OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDRs) of Northern Trust Corporation (NTRS) and its subsidiaries at 'AA-' and 'F1+', respectively. NTRS' Viability Rating (VR) has also been affirmed at 'aa-'. The Rating Outlook remains Stable.

These rating actions were taken in conjunction with Fitch's U. S. trust and processing bank peer review. A full list of rating actions is at the end of this release.

KEY RATING DRIVERS

VR, IDR, AND SENIOR UNSECURED DEBT

The affirmation of NTRS' IDR and VR reflects the company's continued solid operating performance, its conservative risk appetite, and a sound capital profile in the context of what Fitch views as a low risk balance sheet.

Like the other trust and processing banks, NTRS' ratings benefit from a business model that possesses high barriers to entry and supports strong customer relationships due to large fixed technology costs and high switching costs. Fitch believes NTRS has established a strong franchise in asset custody and wealth management, which has created a good competitive position for the company and supports its high ratings.

NTRS' conservative risk profile and balance sheet are a key tenet of the company's rating, according to Fitch. The majority of the company's securities portfolio is composed of U. S. government and agencies securities, and nearly 90% of the portfolio carries an 'AAA' rating. Additionally, NTRS' balance sheet has a large cash position and a loan portfolio with strong credit metrics. To this end, Fitch notes that net charge-offs (NCOs) have been just 6 basis points (bps) of average loans during each of the past two years and were 3bps of average loans during the first quarter of 2016 (1Q16). 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.

Fitch considers NTRS' capital levels to be well situated relative to peer institutions, with Basel III Common Equity Tier 1 under the standardized approach of 10.6% at the end of 1Q16. While there has been a modest decline in NTRS' capital ratios during recent years, Fitch notes that this has largely been driven by deposit inflows which have caused the balance sheet to expand. That said, these incremental deposits continue to be invested very conservatively.

Despite the continued headwinds of a low interest rate environment, NTRS' earnings have remained satisfactory from a credit perspective, but below the company's long-term averages. To combat pressure from low interest rates, management has initiated 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, thereby helping to position the company for meaningful operating leverage in the future.

Though returns are still somewhat lower than pre-crisis levels, fees from custody and asset management continue to grow as a result of upward global equity market valuations over the past few years along with some new business wins and the aforementioned repricing initiatives. Fees from foreign exchange trading remain volatile and securities lending remains challenged. Due to NTRS' short-term asset mix, Fitch believes NTRS' earnings have potential to show meaningful improvement if short-term interest rates continue to rise.

At this juncture, Fitch does not expect the affirmative BREXIT vote to overly impact NTRS' business though Fitch does note it may change the way that it conducts business with some of its foreign clients.

Finally, Fitch considers NTRS' funding profile strong with deposits accounting for approximately 89% of liabilities. Fitch views NTRS' custody deposits to be core in nature given the stickiness of these relationships. Additionally, Fitch believes NTRS' deposits to be somewhat countercyclical, such that deposit inflows tend to occur during times of market stress.

As noted above, deposit growth continued to be strong through the end of 1Q16, with $97.7 billion of total deposits, compared to $84.1 billion at year-end 2013. NTRS has continued to place these deposits at a mix of highly rated financial institutions, at the Federal Reserve, in its securities book, and to a lesser extent in the loan portfolio.

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. These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, 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 because U. S. uninsured deposits benefit from depositor preference. U. S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

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

VR, IDR, AND SENIOR UNSECURED DEBT

Fitch views NTRS' VR as currently well situated, with limited potential for upward movement given the already high level of ratings. Upward rating momentum is limited by elevated operational risk inherent in the trust and processing bank business model. Current ratings incorporate a view of the potential for positive earnings momentum that produces earnings metrics closer to pre-crisis levels.

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. That said, 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.

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. Blockchain, or distributed ledger, is an electronic means of settling, reconciling, and reporting on transaction--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 jointly work to harness this technology to drive efficiencies across their respective platforms, it's also possible that over a long period of time a technology company offers a blockchain 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 Issuer Default Rating (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+'.