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, the ratings would be upgraded if the Company delivers sustained above peer financial results through deeper market shares, while maintaining a similar risk profile. Conversely, sustained negative operating leverage, missteps in managing operational and/or reputational risk that negatively impacts franchise strength would result in a ratings downgrade.

RATING RATIONALE
Northern Trust is one of the largest custodians globally, with $14.5 trillion of assets under custody and administration (AUC/A) at YE20. 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 21% from YE19. Northern Trust is also one of the largest investment managers globally, with $1.4 trillion in assets under management (AUM) at YE20, up 14% from a year ago, benefiting from favorable markets and currency translation.

Despite the challenging operating environment, Northern Trust generated a solid 11.2% return on equity in 2020, which was the highest among trust bank peers. Total revenues were essentially flat compared to 2019, reflecting higher asset servicing fees and higher foreign exchange trading revenue, partially offset by lower net interest income. Meanwhile, total expenses increased 5% versus 2019 primarily due to higher compensation and employee benefits.

Northern Trust’s balance sheet remains very strong, with cash and high-quality securities collectively representing 72% of total assets. The Company’s loan portfolio is the largest of the trust banks, but at 20% 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, including during 2020.

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. At YE20, total deposits were up 32% from the prior year, which we view as a flight to quality given the current environment. Capitalization remains robust, with a common equity tier 1 (CET1) ratio of 12.8%. Moreover, Northern Trust’s stress test results in the Federal Reserve’s DFAST/CCAR process are consistently in the top-tier.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $170 billion in assets at December 31, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at: https://www.dbrsmorningstar.com/research/373262.

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 the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents 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 did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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