NTRS - NASDAQ

Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2024 earnings call. Let's discuss the financial results of the quarter starting on Page 11. This morning, we reported fourth quarter net income of $455 million, earnings per share of $2.26 and our return on average common equity was 15.3%. Excluding notables relative to the prior year, the stronger US dollar was immaterial to revenue growth, but favorably impacted our expense growth by approximately 50 basis-points. Excluding notables, relative to the prior quarter, currency impacts unfavorably impacted our fourth quarter revenue growth by approximately 50 basis-points, largely within our Asset servicing, custody and fund administration segment and favorably impacted our expense growth also by an approximately 50 basis-points. Trust, investment and other servicing fees totaled $1.2 billion, a 2% sequential increase and a 12% increase compared to last year. Net interest income on an FTE basis was $574 million, a new record, up 1% sequentially and up 15% from a year-ago. Our assets under custody and administration were down 4% sequentially, but up 9% as compared to the prior year. Our assets under management were down 1% sequentially, but up 12% year-over-year. And overall, our credit quality remains very strong. Excluding notable items in all periods, other non-interest income was up 13% sequentially and up 17% over the prior year. Revenue was up 3% sequentially and up 13% on a year-over-year basis. Expenses were up 1.2% sequentially and up 5.5% over the prior year, and earnings per share increased by more than 50% as compared to the prior year. Turning to our asset servicing results on Page 12. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up 20% and new business growth continues to be booked at attractive margins. Assets under custody and administration for asset servicing clients were $15.6 trillion at quarter-end, reflecting a 9% year-over-year increase due to strong market levels and client inflows, partially offset by unfavorable currency movements. They were down sequentially due to unfavorable currency movements and weaker markets, particularly bonds. Asset servicing fees totaled $676 million. Custody and fund administration fees were $457 million, up 9% year-over-year, largely reflecting the impact from strong underlying equity markets and new business generation. Both year-over-year and sequential comparisons were dampened by the client exits we discussed in the second-quarter, which are now fully reflected in our run-rate. Assets under management for asset servicing clients were $1.2 trillion, up 12% over the prior year. Investment management fees within Asset Servicing were $157 million, up a strong 20% year-over-year due to favorable markets and new and new business activities. Moving to our wealth management business on Page 13. Wealth Management also had a healthy quarter with particular strength in GFO. Assets under management for our wealth management clients were $451 billion at quarter-end, up 12% year-over-year, including 5% growth in the global family office AUM. Trust investment and other servicing fees for wealth management clients were $547 million, up 14% year-over-year due to strong equity markets and modestly higher flows. Moving to Page 14 and our balance sheet net interest income trends. Our average earning assets were down 1% on a linked-quarter basis as an increase in loans and securities was offset by a decline in cash held at the Fed and other central banks. The duration of our securities portfolio is 1.6 years and the total balance sheet duration continues to be less than one year. Net interest income on an FTE basis was $574 million, up 1% relative to the 3rd-quarter and our net interest margin was 1.71%. The strength was attributable to several factors. First, the deposit mix came in modestly better than our expectations. Average deposits were $113 billion, flat with third quarter levels, but non-interest-bearing deposits increased 7% on a linked-quarter basis and increased 100 basis-points as a percentage of the total mix to 15.5%. Second, deposit pricing improved. As part of our focus on client liquidity management, we made certain pricing adjustments to be more aligned with current market conditions. And as expected, we continue to realize a very strong deposit beta on institutional accounts relative to fourth quarter rate cuts. And third, we saw a pickup in loan activity. And fourth, we continue to have higher than trend quarterly contributions from transactional and other items, although not as strong as what we observed in the 3rd-quarter. Turning to our expenses on Page 15. Non-interest expense was approximately $1.4 billion in the fourth quarter, up 1% sequentially, but down 1% as compared to the prior year. Excluding notable items in the prior-period as listed on the slide, expenses in the fourth quarter were up 1.2% sequentially and up 5.5% year-over-year. Let's now go back and review our core expenses from the quarter. Compensation expense was up 5.5% over the prior year, reflecting the impact of this year's base pay adjustments, modest levels of hiring associated with our modernization initiative and underlying growth in the business. And outside services expenses increased 7% relative to the prior year period, largely due to incremental modernization and resiliency spend. It was down 2% sequentially as we started to see some consulting expense shift into compensation expense as we made permanent hires to replace consultants. Equipment and software expense increased 9% year-over-year, mostly related to higher depreciation and amortization expense and costs associated with our cloud journey. We generated over 600 basis-points of trust fee operating leverage, nearly 800 basis-points overall operating leverage and our expense to trust fee ratio improved by 100 basis-points on a linked-quarter basis to 113%. Turning to the full year's results on Page 16, trust fees were up 8% in 2024 due to both strong underlying markets and solid new business generation. We generated record NII, up 8% for the year, driven by sharply increasing deposits at the beginning of the year and stability over the remainder of the year, a healthy loan book and the multiple securities repositioning trades we completed. Total revenue on an FTE basis was up 22% for the full-year and excluding notables, it was up 8%. Reported expenses were up 6.6% for the full-year. Excluding notables, they were up 6.1%, which includes the impact from our mid-year decision to accelerate certain modernization and resiliency expenditures to offset a portion of the gains we realized from the Visa monetization. Turning to Page 17. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well-above our required regulatory minima. Our common equity Tier-1 ratio under the standardized approach declined 20 basis-points on a linked quarter basis to 12.4% as capital accretion was offset by a slight increase in RWA. Our Tier-1 leverage ratio was 8.1%, flat with the prior quarter. At quarter end, our unrealized pre-tax loss on available-for-sale securities was $598 million. We returned $403 million to common shareholders in the quarter through cash dividends of $149 million and common stock repurchases of $254 million. And for the full-year, we returned over $1.5 billion, reflecting a payout ratio of 78%, including share repurchases of $938 million, our highest-level in five years. We continue to expect our total operating expense growth to be at or below 5% for the full-year, excluding notable items in both periods. Turning to NII, for the first-quarter, we expect NII to be approximately $555 million to $575 million. This assumes the current market implied forward curve, a flattish balance sheet on a dollar-adjusted basis with stable deposit levels, a relatively stable deposit mix, stable pricing and modest currency headwinds. For the full-year, again, assuming the market implied forward curve, we're expecting NII to increase by low-single digits on a percentage basis. And with that, operator, please open the line for questions.

