NTRS - NASDAQ

Ladies and gentlemen, good day, and welcome to the Northern Trust Corporation Second Quarter 2025 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, ma'am.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our second quarter 2025 earnings call. You may have noticed that we included a number of new disclosures in our earnings materials this quarter. They include additional segment-level detail, including average loans, average deposits, pretax profit and margins, along with enhanced regulatory and capital metrics. These additional metrics aim to enhance the quality and transparency of our disclosures, ensuring we are responsive to shareholder feedback. Now let's discuss the financial results of the quarter, starting on Page 12. This morning, we reported second quarter net income of $421 million, earnings per share of $2.13 and our return on average common equity was 14.2%. As Mike mentioned, we delivered our fourth consecutive quarter of generating positive organic growth and positive operating leverage. It's also our fourth consecutive quarter of delivering positive trust fee operating leverage, and improving our expense to trust fee ratio on a year-over-year basis, excluding notables. These are clear signs that we're moving in the right direction, and our strategy is gaining momentum. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 100 basis points. Relative to the prior period, currency movements favorably impacted our revenue growth by approximately 110 basis points and unfavorably impacted our expense growth by approximately 130 basis points. Trust, investment and other servicing fees totaled $1.2 billion, a 1% sequential increase and a 6% increase compared to last year. Net interest income on an FTE basis was a record $615 million, up 7% compared to the prior period and up 16% from a year ago. Excluding notables in the prior year, other noninterest income was down 4% year-over-year, largely reflecting weaker reported FX trading income, partially offset by strength in other capital markets activities. One reminder related to our FX trading income. We've seen steady growth in the underlying core business over time, but it's often muted by the overnight swap activity conducted by our treasury department, which was more pronounced this quarter. Core FX trading revenue, excluding the impact of our swap activity was up 10% year-over-year. Our assets under custody and administration were up 7% sequentially and up 9% compared to the prior year. Our assets under management were up 6% sequentially and up 11% year-over-year. Overall, our credit quality remains very strong with all key credit metrics in line with historical standards. The provision for credit losses increased to $16.5 million in the second quarter, largely reflecting an increase in reserves related to a small number of nonperforming loans, but we expect it to return to more normalized levels in subsequent quarters. Relative to the prior year period, and excluding notable items, revenue was up 8%. Expenses were up 4.8%. Our pretax margin was up 160 basis points. Earnings per share increased 20% and our average shares outstanding decreased by 5%. Turning to our Asset Servicing results on Page 13. Our Asset Servicing business performed well in the quarter. Transaction volumes were particularly strong. 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 and administration for Asset Servicing clients were $16.9 trillion at quarter end, reflecting a 9% year-over-year increase. Asset Servicing fees totaled $692 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $469 million, up 5% year-over-year largely reflecting the impact from strong underlying equity markets, favorable currency, robust transaction activity and new business generation. Assets under management for asset servicing clients were $1.2 trillion, up 11% over the prior year. Investment management fees within Asset Servicing were $157 million up 8% year-over-year due to favorable markets and new business activities. As you can see on the right side of the slide, average deposits grew 7% sequentially, accounting for most of the total increase. Loan volume increased slightly relative to the first quarter. Asset Servicing pretax profit nearly doubled over the prior year period. And the Asset Servicing pretax margin was up more than 10 points to 23.2%. Excluding $75 million in notables in the prior year, asset servicing pretax profit increased 29% and the pretax margin expanded by approximately 330 basis points. Reflecting the pivot in our new business approach, our focus on cross-selling high-margin capital markets and other adjacent products and services and our efforts to streamline our operations. Moving to Wealth Management business on Page 14. Wealth Management also had a healthy quarter with continued strength in Global Family Office. Assets under management for our wealth Management clients were $469 billion at quarter end, up 12% year- over-year. Trust, investment and other servicing fees for Wealth Management clients were $539 million, up 5% year-over-year, primarily due to strong equity markets. As you can see on the right side of the slide, both average deposits and average loans were flattish relative to the