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 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, which generate stable and predictable fee-based revenues. Additionally, the ratings consider the Company’s relatively low risk balance sheet and very strong funding, liquidity and capitalization. DBRS notes that Northern Trust’s primary risks remain reputational and operational in nature given the complexity of operating globally across numerous regulatory jurisdictions.

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

RATING RATIONALE
Northern Trust is one of the largest custodians globally, with $10.1 trillion of assets under custody and administration (AUC/A) at YE18. While this trails the industry leader by a wide margin, DBRS 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 roughly $2.3 trillion since 2015. Northern Trust is also the 16th largest investment manager globally, with $1.1 trillion in assets under management (AUM) at YE18.

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 25% 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. Additionally, capitalization remains robust, with a common equity tier 1 (CET1) ratio of 12.9% and consistently top-tier stress test results in the Federal Reserve’s DFAST/CCAR process.

Given the substantial decline in equity market values in 4Q18, Northern Trust’s AUC/A and AUM at year-end were down 6% and 8%, respectively, from YE17. Positively, the Company generated positive operating leverage in 2018, including 11% revenue growth, reflecting higher servicing fees and net interest income, as well as substantially improved foreign exchange trading income. Meanwhile, expenses increased 7% versus 2017 primarily due to higher compensation, outside services, equipment and software and employee benefits expenses. With the benefit from U.S. tax reform, the Company delivered a 16.2% return on equity (ROE) in 2018, significantly improved from the 12.6% ROE achieved in 2017.

Northern Trust Corporation, a financial holding company headquartered in Chicago, reported $132 billion in assets at December 31, 2018.

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.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial (and other sources such as bank regulators etc.). DBRS 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 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.

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