Thank you. [Operator Instruction] And our first question today comes from Glenn Schorr with Evercore.

Hi, thanks very much. A quick follow-up on -- and thank you for the NII guide. I'm just curious on the durability of some of the underlying trends, meaning, the 7% growth in non-interest-bearing deposits in the quarter. Like, was there some parking of cash by clients that naturally flows out? And then, if you could just clarify, when you talked about made pricing decisions in-line with market conditions, is that just rates came down and you lowered some deposit pricing on clients? Thanks.

Yes, thanks for that question. I think non-interest-bearing deposits were up over $1 billion. I think that's probably higher than other quarters and my guess would be that there's some seasonality to that number. And certainly, we welcome it, but ultimately, it's not out of step with what we've seen in the past. In terms of the pricing adjustments and we've talked about this before, we really have put a lot of effort behind our overall liquidity management and balance sheet management as it relates to deposits. And so, when we think about our pricing adjustments, it's more than just a normal-course of business type of pricing adjustment. It's really taking a look at all the multiple currencies that we do manage on our deposit base and having a much more fulsome review of everything we're doing and making sure those betas are consistent with what we think they should be.

I appreciate all that. Thank you.

And the next question will come from Brennan Hawken with UBS.

Good morning. Thanks for taking my question. I'd love to start out maybe a bit granular. In the past, you guys have spoken to targeting keeping the expense growth in 2025 at 5% or better. Dave, you had some comments that you made in a December industry conference where it seemed as though there was a little bit of uncertainty around that. Could you maybe clarify, is that a reasonable level to expect for 2025? And if not, what are the variables that we should watch?

Yes. Thanks for that question. I was in the chair maybe a month and a half or two months when I was asked that question. And now that I've been in the chair for four months and have gone through our planning period for 2025. I have very strong conviction around a 5% or below number. So, we can take that issue off the table, if you will. And obviously, what we try to do is in putting that number out, we don't put it out in isolation. So, our North Star is, obviously, what Mike talked about earlier, which is positive operating leverage. But at the end-of-the day, we know that we -- the markets were pretty buoyant in 2024 and we want to prepare ourselves to have a resilient business model. And the only way to do that is to keep driving expense curve down.

Okay. Thanks for that color.

And moving on to Betsy Graseck with Morgan Stanley.

Thanks so much.

And the next question will come from Ebrahim Poonawalla with Bank of America.

I just wanted to follow-up on the global family office piece. Looking at the Slide 13, just talk to us, it was a priority in 2024, I'm assuming remains a big area of focus. When we think about the revenue growth, whether or not that should be sort of leading the way going-forward. On a year-over-year basis, pretty strong growth in revenues within the GFO segment. It sort of plateaued out over the last few quarters. If you can talk to how we should think about revenue growth within GFO, given the investments you've made, given just the secular growth in that segment would be helpful.

