DBRS Confirms Northern Trust Corporation at AA (low); Maintains Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Northern Trust Corporation (Northern Trust or the Company) including Northern Trust’s Issuer & Senior Debt rating of AA (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, The Northern Trust Company (Bank). The trend for all ratings is Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

Northern Trust’s ratings reflect its strong competitive positioning within asset servicing and asset management, including the dominant market share catering to clients with at least $200 million of investable assets. As a result, Northern Trust’s business model is fee-centric, most of which is recurring in nature. The ratings are also underpinned by sound asset quality, robust liquidity, and strong capital. While improving, profitability metrics remain pressured through low interest rates, still soft market-driven revenues, and higher regulatory demands. Primary risks remain reputational and operational in nature given the complexity of operating globally across numerous regulatory jurisdictions.

DBRS does not currently see positive rating pressure given the Company’s already high rating level and the current difficult operating environment. Negative rating implications could arise from diminished new business wins, sustained negative operating leverage, or an unexpected material loss which would invade capital.

For FY14, Northern Trust reported net income of $811.8 million, an 11% increase from FY13. Adjusting for one-time items, FY14 net income would have been $833.6 million, or a 14% increase. Specifically, strong growth in core trust, investment and other servicing fees more than offset still soft market-driven revenues and higher expenses. Moreover, improving asset quality metrics resulted in the provision for credit losses declining 70% in FY14 to just $6 million.

Market-driven revenues remain soft with foreign exchange trading income declining 14% to $210.1 million reflecting lower volatility. Positively, foreign exchange trading income did increase 31% QoQ with volatility increasing in each month of 4Q14. DBRS expects a stronger foreign exchange year for Northern Trust, as foreign exchange rates become more volatile. Meanwhile, securities lending revenues were down modestly and remain pressured by the low interest rate environment.

Among the three trust banks, Northern Trust generated the most significant positive operating leverage on a core adjusted basis in FY14. Specifically, adjusting for one-time items and securities losses, core revenues increased 7%, while core expenses increased 4%. As a result, the Company’s pre-tax profit margin and ROE improved to 28% and 10%, respectively.

New business wins in both Wealth Management and Corporate & Institutional Services were strong in 2014 and the pipelines were characterized as very strong by management, as Northern Trust looks to further capitalize on positive momentum. Overall, assets under management and assets under custody are at record levels reflecting the aforementioned new business wins and higher markets.

The Company’s strong, highly liquid balance sheet is primarily comprised of assets and liabilities with short durations, which limits credit and interest rate risk. Asset quality remains very sound with both nonperforming assets and net charge-offs trending lower in 2014. Meanwhile, the securities portfolio remains comprised of very high quality securities and had a duration of approximately 1.1 at year-end.

DBRS views Northern Trust as very well placed to meet more stringent regulatory requirements. Indeed, on a fully phased in basis, the Company’s common equity Tier 1 capital ratio under the advanced approach would have been approximately 11.9% (10.6% under the standardized approach). These ratios are considerably above the 7% requirement. Meanwhile, the supplementary leverage ratio was above 5% at both the Bank and holding company, which exceeds the 3% requirement applicable to Northern Trust. Lastly, the Company noted that its liquidity coverage ratio is already over 100%.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $109.9 billion in assets at December 31, 2014.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Roger Lister
Initial Rating Date: 18 March 2010
Most Recent Rating Update: 10 December 13

For additional information on this rating, please refer to the linking document under Related Research.