NTRS - NASDAQ

Good day, and welcome to the Northern Trust Corporation First Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would 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 first quarter 2025 earnings call. Let's discuss the financial results of the quarter starting on page four. This morning, we reported first quarter net income of $392 million. Earnings per share of $1.90 and our return on average common equity was 13%. As Mike mentioned, we delivered our third consecutive quarter of positive total operating leverage. We also reported our fourth consecutive quarter of positive trust fee operating leverage, both excluding notables. Relative to the prior year, currency movements unfavorably impacted our revenue growth by approximately 20 basis points and favorably impacted our expense growth by approximately 50 basis points. Currency movements were immaterial relative to the prior period. As a reminder, year-over-year comparisons reflect one fewer day this year as last year's first quarter included an extra day in February due to leap year. Trust investment and other servicing fees totaled $1.2 billion, a 1% sequential decline and a 6% increase compared to last year. Net interest income on an FTE basis was $574 million, essentially flat compared to the prior period and up 7% from a year ago. Our assets under custody and administration were up 1% sequentially and up 3% as compared to the prior year. Our assets under management were flat sequentially and up 7% year over year. Overall, our credit quality remains very strong. Excluding notable items in all periods, other non-interest income was down 9% sequentially and down 4% over the prior year. Revenue was down sequentially 1% and up 6% on a year-over-year basis. Expenses were up 3% sequentially and up 4.8% over the prior year, and earnings per share decreased 16% sequentially but increased 13% compared to the prior year. Turning to our asset servicing results on page five. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up double digits over the prior year, and new business growth continues to be booked at attractive margins. Assets under custody administration for asset servicing clients were $15.8 trillion at quarter-end reflecting a 3% year-over-year increase. Asset servicing fees totaled $672 million. Custody and fund administration fees were $453 million, up 4% year over year largely reflecting the impact from strong underlying equity markets and new business generation. Year-over-year comparisons were dampened by the client exits we discussed in the second quarter of last year. Other fees were $48 million up 7% year over year, largely reflecting growth in our front office solutions product as well as higher seasonal benefit payments. Assets under management for asset servicing clients were $1.2 trillion up 7% over the prior year. Investment management fees within asset servicing were $153 million, up a strong 9% year over year due to favorable markets and new business activities. Now moving to our wealth management business on page six. Wealth management also had a healthy quarter with continued strength in our global family office business. Assets under management for our wealth management clients were $447 billion at quarter-end, up 6% year over year. Trust investment and other servicing fees for wealth management clients up 8% year over year, primarily due to strong equity markets. Moving to page seven in our balance sheet and net interest income trend. Our average earning assets were up 3% on a linked quarter basis, fueled by higher deposit levels, which drove an increase in cash held with the Fed and other central banks. The duration of our securities portfolio remained at 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 flat with the fourth quarter and our net interest margin was 1.69%, down two basis points quarter over quarter. NII outperformed our expectations largely due to higher than expected deposit levels. Average deposits were $116 billion up 3% compared to fourth quarter levels. Within this, interest-bearing deposits increased by 4% non-interest-bearing deposits decreased by 3% but remained at 15% of the overall mix. Deposit pricing was largely as expected. Institutional deposit betas remained high, and wealth deposit betas were stable. The quarterly contribution from transactional and other items returned to more normal levels. Turning to our expenses on page eight. Non-interest expense was approximately $1.4 billion in the first quarter up 3% sequentially and 4% as compared to the prior year. Excluding notable items in the prior period as listed on the slide, expenses in the first quarter were up 4.8% year over year, an improvement from the fourth quarter's 5.5% year over year increase. Let's go back and review our core expenses from the quarter. Compensation expense was up 8% sequentially largely reflecting the impact of our seasonal equity incentive grants. Top expense increased 3% over the prior year resulting from modest levels of hiring associated with our modernization initiative and underlying growth in the business. Outside services expense increased 7% relative to the prior period largely due to higher levels of spend associated with our modernization and resiliency initiative but it was down 3% sequentially as the same spend started to flatten out. Equipment and software expense increased 11% year over year mostly related to higher depreciation and amortization expense, and costs associated with our cloud journey. Turning to page nine, our capital levels and regulatory ratios remained strong in the quarter. We continue to operate at levels well above our required regulatory minimums. Our common equity Tier one ratio under the standardized approach increased by 50 basis points on a linked quarter basis to 12.9% driven by capital accretion and a decline in RWA. Our Tier one leverage ratio was 8% down ten basis points from the prior quarter. At quarter-end, our unrealized pretax loss on available for sale securities was $527 million. Dollars and we returned $435 million to common shareholders in the quarter through cash dividends of $148 million and common stock repurchases of $287 million. Reflecting a payout ratio of 116%. Turning to our guidance. Starting with expenses, we continue to expect our total operating expense growth to be below 5% for the full year. Excluding notable items in both periods. Turning to NII. Given our first quarter outperformance, coupled with recent deposit growth, we're raising our full-year guidance from low single-digit growth to low to mid-single-digit growth. This assumes continued strong deposit levels stable deposit mix, meaning we wouldn't expect absolute levels of NIB to move materially from current levels, but the percentage overall mix could change. Market implied forward curves as of this week and relatively stable deposit pricing. And with that, operator, please open the line for questions.

