, and the maintenance of its strong balance sheet. Nonetheless, the Company’s return on equity was 9.3% for the quarter, which is still below its target range of 10% to 15%.

Excluding an other-than-temporary impairment charge related to certain Community Reinvestment Act securities, revenues were relatively stable sequentially, even with lower net interest income from two fewer days in the quarter. Noninterest income was up modestly benefiting primarily from higher institutional trust, investment and other servicing fees. Revenue headwinds included higher money market fee waivers and currency volatility being at multi-year lows. Meanwhile, adjusted noninterest expenses declined by approximately 1% allowing Northern Trust to generate modest positive operating leverage sequentially.

Solid net new business and slightly higher market valuations contributed to both assets under custody and assets under management growing 3% during the quarter. Management noted that Wealth Management new business wins during the quarter were higher than 4Q13’s, but less than 1Q13’s new business wins.

The Company’s balance sheet remains strong with improving asset quality metrics, ample liquidity, and sound capital metrics. The Federal Reserve did not object to Northern Trust’s 2014 capital plan, which included repurchasing up to $425 million of common stock over the next four quarters and a planned increase in the dividend to $0.33 cents per share.

Based on Northern Trust’s interpretation of the final Basel III rules, the Company estimated that its common equity tier 1 capital ratio on a fully phased-in basis was approximately 11.1% under the advanced approach at quarter-end. Meanwhile, Northern Trust estimated its supplementary leverage ratio was approximately 5%. Both metrics have comfortable cushions compared to regulatory requirements, as the Company is only subject to a 3% leverage ratio unlike its larger trust bank peers.

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.]