Fitch Affirms Northern Trust's Ratings at 'AA-/F1+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDRs) of Northern Trust Corporation (NTRS) and its affiliates at 'AA-' and 'F1+', respectively. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

A long history of conservative management, strong capital ratios, and a low-risk balance sheet support NTRS' high credit ratings and Stable Rating Outlook. Moreover, the ratings incorporate NTRS' very solid franchise in personal trust, private banking, institutional custody, and institutional asset management. Fitch notes that the company's conservative operating philosophy has allowed NTRS to remain profitable throughout the credit crisis.

NTRS' capital ratios compare reasonably well with other custodial banks as well as U.S. commercial banks. Though NTRS' Tier 1 capital ratio is modestly below the median ratio of similar institutions, Fitch believes the company's low-risk balance sheet compensates for this. At the end of 2Q12, NTRS' Tier 1 ratio was 12.9%, up modestly from its 1Q12 ratio and essentially flat from the year-ago period. Under current Basel 3 proposals, NTRS' estimated Tier 1 ratio was unchanged at 12.9% as of 2Q12.

NTRS' balance sheet is highly liquid and routinely sports a loan-to-deposit ratio of less than 50%. Credit quality of the loan portfolio is good and losses are very manageable which is in part reflective of NTRS' affluent client base. The $29 billion investment portfolio, representing 31% of assets, is also highly liquid with over 70% of investment securities repricing or maturing within one year. Moreover, Fitch views credit risk in the investment portfolio as low given that more than 60% of the portfolio is invested in agency securities or agency collateralized mortgage obligations.

Similar to other global processing banks, NTRS does have some European exposures on its balance sheet, which in the case of NTRS are primarily related to cash held on deposit with other banks. Fitch views this as manageable, as total Eurozone exposures is only $5.3 billion as of 2Q12..

Fitch views funding as solid, given that NTRS is primarily deposit funded with total deposits amounting to $76.9 billion, or 81% of total liabilities and equity.

Given some of the current macroeconomic headwinds, Fitch expects NTRS' earnings growth to be challenging on a go-forward basis. Specifically, the low interest rate environment is pressuring the company's net interest margin (NIM) and also causing it to continue to incur money market mutual fund fee waivers. Additionally NTRS has had some weakness in foreign exchange trading income and securities lending income. Fitch believes there is also likely some increased pricing competition in the company's institutional asset management and custody businesses.

To combat these headwinds, NTRS has optimized its fee structure in its personal trust and private banking business, and also engaged in some efficiency initiatives. Fitch views this strategy positively, and though overall earnings growth may still be challenging, there should be some continued benefit from these initiatives, which help support the company's Stable Rating Outlook.

Ratings Drivers and Sensitivities

Upward rating potential is limited given NTRS' already high credit ratings.

Risks to NTRS' ratings include any large and unexpected loan or securities losses. Given the processing bank business model, however, the larger risk to NTRS' business and ratings is the potential for operational errors that produce a combination of either financial losses or cause clients to leave the firm. While these risks are inherently difficult to predict and quantify, a large occurrence would likely prompt Fitch to review ratings to determine if a negative action was appropriate.

However, the level of NTRS' operational losses has historically been very moderate, and the most significant recent losses represent support provided to investors during the 2008-2009 market collapse.

There are also some competitive threats to the company's business from potential money market reform, which could impact revenues from the company's suite of money market funds. In addition there continues to be increased competition in its asset management business from exchange traded funds (ETFs), which could impact both revenue and profitability. However, NTRS does have a presence in ETFs, though it is significantly smaller than its traditional mutual fund business.

NTRS, headquartered in Chicago, IL, focuses on investment management and asset servicing for large corporate and institutional investors as well as for high net worth individuals.

Fitch has affirmed the following ratings:

Northern Trust Corporation

--Long-term IDR at 'AA-';

--Long-Term Senior Unsecured at 'AA-';

--Short-term IDR at 'F1+';

--Short-term commercial paper at 'F1+';

--Viability at 'aa-';

--Support '5';

--Support floor 'NF'.

Northern Trust Company (The)

--Long-term IDR at 'AA-';

--Short-term IDR at 'F1+';

--Short-term deposits at 'F1+';

--Long-term deposits at 'AA';

--Subordinated notes at 'A+'

--Viability at 'aa-';

--Support '5';

--Support floor 'NF'.

NTC Capital I and II

--Preferred stock at 'BBB+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research

--'Global Financial Institutions Rating Criteria', Aug. 15, 2012

--'Rating FI Subsidiaries and Holding Companies', Aug. 10, 2012

--'Investment Manager and Alternative Funds Criteria', Dec. 23, 2011

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=661367

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