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 the Company’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 (the 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 and deeply entrenched franchise, which holds top tier positions within the fee-centric businesses of managing and servicing client assets. Its broad-based, scalable business profile underpins its strong franchise and resilient earnings generation capacity. Indeed, despite the sustained difficult operating environment, including low interest rates, significant market volatility, and modest global economic growth, Northern Trust generated core positive operating leverage in FY15, resulting in improved pre-tax profit margin and ROE at 31.5% and 11.54%, respectively. The ratings also consider Northern Trust’s strong balance sheet fundamentals including robust liquidity, sound asset quality, and ample capital. DBRS notes that the Company’s 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 continuing, challenging operating environment. Meanwhile, negative rating implications could arise from diminished new business wins, sustained negative operating leverage, or an unexpected material loss, which would invade capital.

Reflective of its strong earnings capacity, Northern Trust reported net income of $973.8 million for FY15, a 20% increase from FY14. Adjusting for one-time items, including the FY15 $99.9 million pre-tax gain related to the sale of Visa Inc. Class B common shares, $45.8 million of voluntary cash contributions to certain constant dollar net–asset value funds, and a $17.8 million impairment of the residual value of certain aircraft under leveraged lease agreements, Northern Trust’s net income totaled $951.4 million for FY15, up 14% from FY14.

Overall, total revenues were improved year-over-year (YoY), driven by growth in trust, investment and other servicing fees, improved spread income, and enhanced foreign exchange trading income. Higher trust, investment and other servicing fees reflected business wins that were well balanced across geographies, client and product types, and a dynamic that should be sustained, given that management continues to characterize the Company’s pipelines as strong. Improved spread income was driven by higher levels of average securities and average loans, despite a slight narrowing of the net interest margin. Meanwhile, improved foreign exchange trading income was driven by higher currency volatility.

Client assets under custody totaled $6.1 trillion at December 31, 2015, up 1.9% from September 30, 2015, and up 1.7% from December 31, 2014. The quarter-over-quarter (QoQ) increase reflected improved equity markets and new business, partially offset by the impact of a stronger dollar against most major currencies. Meanwhile, assets under management totaled $875.3 billion at December 31, 2015, down 1.3% from September 30, 2015, and down 6.3% from December 31, 2014. The QoQ decline was primarily due to lower securities lending collateral, while the annual decline reflected, in part, outflows from certain sovereign wealth fund clients.

Expenses were higher YoY, reflecting investments in staffing and technology to support the growth of the Company, and changing regulatory requirements. Higher staffing costs were primarily related to the Company’s global operating centers in lower cost locations in Bangalore, Manila, and Limerick, as well as its new operating center in Tempe, Arizona. Finally, improving credit quality along with a change in estimation methodology for inherent losses led to a $43 million credit to provisions for loan loss reserves in FY15, benefiting the bottom line.

The Company’s fundamentals remain strong, reflecting a highly liquid balance sheet that is primarily comprised of assets and liabilities with short durations, which limits credit and interest rate risk. Asset quality remains sound, reflecting lower YoY levels of nonperforming assets and very low net charge-offs. Meanwhile, the securities portfolio is comprised of high quality instruments.

Finally, ratings also reflect Northern Trust’s strong capital profile, which includes a common equity Tier 1 capital ratio of approximately 11.9% (advanced approach), and supplementary leverage ratios above 5% for both the Bank and holding company, which exceeds the 3% requirement applicable to Northern Trust.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $116.7 billion in assets at December 31, 2015.

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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (December 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: 18 March 2010
Most Recent Rating Update: 23 February 2015

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