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.

The Bank's Intrinsic Assessment of AA has been assigned at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views Northern Trust's credit fundamentals and performance as commensurate with those of similarly rated peers.

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 $16.8 trillion at Q4 2024, 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 $1.6 trillion in assets under management (AUM) at Q4 2024.

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 (74% of revenues in 2024), 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 2024, the Company reported net income of $2.0 billion (up 83% YoY), driven by higher revenues (up 22%) that was slightly offset by higher expenses (up 7%). Excluding one-time items, we estimate Northern Trust had a return on equity of approximately 13.9% and achieved around 260bps of positive operating leverage in 2024.

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 28% of total assets (at Q4 2024), 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 (86% of total liabilities at Q4 2024). Client deposits have been a stable source of funding through recent market cycles, with deposits increasing in flight to quality flows during market disruptions. The Company's deposit mix has recently come in modestly better than expected and deposit pricing has also improved, with Northern Trust realizing a strong deposit beta on institutional accounts relative to the 2024 Fed rate cuts.

Capitalization Combined Building Block (BB) Assessment: Very Strong/ Strong
Northern Trust's capitalization remains sound, with a CET1 ratio of 12.4% at Q4 2024, providing a 540-basis point cushion over required CET1 levels. In addition, Northern Trust's annual Federal Reserve stress test results are also consistently top tier, with the 2024 stress test projected minimum CET1 ratio of 11.4% (i.e., unchanged from its starting point), compared to the aggregate minimum level (across the 31 banks that participated) of 9.9%, down 2.8% from its starting point.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/447260.

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 Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781in 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 https://dbrs.morningstar.com.
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