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

DBRS, Inc. (DBRS) 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 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 Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

Northern Trust’s ratings reflect its strong market positions in investment servicing and investment management, as well as its premier personal trust business, which generate stable and predictable fee-based revenues. Additionally, the ratings consider the Company’s relatively low risk balance sheet, very strong funding and liquidity profile and robust capital position. DBRS notes that Northern Trust’s primary risks remain reputational and operational in nature given the complexity of operating globally across numerous regulatory jurisdictions.

While Northern Trust’s assets under custody and administration (AUC/A) trail the industry leader by a considerable margin, it still owns a strong market share position (top 10 global custodian), with sufficient scale to compete with the largest players. During 2017, the Company’s AUC/A increased 26% from the prior year (to $10.7 trillion), driven by favorable financial markets, solid new business and the acquisition of UBS Asset Management’s fund administration servicing units in Luxembourg and Switzerland. Northern Trust is also the 14th largest investment manager globally, with $1.2 trillion in assets under management (AUM) at YE17. The 23% increase in AUM during the year reflected higher market values and net inflows, particularly in securities lending collateral and cash-related balances.

Reflecting further momentum, the Company reported $1.2 billion of net income in 2017, a 16% increase from the prior year, representing a return on equity of 12.6%. With a more favorable operating environment, including higher asset prices and the rise in short-term interest rates, total revenues were up 9% compared to 2016. Specifically, higher servicing fees and net interest margin expansion more than offset a decline in foreign exchange trading, which resulted from lower volatility and client volumes. Meanwhile, expenses were moderately elevated (up 9% versus 2016) largely due to higher incentive compensation and continued investment in the franchise. Positively, Northern Trust’s pre-tax profit margin for 2017 was 31.0%, consistent with historical trends and significantly improved from the levels generated earlier this decade.

Overall, Northern Trust’s balance sheet remains very strong. Specifically, cash and high-quality securities comprise a substantial amount of total assets (71% collectively at YE17) on an absolute basis and compared to traditional bank peers. Although the Company has the largest loan portfolio relative to BNY Mellon and State Street Corporation, at 24% of total assets, it is considerably smaller than most other banks. In addition, loan exposures are predominately to solid businesses or wealthy individuals. Moreover, 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. Finally, capitalization remains robust, with a fully phased-in CET1 ratio of 12.4%, as well as continued top-tier stress test results in the Federal Reserve’s DFAST/CCAR process.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $139 billion in assets at December 31, 2017.

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

RATING DRIVERS
Although already highly rated, if Northern Trust continues to win new business and therefore enhances its franchise strength, while maintaining strong balance sheet fundamentals, there could be positive rating actions. Conversely, sustained negative operating leverage or if the Company begins to lose clients evidencing diminished franchise strength, could result in negative rating actions.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 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, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 18 March 2010
Most Recent Rating Update: 13 March 2017

The rated entity or its related entities did participate in the rating process. DBRS 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 or contact us at info@dbrs.com.