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And our first question is gonna come from Steven Chubak from Wolfe Research. Please go ahead.

Hi. Good morning, and thanks so much for taking my questions. I wanted to start on a question on the NII guidance and the modest upward revision is certainly encouraging. The cumulative beta of 86% so far this easing cycle, it's certainly surprised positively, especially relative to the 72% beta we saw during the period of Fed tightening. Was hoping you could speak to what deposit beta assumption is underpinning that guidance. Just trying to gauge what sort of deposit betas we can underwrite to sustainably if we get four additional cuts consistent with the forward curve.

Yeah. Our deposit betas remain relatively stable if you look historically, but I would say that it's obviously gonna be higher for the institutional business, closer to a hundred and then lower for wealth. Sixty to seventy percent, roughly. I will also point out though that we have spent a lot of time on our deposit pricing mentioned this in the last earnings call. And thinking a little bit about tiering and the size of our deposits, where we get our deposits. So I think having spent more time doing that, I think it's really it's benefited the deposit beta on the positive side.

That's great. And for my follow-up, just on the fee outlook and the impact on expenses, just given you're gonna have to absorb some of the negative marks related to month and quarter lag price. And David, it sounds like you were reaffirming the five percent or better expense guide. I wanted to better understand how much flex you have if those fee pressures intensify and we don't necessarily exceed an inflection or recovery in equity markets over the course of the year.

Yeah. We are dedicated to keeping that expense growth rate below five percent. I'd point out that at the beginning of the year as we were doing our planning, we spent a lot of time identifying discretionary and nondiscretionary spending. We know exactly what we have to do to flex. I think you also heard me say in the previous call that we're trying to build a more flexible business model that can basically, you know, adjust itself as market conditions either get better or get worse. Right? So we know where we have to do it. We know what our levers are. They're gonna be, you know, obviously, in the consulting side, outside services, technology spend. And then potentially even on incentives as well. So we've got a management team, I think, that's really driving towards having strong positive operating leverage through all the cycles. And that's why I'm willing to say we're gonna obviously stay within that below five percent. Currency creates a bit of a headwind for us. You know, from my perspective, it's neutral in the sense that it helps us on the revenue side and hurts us on the expense side. That's obviously gonna be something we have to manage more proactively. But at the end of the day, we don't control it. We're still based on the current exchange rates, we still think we can get to that five percent or below.

Very helpful, caller. Thanks so much for taking my questions.

And our next caller is Betsy Graseck from Morgan Stanley.

Thank you.

And our next caller is gonna be Ken Houston from Autonomous Research. Please go ahead.

Hey, guys. Good morning. Nice to see the little incremental buyback. Just wondering and now even with the even higher CET1 ratio at twelve nine, I know you had previously talked about doing greater than the seventy-eight percent total capital return you did last year. You talk about your comfort with that or just given the environment and where capital still was going, you know, could you still move that up forward, you know, more and more back to shareholders? Thanks.

