Morningstar DBRS Confirms the Long-Term Credit Ratings of Northern Trust Corporation at AA (low); Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit 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, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, The Northern Trust Company (the Bank). The trend for all credit 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 CREDIT RATING CONSIDERATIONS
Northern Trust’s credit ratings reflect its strong market positions in investment servicing and investment management, as well as its premier wealth management business. The Company’s business model is fee-centric, most of which is stable and recurring in nature. The credit ratings are also underpinned by the Company’s relatively low risk balance sheet and very strong funding, liquidity, and capitalization. Primary risks remain operational and reputational given the complexity of operating globally across numerous regulatory jurisdictions.

CREDIT RATING DRIVERS
Over the long term, the Company’s credit ratings would be upgraded if it delivers sustainable, above peer financial results through increased market share gains and/or improving economies of scale, while maintaining similar risk, funding, and liquidity profiles. Conversely, sustained negative operating leverage and/or missteps in managing operational and reputational risk that negatively impacts franchise strength would result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
Northern Trust maintains a strong franchise given its global reach, conservative corporate culture, and reputable wealth management business. While it remains the smallest among the three independent bank-chartered custodians in the U.S. (assets under custody/administration of $15.4 trillion at YE23, trailing the industry leader by a wide margin), Morningstar DBRS views the Company as having sufficient scale to be competitive given that it continues to win its fair share of new business. The Company is also one of the largest investment managers globally, with $1.4 trillion in assets under management (AUM) at YE23.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Northern Trust’s earnings power remains strong, reflective of a fee dominant set of products/services. Fees comprised the majority of revenues (71% of revenues in 2023), resulting in revenue generation that is both less capital intensive (vs. traditional banks predominately driven by spread income) and more recurring/stable over time given high switching costs for customers. In 2023, total revenues were relatively stable compared to the prior year, as strong growth in net interest income was offset by lower fees. Meanwhile, total expenses increased 6% versus 2022, primarily driven by equipment and software, compensation, and other operating expenses. In 2024, the Company’s focus remains on maintaining expense discipline to drive greater efficiency into the Company’s business model, as well as to accelerate organic growth.

Risk Combined Building Block (BB) Assessment: Very Strong/Strong
The Company’s risk profile remains sound, and is reflective of its conservative corporate culture. Credit risk remains very low, as Northern Trust’s loan exposures are predominately to solid businesses or wealthy individuals, typically resulting in pristine asset quality. At 32% of total assets (at YE23), the Company’s loan portfolio is the largest among the trust banks, but is still considerably smaller than traditional banks. We view operational risk as the largest risk the Company faces given the nature of its business, but this has also been well-managed over time.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
Northern Trust’s funding profile remains strong, underpinned by its large deposit base (84% of total liabilities at YE23). Client deposits have been a stable source of funding through recent market cycles, with deposits increasing in flight to quality flows during the pandemic. Nonetheless, total deposits have continued to decline after reaching a peak in 2021, with total deposits down 27% from YE21 to YE23. However, the Company experienced a stronger than anticipated increase late in 4Q23, resulting in EOP deposits that were up 5% QoQ. In terms of liquidity, the Company had $90 billion in cash/equivalent and securities at YE23, representing 60% of total assets.

Capitalization Combined Building Block (BB) Assessment: Strong
The Company’s capitalization remains sound, with a CET1 ratio of 11.4% at YE23, providing a 440 basis point cushion over its required CET1 levels. In additional, Northern Trust’s stress test results in the Federal Reserve DFAST/CCAR process are consistently top-tier, with the 2023 stress test projected minimum CET1 ratio at 11.4%, above the Company’s starting point of 10.8%. Similar to past years, we expect the Company will remain prudent when considering potential share repurchases, especially in light of expected increased regulatory requirements and uncertain economic outlook.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/427820.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (January 23, 2024).

Morningstar DBRS notes that this press release was amended on July 5, 2024, to incorporate the disclosure for primary sources of information.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organizations: https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (June 22, 2023). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (January 23, 2024) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

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

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