DBRS: Northern Trust’s 2Q14 Adjusted Earnings Improve; Shuffles Sr. Mgmt

Summary:
• Excluding one-time charges and write-offs, 2Q14 net income was $209.8 million reflecting positive adjusted operating leverage both year-over-year (YoY) and quarter-over-quarter (QoQ).
• The Company announced several senior leadership changes to improve profitability and to further develop senior leadership by exposing them to different roles.
• DBRS rates Northern Trust Corporation Issuer & Senior Debt at AA (low) with a Stable trend.

DBRS, Inc. (DBRS) views Northern Trust Corporation’s (Northern Trust or the Company) 2Q14 results as solid with improving core profitability metrics, continued net new business wins, while maintaining its strong balance sheet. Importantly, new business opportunities remain strong on the institutional side, especially in Global Fund Services. Meanwhile, Wealth Management fees grew nicely across its U.S. regions, and the Company continues to invest in its markets of Texas and New York. Excluding the $42.3 million of one-time charges and write-offs, the Company’s pre-tax profit margin improved to 29.4% from 28.6% a year ago.

Core revenues, on a fully taxable equivalent basis (excludes investment security gains or losses), increased 5.8% YoY, while adjusted core noninterest expense increased 5.3%YoY resulting in modest positive operating leverage. Positive operating leverage was more pronounced sequentially despite modestly lower net interest income from net interest margin pressure and higher money market fee waivers. Specifically, securities lending benefited from the seasonally higher international dividend season, and foreign exchange trading income increased reflecting higher volumes that more than offset multi-year lows in volatility. Net new business wins and higher market valuations resulted in continued growth in both assets under custody (AUC) and assets under management (AUM), both of which bolster fee revenues. Specifically, AUC totaled over $6 trillion, while AUM totaled $924.4 billion.

The Company announced several senior leadership changes including a new Chief Operating Officer, a new Chief Financial Officer, and new Heads of its Corporate & Institutional Services and Wealth Management businesses. The moves are being done to sharpen the Company’s focus on profitable growth, as well as to expose senior leaders to different roles. DBRS notes that the strategy will remain the same, Northern Trust has a successful track record of shuffling senior executives, and that each affected employee remains with Northern Trust.

Despite returning more capital to shareholders through dividends and share repurchases in 1H14 then 1H14 net income, capital remains strong. Indeed, 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 above 5% at both the Bank and the Company.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.