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 Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA3. The Company’s Support Assessment is also SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

Northern Trust’s ratings reflect its leading market positions in asset servicing and asset management, as well as its premier personal trust business. Consequently, the Company’s business model is primarily fee-based, most of which is recurring in nature. The ratings also consider Northern Trust’s strong balance sheet fundamentals, including ample funding and liquidity, strong asset quality, and robust 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.

For 2016, Northern Trust reported net income of $1.03 billion, up 6% from FY15, representing an ROE of 11.9% (up from 11.5% in 2015). Specifically, total revenues increased 5% in 2016 led by growth in trust, investment and other servicing fees, benefiting from new business and lower money market mutual fund fee waivers. Additionally, with a wider net interest margin and higher level of earning assets, net interest income reflected significant improvement from the prior year. However, foreign exchange trading income declined 10% as a result of lower client volumes. Meanwhile, noninterest expenses were up 6% due to increased compensation, outside services, and equipment and software expense.

Client assets under custody totaled $6.7 trillion at December 31, 2016, an 11% increase compared to the prior year, driven by solid new business and favorable equity markets, partially offset by the currency translation impact of a stronger dollar. Meanwhile, assets under management stood at $942 billion at year-end, up 8% versus YE15, also benefiting from the rise in stock prices.

The Company’s credit fundamentals remain favorable, reflecting a highly liquid balance sheet that is principally comprised of assets and liabilities with short durations, which limits credit and interest rate risk. In addition, asset quality remains strong, as evidenced by very low levels of nonperforming assets and net charge-offs. Lastly, Northern Trust’s capital position remains robust, with a fully phased-in common equity Tier 1 capital ratio of 11.5% (standardized approach), and supplementary leverage ratios of 6.8% and 6.0%, respectively, at the holding company and Bank, both of which exceed the 3% requirement applicable to Northern Trust in 2018.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $124 billion in assets at December 31, 2016.

RATING DRIVERS
DBRS does not currently see positive rating pressure given the Company’s already high rating level and challenging operating environment. Conversely, sustained negative operating leverage and/or a significant unexpected loss, which could invade capital could lead to negative rating pressure.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under 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.

Lead Analyst: Michael McTamney, Vice President – Global FIG
Rating Committee Chair: William Schwartz, Global Credit Policy
Initial Rating Date: 18 March 2010
Last Rating Date: 22 February 2016

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.