Yeah. So I'll take a crack at that. You know, we love our flexibility, and it's hard in a point in time to exactly where you're going to land. Particularly in uncertain markets. You wanna make sure you're there for your clients, and so it trended up this quarter. There's obviously some room to take it down. And I will remind you, we did pay out 116% of earnings, which is an insignificant versus the 90% we did in Q1. So, yeah, our range is eleven percent to twelve percent on CET1, and that hasn't changed. We do watch our capital levels compared to our peers. You know, and so we like the higher payout levels. I think going forward of around a hundred percent could be something that we could aim more towards going forward.

Makes sense. Great. And a follow-up on the expense side. So expenses to trust fees, calculating around one eighteen, about flat year over year. I know you have the long-term goal, one zero five, one ten. And I know there's a direction of travel that you're aspiring for, but just given Steven's prior comments about, you know, the market headwinds that you're facing, I think you expect to see directional improvement there, as we move forward? And I guess, you know, there's a push and pull with as you already mentioned, you're trying to get the expense growth rate lower. So just how do we just think about that? Thanks.

Yeah. Well, there's obviously two components to that ratio. You know, in the trust fee environment right now, given what's happened in the capital markets, is gonna be something that we again, we don't control. What I try to focus people on is organic trust fee growth and organic expenses. Those are the only things that we really have pretty much complete control over. What we try to do is drive those down as much as we possibly can then we have to just confront whatever market environment that we have at the time. And there's certain things that are gonna sort of we're just gonna have to accept them. The more we drive down the organic side and drive up the trust fees, that we're gonna be in better shape. So that's sort of how we think about it. And then it all ends up being in the expenses to trust fees, but, again, that doesn't that that includes all the market gyrations that are in there as well. And clearly, our targets are much lower than where we currently are.

Got it. Thank you, Dave.

And our next question is gonna come from Mike Mayo from Wells Fargo Securities. Please go ahead.

Alright. Thank you.

And our next question is gonna come from Ibrahim Poonawala from Bank of America. Please go ahead.

It's good color, Mike. Thanks for talking through that. And maybe one, Dave, heard your guidance on NII. Just remind us in terms of sensitivity to rate cuts, how we should think about that going forward. Rapid rate cuts, is that a negative? How you think how are you just going about managing the balance sheet? An Alco perspective? Thank you.

Yeah. We have, you know, in our model, we've got two or three rate cuts potentially in there. You know, from our perspective, it doesn't really impact it all that much, to be honest with you. The NIM compression really doesn't start until we get a much, much lower rates. If you wanna think about it, you know, roughly speaking at twenty-five basis point rate cut it translates into less than a million dollars a month for us. So it isn't something that we anticipated, but this isn't something that's gonna prevent us from hitting our goal.

Sure. Thank you.

And our next question is gonna come from Glenn Shore from Evercore. Please go ahead.

Alright. Thank you.

And our next question comes from Gerard Cassidy from RBC. Please go ahead.

Morning, Dave. Morning, Mike. Can you guys share with us it might be difficult to do this, but how can you calibrate the fee revenues for asset values versus volume? So if the global asset values were to continue to decline this year, how much can that be offset on your revenues with increased volumes?

Yeah. I mean, so our AUC is about fifty percent equities. And thirty percent fixed income. AUM is about fifty-six percent equities. So we are levered towards the equity markets, right, from that perspective. So, yeah, it's gonna be volume and it's gonna be mix. Obviously, it's gonna be super important there. As well. Also, keep in mind that within, you know, the AUC bucket, a lot of the stuff that we do in asset servicing is custody agnostic. We're moving more towards solution-based revenues, like front office solutions and integrated trading solutions and things of that nature. So it what you know, assets under custody is super important, but we've added a ton of extra services around all of that, and it's less affected by that by that volume.

Very good. Thank you.

And our next caller is gonna be David Smith from Turis Securities.

Thank you.

And our next question is gonna come from Jim Mitchell from Seaport Global Securities.

Okay. Thanks. For the color.

