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Fitch: U.S. Trust and Processing Banks' Ratings Affirmed Following Peer Review; Outlooks Stable
July 12, 2017 / 3:20 PM / 5 months ago

Fitch: U.S. Trust and Processing Banks' Ratings Affirmed Following Peer Review; Outlooks Stable

(The following statement was released by the rating agency) CHICAGO, July 12 (Fitch) Fitch Ratings has affirmed the ratings of the U.S. Trust and Processing banks following a peer review committee. The four Fitch rated banks included in this peer review are Bank of New York Mellon (Bank of New York), State Street Corporation (State Street), Northern Trust Corporation (Northern), and Brown Brothers Harriman (Brown Brothers)..The Rating Outlooks were Stable. The actions were driven by solid company profiles, including high barriers to entry, good capital ratios in context of lower risk balance sheets, strong liquidity position, and improving earnings performance. These credit strengths continue to be counterbalanced by Fitch's view of elevated operational risk (inclusive of cyber security risks) present in the business model as well as the sensitivity of earnings to multiple market factors. Fitch notes that idiosyncratic operational risk remains the main risk to the trust and processing bank business model, though this has generally been well controlled through significant technology investments and operational risk capital held against any potential losses. Over the course of the last year, the U.S. Trust and Processing banks have benefited from higher short-term interest rates, resulting in net interest margin (NIM) expansion and strong growth in net interest revenue. This has helped drive operating performance improvement for the group as measured by return on average equity. Additionally, these companies continue to be relatively well positioned to continue benefiting from the shift from active management to more passive management given their growing exchange traded fund (ETF) products and servicing capabilities. These revenue tailwinds combined with Fitch's view of the still significant but slowing growth of compliance and regulatory related expenses, inclusive of those related to resolution planning initiatives, may enable the trust and processing banks to make additional investments in technology initiatives or return more capital to shareholders. Additional technology investments could include efforts to digitize previously manual back and middle office operations, which Fitch believes will allow the firms to further manage expenses by reducing headcount. Further, with each firm focused on making its processing more automated, this effort should reduce the incidence of routine operational losses on a prospective basis. The trust and processing bank technology investments also consist of investments in more "disruptive" technology initiatives, which have the potential to dramatically change the way these companies operate by reducing the latency embedded in the operations and potentially making the business model more scalable. The most significant technology focus is on distributed ledger technology (DLT), more commonly referred to as "blockchain". Northern and Bank of New York have publicly touted their nascent use of distributed ledger technology in specific applications within their operations. This technology could impact the operations of these businesses over a longer-term horizon through lower operational risk and strong operating efficiencies. At the same time, Fitch also acknowledges that DLT also poses the risk of unknown competitor(s) making inroads in transaction processing and eroding some of the barriers to entry in the trust and processing industry. The ultimate impact of DLT is currently unclear and likely remains outside of Fitch's Rating Outlook horizon. Importantly, the binding capital ratio for the largest trust banks, State Street and Bank of New York, is the enhanced supplementary leverage ratio (ESLR), given the significant deposit flows that can occur during market downturns. Each bank complies with its ESLR, at both the holding company and main-bank subsidiary level. Fitch will publish an industry overview report on the trust and processing banks in the coming weeks, available at Contact: Justin Fuller, CFA Senior Director +1-312-269-2057 70 W. Madison Street Chicago, IL 60602 Christopher VanBell Associate Director +1-212-908-0777 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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