DBRS: Northern Trust’s 3Q14 Strong New Business, but Earnings Decline

Summary:
• Reported 3Q14 net income of $204.5 million, down from $209.8 million, which excludes one-time charges and write-offs.
• Northern Trust generated adjusted core positive operating leverage year-over-year (YoY), but not sequentially reflecting seasonality and higher expenses.
• 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) 3Q14 results as sound. While trust, investment and other service fees were higher sequentially, other noninterest income were generally weaker, resulting in a modest decline in revenues compared to the seasonally stronger second quarter. Meanwhile, adjusted expenses increased 1% resulting in negative operating leverage sequentially. Nonetheless, DBRS notes that Northern Trust has generated positive operating leverage both YoY and YTD on a core adjusted basis. The strong balance sheet remains supportive of the rating particularly when accompanied by improving asset quality, sound capital and robust liquidity.

Adjusted core revenues were basically stable with growth in net interest income, trust, investment and other service fees. However, foreign exchange trading income and securities lending revenues were soft, declining both YoY and sequentially. Foreign exchange trading was hampered by low volatility and some seasonality, while securities lending was down following the seasonally stronger international dividend season in the second quarter. Moreover, the low interest rate environment remains a headwind, resulting in higher money market fee waivers and continued modest net interest margin compression.
Both assets under custody and management declined modestly during the quarter primarily reflecting lower international equity valuations. Highlights of the quarter include the onboarding of Bridgewater Associates onto the Company’s hedge fund servicing platform, and other new business wins. DBRS notes that Northern Trust’s ETF business continues to gain significant traction. Management noted that new business growth for both Corporate & Institutional Services and Wealth Management was strong and broad-based.

Capital remains a source of strength and capital was bolstered by a $400 million perpetual preferred stock issuance during the quarter. Specifically, Northern Trust estimated that its common equity Tier 1 capital ratio on a Basel III fully phased-in advanced approach basis was approximately 12.3%. Meanwhile, Northern Trust’s supplementary leverage ratio is above 5% at both the holding company and Bank.

Positively, the Company noted that it is already fully compliant with the 100% minimum requirement mandated by the liquidity coverage ratio even though it does not go into effect until 2017.

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.