DBRS: Northern Trust’s 3Q15 Sound: Core Earnings Down QoQ, Yet Up YoY

Summary:
• Northern Trust reported 3Q15 net income of $234.6 million, down from $246.7 million (excluding one-time items) for 2Q15, yet up from $204.5 million for 3Q14.
• Lower sequential earnings reflected a decrease in foreign exchange trading income, and lower trust investment and other servicing fees, but overall results remained sound, demonstrating the strength of the franchise.
• 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) 3Q15 results as sound. Sequential earnings, excluding several 2Q15 non-core items declined 5%, mostly reflecting lower foreign exchange trading income, and seasonally lower securities lending fees. Meanwhile, on a year-over-year (YoY) basis, core net income increased 15%, mostly reflecting new business mandates, which led to higher trust, investment and other servicing fees, as well as due to higher foreign exchange trading fees. Overall, the Company’s core expense base remains well managed, even with additional regulatory related expenses in the quarter.

Excluding a non-core 2Q15 $99.9 million gain from the sale of Visa stock, fee income was moderately lower quarter-on-quarter (QoQ), reflecting a 16% decrease in foreign exchange trading income, along with a 1% decline in trust, investment and other servicing fees. Lower foreign exchange fees were driven by muted currency volatility in 3Q15. The decline in trust, investment and other services fees reflected lower securities lending fees, driven by a decrease in spreads due to the international dividend season that occurred in 2Q15. Meanwhile, the recent downturn in the equity markets led to a moderate decline in wealth management fees. Finally, excluding the impact of a 2Q15 leveraged lease impairment, net interest income was relatively stable QoQ.

DBRS notes that assets under custody decreased 3.6% sequentially, and assets under management (AUM) contracted by 6.2%. Lower AUM mostly reflected a decrease in equity assets, due to the recent downturn in the markets, as well as due to outflows from certain sovereign wealth fund clients. Fixed income assets were also lower, driven by the loss of one sizable passive mandate. Importantly, the Company continues to generate new business mandates and management has indicated that new business opportunities remain robust and momentum is still strong.

Expenses remain well managed, especially considering investments being made to support growth and increase efficiencies. Excluding a 2Q15 $45.8 million charge related to voluntary cash contributions to certain constant dollar net asset value funds, sequential expenses were slightly up QoQ.

The Company’s strong balance sheet remains supportive of the ratings. Specifically, on a fully phased-in basis, Northern Trust estimated its common equity tier 1 ratio at 10.4% under the standardized approach. Meanwhile, management noted that Northern Trust is already compliant with the fully phased in Liquidity Coverage Ratio.

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.