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Fitch Affirms Northern Trust's Long-Term IDR at 'AA-'; Outlook Stable
July 12, 2017 / 3:16 PM / 5 months ago

Fitch Affirms Northern Trust's Long-Term IDR at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, July 12 (Fitch) Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of Northern Trust Corporation (NTRS) at 'AA-'/'F1+'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of this rating action commentary. KEY RATING DRIVERS IDRs, VR AND SENIOR DEBT The affirmation of NTRS' ratings reflects the company's solid franchise in institutional asset management, private wealth management, asset custody, low risk appetite, continued sound operating performance and highly liquid balance sheet. The company's ratings are supported by its business model, which Fitch believes benefits from high barriers and economies of scale. The custody business also brings NTRS ample levels of deposit funding that Fitch considers core in nature. Fitch views NTRS' conservatively managed balance sheet as a key rating strength. The company has 66% of its assets invested in cash and high quality securities, 91% of which are rated 'AAA' or 'AA'. Additionally, NTRS' net charge-offs in its loan portfolio have remained below 10 basis points in each of the last three years, which demonstrates the company's strong underwriting standards and low risk appetite. Fitch believes NTRS' management team has been responsible for cultivating the company's conservative risk culture over many years, which is a key ratings differentiator relative to many other financial institutions. Despite headwinds from highly competitive pricing in the custody business, continued high regulatory costs, and revenue challenges affecting the asset management industry, NTRS has demonstrated solid growth in its core businesses, with fee growth at 6% year-over-year in the 1st quarter of 2017 (1Q17). Fitch believes management continues to successfully differentiate its businesses through technology investments and new products, such as its factor-based investment solutions. Management has made progress on several expense management measures to improve efficiency, along with reviewing custody relationship pricing to better align revenues and costs in the core business. Some current investment initiatives related to information technology (IT) and regulatory and compliance staffing have elevated non-interest expense. Fitch notes that some of the IT investments should improve efficiency in the long run by automating manual processes and taking structural costs out of the business. NTRS' earnings have remained solid from a credit perspective and are slightly ahead of its peer group on a return on average equity (ROAE) basis. NTRS earned an 11.6% ROAE in 1Q17, which is in line with Fitch estimated cost of equity (10% to 12%) for the company. Fitch believes management's various initiatives have positioned the company well for meaningful operating leverage in the future. NTRS' earnings remain sensitive to further increases in short-term interest rates. Since the Federal Reserve began increasing rates late in 2015, NTRS' net interest margin (NIM) has risen from a low of 1.07% at the end of 2015 to 1.35% and the end of 1Q17. Fitch believes NTRS' earnings have potential to show meaningful improvement if short-term interest rates continue to rise due to its short duration balance sheet and stable funding base. Fitch views NTRS' capitalization as solid for its rating level in the context of its low risk balance sheet. As of 1Q17, the company had a Common Equity Tier 1 (CET1) Ratio of 12.2% under the standardized approaching, up from 10.6% in the prior year due to conservative shareholder returns by management. While NTRS' capital plan approved by the Federal Reserve included a $750 million buyback, nearly three times higher than last year's request, Fitch believes NTRS will continue to manage its CET1 Ratio in its range from the past several years. SUPPORT RATING AND SUPPORT RATING FLOOR NTRS' Support Rating (SR) of '5' reflects Fitch's view that external support cannot be relied upon. The Support Rating Floor (SRF) of 'No Floor' reflects Fitch's view that there is no reasonable assumption that U.S. government support would be forthcoming to NTRS. SUBORDINATED DEBT AND OTHER HYBRID INSTRUMENTS NTRS' subordinated debt rating is notched one level below its VR of 'aa-' while NTRS' preferred stock rating is notched five levels below its VR. Capital trust securities have been notched down four notches from the VR. These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. These ratings have been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSITS The uninsured deposit ratings for the Northern Trust Company are one notch higher than NTRS' IDR and senior unsecured debt reflecting the deposits' superior recovery prospects in case of default given depositor preference in the U.S. HOLDING COMPANY The IDR and VR of NTRS are equalized with those of the operating company, the Northern Trust Company, reflecting its role as a bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiary. RATING SENSITIVITIES IDRs, VR AND SENIOR DEBT Given NTRS' ratings are already near the top of Fitch's global rated bank universe, there is limited potential for upward ratings momentum. Fitch believes the most significant risk to NTRS is a large operational or technological event that causes significant reputational damage and causes clients to leave the firm. NTRS has a good track record of performance and minimal operational losses, and Fitch considers these risks to be well managed. However, negative rating action could be driven by an operational loss or similar event result in a fine, loss, or revenue reduction equivalent to 5% of annual revenue or more. Currently, Fitch does not expect the affirmative BREXIT vote to overly impact NTRS' business; however, it may change the way that the company conducts business with some of its foreign clients. Finally, Fitch also notes that NTRS and its peer trust and processing banks are beginning to be at risk of certain technology potentially being disruptive to its business, though this is likely over a very long-term time horizon. Distributed ledger technology, or "blockchain", is an electronic means of settling, reconciling, and reporting on transactions -- the core of NTRS and its peer banks' businesses. While Fitch believes that it is highly probable that NTRS and its peer trust and processing banks work to harness this technology to drive efficiencies across their respective platforms, it is also possible that over a long period of time a technology company offers a distributed ledger solution that causes clients to leave NTRS for their core custody business. At present, Fitch views this risk as well outside of the Rating Outlook horizon. SUPPORT RATING AND SUPPORT RATING FLOOR An upward revision to the SR and SRF would be contingent on a positive change in the U.S.'s propensity to support its banks. While not impossible, Fitch views this as highly unlikely. SUBORDINATED DEBT AND OTHER HYBRID INSTRUMENTS The ratings for NTRS and its operating company's subordinated debt and preferred stock are sensitive to any change in NTRS' VR. LONG- AND SHORT-TERM DEPOSITS The long- and short-term deposit ratings for the Northern Trust Company are sensitive to any change to NTRS' Long- and Short-Term IDR. HOLDING COMPANY Fitch could notch the holding company's ratings from the operating company's ratings if holding company liquidity were to deteriorate, and raise concerns relative to the parent's ability to meet its obligations. Fitch has affirmed the following ratings: Northern Trust Corporation --Long-Term IDR at 'AA-'; Outlook Stable; --Long-term Senior Unsecured Debt at 'AA-'; --Short-Term IDR at 'F1+'; --Short-Term Commercial Paper at 'F1+'; --Viability at 'aa-'; --Subordinated Debt at 'A+'; --Preferred Stock at 'BBB'; --Support at '5'; --Support Floor at 'NF'. Northern Trust Company (The) --Long-Term IDR at 'AA-'; Outlook Stable; --Short-Term IDR at 'F1+'; --Short-Term Deposits at 'F1+'; --Long-Term Deposits at 'AA'; --Viability at 'aa-'; --Subordinated Debt at 'A+'; --Support at '5'; --Support Floor at 'NF'. NTC Capital Trust I & II --Preferred Stock at 'BBB+'. Contact: Primary Analyst Justin Fuller, CFA Senior Director +1-312-368-2057 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Christopher Van Bell Associate Director +1-212-908-0777 Committee Chairperson Julie Solar Senior Director +1-312-368-5472 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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