DBRS: Northern Trust 1Q Results Evidence Sustainable Improvement

Summary:
• Reported 1Q net income of $230.7 million, up significantly from 1Q14, but down from $234.5 million adjusting for a tax benefit in 4Q.
• Strong FX trading results and new business bolstered results, but unfavorable movements in foreign exchange rates muted fee growth.
• 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) 1Q15 results as evidence that the Company is executing well on its strategy of delivering increased, sustainable results. Indeed, new business has been solid, expenses have been well controlled, and Northern Trust has benefitted from higher market valuations and stronger foreign exchange trading. Overall, total revenues have increased 9% over the last year, while expenses increased only 3% resulting in significant positive operating leverage. Meanwhile, assets under custody and management increased 2% and 3% during the quarter to record levels, respectively.

Highlights of the quarter include strong foreign exchange trading reflecting higher volatility and higher volumes, still solid, albeit lower Security Commissions and Trading Income following a record 4Q, and continued new business wins that show Northern Trust is competing effectively. Positively, trust, investment and other service fees, Northern Trust’s largest revenue component, increased 7% year-over-year for both Wealth Management and C&IS. Meanwhile, net interest income was down modestly sequentially despite continued average loan growth and net interest margin expansion primarily from two fewer days in the quarter. The Company noted that it reallocated a portion of their short-term deposit balances held at the Fed into securities during the quarter.

The balance sheet remains strong and supportive of the ratings. Northern Trust noted that its Liquidity Coverage Ratio is already over 100% and that its estimated fully phased in Common Equity Tier 1 Capital ratio under the advanced approach was approximately 11.5%. Meanwhile, asset quality continued to improve with both nonperforming assets and net charge-offs declining during the quarter from already low levels.

In March, the Federal Reserve did not object to Northern Trust’s capital plan, which includes a share repurchase of up to $675 million through 2Q16 and a 9% increase in the dividend (still subject to Board approval that meets today).

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.