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.
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.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Northern Trust is one of the largest custodians globally, with $16.2 trillion of assets under custody and administration (AUC/A) at YE21. 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 12% from YE20. Northern Trust is also one of the largest investment managers globally, with $1.6 trillion in assets under management (AUM) at YE21, up 14% from a year ago, benefiting from both favorable markets and client flows.
Earnings Combined Building Block (BB) Assessment: Very Strong/Strong
Northern Trust generated a solid 13.9% return on equity in 2021, which was the highest among trust bank peers. Total revenues increased 6% compared to the prior year, benefiting from new business and favorable markets, partially offset by the impact of money market fee waivers and lower net interest income. Meanwhile, total expenses increased 4% versus 2020 primarily due to higher compensation and outside services.
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. The Company’s loan portfolio is the largest of the trust banks, but at 22% 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 2021. We view operational risk as the largest risk the Company faces but this has been well managed over time.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
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. Benefiting from high levels of liquidity in the system, total deposits were up 11% from YE20. On the asset side, Northern Trust had $132 billion of cash and securities at YE21, representing 72% of total assets.
Capitalization Combined Building Block (BB) Assessment: Very Strong/Strong
Northern Trust’s capitalization remains sound, with a CET1 ratio of 11.9% at YE21. In addition, Northern Trust’s stress test results in the Federal Reserve’s DFAST/CCAR process are consistently top-tier.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/392977
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.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organizations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/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):
The primary sources of information used for this rating include Morningstar Inc. and Company Documents. 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 generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
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