Sure. I'm happy to do that. What I would say is GFO probably had its strongest year than it's ever had in terms of organic growth. It was exceptional, very high single digit organic growth. And we've also been reaching out more to international markets as well. And so, from that perspective, it was a great year. Also keep in mind that our assets under management in the fourth quarter were up 5%. And I think there is a lag effect there, right? So depending on when you bring that business in, you'll see it in your numbers. And so there's that issue as well. So I wouldn't say that it actually has plateaued. What I would tell you is the pipeline looks -- the GFO pipeline actually looks more robust going into 2025 than it did in 2024.

Understood. And maybe just a separate question. So heard you on the NII guide. How should we think about the gearing of the balance sheet? One, do you think that we are at a point where if the Fed were not to do anything, rates stay more or less the same, NII and deposit balances should grow from here, all else equal?

Yes. I mean, we're still anticipating a certain number of rate cuts at least a couple this year in the US. And then globally, there's a lot of other potential rate cuts that are in our numbers as well. Keep in mind, our deposits aren't all-in dollars. So, we obviously did some pricing adjustments, which help on the NII front as well. We also have a pickup in loan activity, which we think could continue into next year. So there's a lot of different puts and takes when you get into the NII number apart from just the various cuts in interest-rate cycles.

Yes. But rate cuts alone, would that be incrementally positive or negative given the balance sheet mix.

No, we think obviously, if there are less rate cuts, that's better.

Okay. Got it. Thank you.

And moving on to Alex Blostein with Goldman Sachs.

Got it. Okay. That's perfect. Thanks you guys.

And our next question comes from David Smith with Truist Securities. Please go ahead.

Thank you. And then separately on NII, if I just take the midpoints of your 1Q and full-year NII guides, it would suggest NII staying pretty consistent throughout the year, at least on average. Is there anything that we should be considering in terms of the cadence there across the cuts in the forward curve as well as your expectations for loan growth or balance sheet shifts.

Yes. I mean, one thing to keep in mind with us as it relates to NII is that, we are a very liability driven institution. And so -- and that's why to Mike's points about capital, that's why we keep this excess capital. And so, for example, we saw a very large pickup in our loan activity over the last quarter. And so, we want to make sure our balance sheet is there for our clients. We can't always predict when that's going to be, when they're going to want to put deposits on or take loans out or things of that nature. So we've guided still for deposit -- for the NII to be up over the course of the entire year by low-single digits. But at the end of the day, trying to land on the head of a pin as to exactly when that's going to happen quarter-by-quarter is going to be difficult to do for the entire year.

Understood. Thanks.

And we'll take a question from Brian Bedell with Deutsche Bank.

Great. Thank you.

And moving on to Jim Mitchell with Seaport Global Securities.

Right. Great. Thanks for that.

And our next question will come from Steven with Wolfe Research.

Understood. And if I could just squeeze one more, similar line of questioning to what Brennan asked on the medium term targets, but I actually want to drill down into pre-tax margin target. Given you already achieved a 30% profitability level in the back-half of this year, heard a lot on this call about the commitment to drive better efficiency from here. I was hoping to get some perspective or context as to what informed the decision to set the bar at 30 and not something higher in terms of the longer-term objectives.

So to your point, we hit 30% for the quarter, but we didn't hit 30% for the year. So we're still working our way into that range, which over-extended time periods, we've been in the 30 plus percent pre-tax margin range. And the rationale is similar to what I mentioned with Brennan's question, which is we're trying to drive the combination of growth and returns. So getting the margin up to some very-high level, if you will, but doing so by essentially cutting off growth is not going to produce the greatest value for shareholders. And so we think that right combination is in that kind of 30-plus range. So if you said low-30s, that's the area we've seen where we can have the -- that best combination of growth and returns.

Understood. Thanks so much for taking my questions.

And next will be Gerard Cassidy with RBC.

David, when you mentioned in response to one of the questions about your Northerns focused on building a sustainable financial model. Can you -- through the cycles, can you define what that sustainable financial model is from your viewpoint?

Yes. I mean, obviously, it means you can't rely on factors you don't control, right? So when you think about expenses, that's obviously a huge focus and you think about organic growth. Those are the two things you can spend a lot of your time on making sure you control those elements. And so you're always going to get buffeted by external events. There's nothing you can do about that, but you certainly can't predict it and you definitely don't control it. So the more organic growth you've got built into your model, the more resiliency you've got in your financial model and that's sustainable through time. So that is the overall goal is to get that expense curve down and get the organic growth up so that we can weather the storm if there is one going forward.

Very good. Thank you, Michael.

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Jennifer Childe, Director of Investor Relations.

Thank you, operator, and thanks everyone for joining us today. We look forward to speaking with you again in the future.