Fitch Affirms Northern Trust Corporation's IDR at 'AA-'; Outlook Remains Stable
KEY RATING DRIVERS
VR, IDR, AND SENIOR UNSECURED DEBT
The affirmation of NTRS' IDR and VR is driven by an ongoing track record of good operating performance, conservative risk culture, and sound capital profile particularly within the context of Fitch's view of the company's low risk balance sheet.
Similar to other trust and processing banks, NTRS' ratings also benefit from a business model that possesses high barriers to entry and supports strong customer relationships. Further, the stickiness of NTRS' customer relationships aids its funding profile as Fitch considers the company's custody deposits to be core in nature.
Fitch continues to view NTRS' conservative risk posture and balance sheet as a key tenet of the company's ratings. To this end, NTRS' securities portfolio is composed of over 80% U.S. Treasuries and GSE mortgage-backed securities and 'AAA' rated securities, in addition to a loan portfolio that yielded net charge-offs of just 0.06% for 2014 and 0.03% in the second quarter of 2015 (2Q15).
Fitch considers NTRS' capital levels to be well situated relative to peer institutions, with Basel III Common Equity Tier 1 (CET1) under the standardized approach of 10.7% at the end of 2Q15. While there has been some modest decline in NTRS' capital ratios, Fitch notes that this has been largely driven by deposit inflows which have caused the balance sheet to expand. That said, these incremental deposit inflows continue to be invested very conservatively.
Despite the continued headwinds of a low interest rate environment paired with relatively low volatility, NTRS' earnings have remained satisfactory from a credit perspective, but below the company's long-term averages. During this challenging interest rate environment, NTRS' management has initiated several cost-cutting measures to improve efficiency and net earnings.
Some current initiatives, such as investment in information technology (IT) and increased regulatory and compliance staffing, have elevated non-interest expense, Fitch notes that some of the IT investments should also improve efficiencies across the franchise, thereby helping to position the company for meaningful operating leverage.
Though returns still trail pre-crisis levels, fees generated from NTRS' custody and asset management lines of business continue to improve as a result of a general upward movement in global equity valuations over the last few years as well as some new business wins. Fees earned from foreign exchange (FX) trading have been muted until recently, and securities lending revenue remains challenging.
Fitch views positively the potential for NTRS' earnings to show meaningful improvement in a rising short-term interest rate environment. With an average re-pricing duration of one year in the securities portfolio, the company can quickly re-place lower yielding assets into higher yielding securities should short-term rates eventually rise.
Finally, Fitch considers NTRS' funding profile to be strong with deposits accounting for approximately 90% of liabilities. Fitch views NTRS' custody deposits to be core in nature and to be somewhat countercyclical, such that deposit inflows tend to occur in adverse market scenarios.
As noted above, deposit growth through the 2Q15 remained strong, totalling \\$92.3 billion, compared to total deposits of \\$64.2 billion at year-end 2010. Due to these higher levels of deposits, NTRS has largely been placing deposits with a mix of highly rated financial institutions, the Federal Reserve, within the securities book, and to a lesser extent in the loan portfolio.
Offsetting these strengths is elevated operational risk inherent in the trust bank business model, which serves as a limiting factor for upward rating momentum.
Fitch believes the largest threat to NTRS' business model remains an idiosyncratic operational or technological loss that causes severe reputational damage such that customers consider leaving the firm.
To date, given NTRS' good operational performance and minimal losses, it is Fitch's belief that operational and technological risks are adequately managed. Since these types of events are difficult to predict and quantify, Fitch would review the company's ratings to determine if a rating action was necessary.
SUPPORT RATING AND SUPPORT RATING FLOOR
NTRS' Support Rating of '5' reflects Fitch's view that external support cannot be relied upon. The Support Rating Floor 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 is notched one level below its VR of 'aa-' while NTRS' preferred stock 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 rated 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 its 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. Current ratings incorporate a view of the potential for positive earnings momentum that produces earnings metrics closer to pre-crisis levels.
A negative rating action, while not expected, could occur should an idiosyncratic operational or technological event materialize and generate meaningful losses for the company. To the extent that these types of losses create reputational damage for the company, such that customers contemplate fleeing the firm, a negative rating action may be deemed appropriate.
SUPPORT RATING AND SUPPORT RATING FLOOR
Any 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 '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 ay '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+'.
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