Fitch: U.S. Trust Banks Focused on Expense Management

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of the following U.S trust banks: Bank of New York Mellon ('AA-'), State Street Corporation ('AA-'), Northern Trust Corporation ('AA-'), and Brown Brothers Harriman ('A+'). The Rating Outlooks for all of the banks are Stable.

The affirmations were driven by high barriers to entry in the trust banks' business models, good capital ratios in the context of their low risk balance sheets, and their strong liquidity positions.

These strengths are partially offset by continued earnings challenges. Given the slower than anticipated pace of increases in short-term interest rates, the U.S. trust banks remain acutely focused on expense management.

While Fitch believes that these institutions have done a good job of reducing headcount and digitizing their core operations through significant technology investments, these savings have been largely offset by higher compliance and regulatory related expenses.

At some point Fitch believes the higher compliance and regulatory related expenses will level-off, though this is unlikely to occur in 2016 as affected trust banks are focused on finalizing resolution plans over the balance of the year. To the extent theses expenses level off and short-term interest rates rise more quickly and meaningfully, the trust banks could drive significant positive operating leverage and returns on equity could improve substantially. This is significant as these banks are carrying much larger equity bases than they have historically.

Fitch continues to believe that the binding capital ratio for the largest trust banks, State Street and Bank of New York, is the enhanced supplementary leverage ratio (SLR). Each bank has reported that it is in compliance with its SLR, though Fitch believes management teams will remain vigilant in moving non-operational deposits away from the balance sheet as a means to manage the SLR.

Fitch does not expect the affirmative BREXIT vote to adversely impact trust banks as settlements occurred without issue in the aftermath of the vote. Longer-term, trust banks may need to restructure how they do business with certain clients in certain geographies, but this is at least two years away, which should allow ample time for proper planning.

Additionally, there has been chatter in the marketplace regarding disruptive technology in the trust bank industry. Specifically, this is called Blockchain, or distributed ledger, technology. Fitch is currently assessing potential impacts on the industry, which could range from significant cost savings by digitizing settlement, reconciliation, and reporting to unknown competitors making inroads in transaction processing against the trust banks. The impact of Blockchain is currently unclear and likely outside of Fitch's 24-month Rating Outlook horizon.

Notwithstanding the above two risks, Fitch views idiosyncratic operational risk as the main threat to the trust bank model, though this has generally been well controlled through significant technology investment and substantial operational risk capital held against any potential losses.

Additional information is available at 'www.fitchratings.com'.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160712006452/en/

Fitch Ratings
Justin Fuller, CFA
Senior Director
+1-312-269-2057
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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