And our next question is gonna come from Vivek Jainja from JPMorgan.

Hi. Thanks. Just want a clarification on your fees in both servicing and asset management. Dave, I heard you say you know, you've added a lot of services, and then you also mentioned in your release about, you know, the lag defect that you always have. From asset values. Obviously, fourth quarter asset values did well. But when I look at your servicing and asset management fees, both were downlinked quarter. Any color on what drove that down and how we should think about it given that Q1 was actually down further? So any talk about this?

So the way to think about the billing lag is twenty-five percent quarterly, sixty percent monthly, and fifteen percent daily. Sort of the way we think about it. So, you know, obviously, the quarterly benefit, we'll still see it. Going into Q2 because March 31st wasn't was before liberation day. So we're still gonna see an impact there. But you know, going forward is it obviously will catch up to us unless the markets will, you know, come back materially.

Yeah. Dollars still represented about eighty percent of our trust fees.

Okay.

And our next question is gonna come from Alex Goldstein from Goldman Sachs. Please go ahead.

Hey, everybody. Thanks for squeezing in here. A couple of follow-ups for me. First, maybe on NII. Understanding that the environment is obviously quite volatile. I think in your forward guidance, you guys are assuming fairly stable deposits. I'm assuming that's too average in Q1, but maybe give us an update on kinda how things stand so far in April both in terms of the level and the mix just given, you know, all the volatility we've seen so far in the second quarter?

Yeah. I mean, deposit levels are hanging in there. And obviously, you know, you'll you know, March 31st was a point in time, but at the end of the day, our clients, I think, are, you know, have taken a somewhat of a risk-off position in the marketplace, and they think they view Northern as a good place to put their deposits. And so from our perspective, you know, the deposit levels are driving a little bit obviously, of the guide I've given you going forward, and we don't see them abating, you know, obviously, for the next couple of months. And so from that perspective, we feel pretty good about that.

Right. So okay. That makes sense. And then in terms of just the mix as well, could you just kinda us think about what should we be looking out for when thinking about the mix going forward? The risk-off environment doesn't seem to change the mix. Miss mix rather drastically. It sounds like non-interest-bearing deposits is still kinda hanging in around the same level in terms of percentages. But what would change that, and what sort of the client segment that will be most responsible, I guess, for that shift?

So yeah, so keep in mind that fifty percent of our securities reprice in ninety days or less. And over eighty percent of the book is in US dollars. And we've got about a billion of fixed securities that run off each quarter and then are being reinvested in fixed and floating. And we have our duration has gone up a little teeny bit, but we have been taking the opportunity think a little bit about protecting twenty-six, if you will. So you know, from that perspective. So and also keep in mind that about seventy percent of our deposits are in US dollars. Right? So there are opportunities for us to do some arbitrage opportunities between those currencies and things of that nature. And as I said before, deposit betas are gonna remain pretty steady until we get to much lower interest rate levels. So that's sort of what's driving the NII outlook.

Gotcha. Okay. And then just another quick on expenses. So I heard you guys, in terms of your prepared remarks and outlook for this year, just given the more uncertain macro backdrop and the effect will be delayed on fees that lower markets might have on you guys, could you just remind us the percentage of your expense base that flexes directly with lower asset levels? There's some things like subadvisor or sub custody fees and things like that that are that I think quite floating. But if you look at your expense base more holistically, what percentage of that is sort of truly variable with the fee revenue?

Not as much as you might think. Roughly, it's less than half a percent.

Right? So Okay. In the general, the time we give you guys is the ten percent change in the markets is about a three percent change in trust fees. Two percent revenues. Unfortunately, on the way down, we don't get as much benefit from those kind of fees going down.

K. Great. Alright. Thanks so much.

And our next question is gonna come from Gerard Cassidy. From RBC.

Got it. And just and maybe reword the question. What's the unrealized gain potential, I guess, is was the better question since it's carried at zero on the balance sheet?

About $1.1 billion? Pretax.

Great. Okay. Super. Appreciate that. Thank you.

And there are no further questions in the queue at this time. I will now turn the conference back over to Jennifer Childe for closing remarks.

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