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

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Northern Trust Corporation (Northern Trust or the Company), including the Company’s Long-Term Issuer Rating of AA (low). At the same time, DBRS Morningstar 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 SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
Northern Trust’s ratings reflect its strong market positions in investment servicing and investment management, as well as its premier personal trust business. As a result, Northern Trust’s business model is fee-centric, most of which is recurring in nature. The ratings are also underpinned by the Company’s relatively low risk balance sheet and very strong funding, liquidity and capitalization. Primary risks remain reputational and operational in nature given the complexity of operating globally across numerous regulatory jurisdictions.

RATING DRIVERS
DBRS Morningstar views Northern Trust as well placed within its current rating category. Over the long term, DBRS Morningstar sees potential ratings upside if the Company further diversifies its business mix effectively and/or meaningfully improves its competitive position in current businesses. While DBRS Morningstar sees downward ratings pressure as unlikely, sustained negative operating leverage or if the Company begins to lose clients evidencing diminished franchise strength, it could result in negative ratings actions.

RATING RATIONALE
Northern Trust is one of the largest custodians globally, with $12.1 trillion of assets under custody and administration (AUC/A) at YE19. While this trails the industry leader by a wide margin, DBRS Morningstar views the Company as having sufficient scale to be competitive given that it continues to win its fair share of new business, with AUC/A up more than $4 trillion since 2015. Northern Trust is also one of the largest investment managers globally, with $1.2 trillion in assets under management (AUM) at YE19.

Northern Trust delivered another solid performance in 2019. AUC/A grew 19% from 2018 and AUM were up 15%, reflecting favorable financial markets and organic growth. Total revenue increased 2% in 2019 driven by higher trust, investment and other servicing fees, as well as higher net interest income, partially offset by a significant decline in foreign exchange trading income that was negatively impacted by a decline in foreign exchange swap activity and lower market volatility and client volumes. Expenses were somewhat elevated for the year primarily due to an increase in technology investments, resulting in modest negative operating leverage for the year. Nonetheless, Northern Trust’s reported return on equity (ROE) of 14.9% stood at the upper range of its 10% to 15% target, but trailed last year’s stellar results (ROE of 16.2% in 2018).

Northern Trust’s balance sheet remains very strong, with cash and high-quality securities collectively representing approximately 70% of total assets. The Company’s loan portfolio is the largest of the trust banks, but at 23% of total assets, is considerably smaller than traditional banks. In addition, loan exposures are predominately to solid businesses or wealthy individuals, resulting in pristine credit quality.

Northern Trust’s funding profile remains very strong, and is substantially comprised of client deposits associated with investment securities and financial instruments transactions, which has been a stable source of funding through the cycle. Capitalization remains robust, with a common equity tier 1 (CET1) ratio of 12.7%, and consistently top-tier stress test results in the Federal Reserve’s DFAST/CCAR process.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $137 billion in assets at December 31, 2019.

The Grid Summary Grades for Northern Trust Corporation are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Very Strong/Strong; Funding & Liquidity – Very Strong/Strong; Capitalisation – Very Strong/Strong.

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

The principal methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents, (other sources such as central bank, regulator etc.) and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA