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 wealth management business. 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 operational and reputational in nature given the complexity of operating globally across numerous regulatory jurisdictions.
Over the longer term, the ratings would be upgraded if the Company delivers sustained above peer financial results through increased market shares, while maintaining a similar risk profile. Conversely, sustained negative operating leverage, or evidence of loss in clients or market shares, or operating or reputational missteps that result in adverse financial or regulatory outcomes would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Strong
Northern Trust is the sixth largest custodian globally, with $13.6 trillion of assets under custody and administration (AUC/A) at YE22. 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 maintain its market share of new business, with AUC/A up 12.4% since 2019, despite the market deterioration experienced in 2022. Northern Trust is also the 16th largest investment manager globally, with $1.3 trillion in assets under management (AUM) at YE22. The franchise is also supported by a leading wealth management business, including advising 30% of the Forbes 400 wealthiest Americans.
Earnings Combined Building Block (BB) Assessment: Strong/Good
Northern Trust generated a solid 12.7% return on equity in 2022, which compares well with peers. Total revenues increased 5% compared to the prior year, benefiting from higher net interest income, on the rise in interest rates, which offset lower fee revenues due to lower market valuations, lower client volumes, and lower earning asset balances. The rise in interest rates largely eliminated money market fee waivers compared to 2021 and 2020. Meanwhile, total operating expenses increased a substantial 10% versus 2021 primarily due to higher compensation, equipment and software, and outside services expenses. The deterioration in profitability relative to the Company’s historical levels is being addressed by new initiatives to reduce costs and improve efficiency this year.
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, at 28% of total assets, but is considerably smaller than commercial banks’ loan portfolios. In addition, loan exposures are predominately to sound businesses or wealthy individuals, resulting in pristine credit quality, including during 2022. The Company took action to reposition its securities portfolio to improve credit quality while also increasing portfolio yield by selling lower quality corporate securities and replacing these with higher quality, higher yielding agency and UST securities, which have repriced higher due to the increase in 2022 in interest rates.
We view operational risk as the largest risk the Company faces but this has been well managed historically. Recent problems with processing backlogs around the UK Gilts markets volatility during 2022 showed some evidence that the Company’s more manual processing of trades and transactions in this business had an impact on market trading liquidity. To date, we have not seen a material impact from this event, but we will to look at the Company’s ability to win new clients, as well maintain existing business as evidence this incident does not adversely impact the franchise.
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 (80% of total liabilities & equity). Client deposits have been a stable source of funding through recent market cycles, with deposits increasing in flight to quality flows during the pandemic. After peaking in 2021, deposits declined 22.5%, in line with peers, on recovery in economic activity levels, while low interest bearing and non-interest bearing deposits moved to higher-earning assets as interest rates increased. Evidencing strong liquidity, Northern Trust had $99 billion of cash and securities at YE22, representing 64% of total assets.
Capitalization Combined Building Block (BB) Assessment: Very Strong/Strong
Northern Trust’s capitalization remains sound, with a CET1 ratio of 10.8% at YE22, providing a 380 basis point cushion over required CET1 levels. In addition, Northern Trust’s stress test results in the Federal Reserve’s DFAST/CCAR process are consistently top-tier, with 2022 Stress Test loss levels at just 110 basis points, and stressed CET1 ratio of 10.8%, which was above the median score by 110 basis points. The Company manages capital conservatively, taking a cautious approach in recent quarters to share repurchases, instead retaining capital to rebuild CET1 capital levels to above 11% again. We expect a conservative stance will be maintained until there is greater visibility on the economic outlook and earnings trajectory this year and into 2024.
Further details on the Scorecard Indicators and Building Block Assessments can be found at www.dbrsmorningstar.com/research/409526/
ENVIRONMENTAL, SOCIAL, 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 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations
(June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
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 have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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 under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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