first quarter. Wealth Management's pretax profit increased 18% over the prior year period and the pretax margin was flattish 37.2%. Excluding approximately $33 million in notables in the prior year period, Wealth Management's pretax profit increased 5% year-over-year, while the pretax margin decreased 25 basis points. It's worth noting that more than 2/3 of the $16.5 million second quarter provision was allocated to the Wealth segment. Moving to Page 15 and our balance sheet and net interest income trends. Our average earning assets were up 6% on a linked-quarter basis fueled by higher deposit levels, which drove an increase in cash held at the Fed and other central banks and a slight increase in securities. The duration of our securities portfolio decreased to 1.5 years. While we're opportunistically adding duration to protect against future rate cuts, we've also shifted the mix of the portfolio slightly. So the fixed floating breakdown is now 52% to 48%, including the impact of swaps. The duration of our total balance sheet remains under 1 year. Net interest income on an FTE basis was a record $615 million, and our net interest margin held steady at 1.69%. NII outperformed our expectations, largely due to higher-than-expected deposit levels. Average deposits were $122 billion, up 6% compared to the first quarter levels. within this, interest-bearing deposits increased by 7%, while noninterest-bearing deposits decreased by 60 basis points, comprising 14% of the overall mix. The quarterly contribution from transactional and other onetime items was elevated in the second quarter, mostly due to the overnight FX swap activity conducted by our treasury team as we capitalized on FX volatility during the quarter. We estimate this added an incremental $10 million to second quarter NII that is not expected to persist. Turning to our expenses on Page 16. Excluding notable items in the prior period as listed on the slide, expenses in the second quarter were up 4.8% year-over-year. Excluding notables and unfavorable currency movements, expenses were up just 3.8%, the lowest rate of growth in the past 6 quarters. 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 minimums. Our common equity Tier 1 ratio under the standardized approach decreased by 70 basis points on a linked quarter basis to 12.2% with capital accretion more than offset by an increase in RWA. The RWA growth was driven largely by quarter end lending, coupled with higher capital markets activities. Our Tier 1 leverage ratio was 7.6%, down 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $481 million and we returned $486 million to common shareholders in the quarter through cash dividends of $146 million and common stock repurchases of $339 million, reflecting a payout ratio of 117%. Finally, based on the 2025 CCAR results, we recently disclosed that our stress capital buffer will remain at the 2.5% minimum requirement. And yesterday, our Board approved a $0.05 or a 7% increase to our quarterly dividend. 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 and regardless of currency movements. Turning to NII. We now expect the full year NII to increase by mid-single digits over the prior year. This assumes a modest decline in third quarter deposits in line with seasonal trends and mostly stable deposit mix, meaning that we wouldn't expect absolute levels of NIB to move materially from current levels, but the percentage of the overall mix could change. Market implied forward curves as of this week, and slightly weaker institutional deposit betas with the next series of global rate cuts. And with that, operator, please open the line for questions.

[Operator Instructions] And our first question comes from Glenn Schorr with Evercore.

And our next question comes from Betsy Graseck with Morgan Stanley.

Our next question comes from Ebrahim Poonawala from Bank of America.

Yes. So when we look at buybacks, it isn't just about the stock price, right? We're looking at our regulatory capital, earnings power, ROE, loan growth, as you know, dividends, we like our balance sheet to be available for our clients, right? So we still like to run a little bit of a cushion, if you will, that we want to have in the system. We've picked up our capital return to shareholders significantly. When you think about the current pace that we're on, we will probably end up exceeding what we did all of last year, and last year had Visa included in it. So I think we're at a very healthy clip close to $500 obviously this quarter. And so you take all those factors into consideration, not just the stock price, when we look at it, and we balance that against our capital requirements and other issues at the time.

And we'll take our next question from Mike Mayo with Wells Fargo.

Yes, Mike. And I would only add to that, that when you look at the Asset Owner segment within Asset Servicing, it already chins the bar in terms of our margins where we're trying to go. And so as that business gets bigger, and the Asset Management side of the equation gets smaller, you're going to see the margins drift up as well. So that particular segment we've identified is already there.

And we'll take our next question from Alex Blostein with Goldman Sachs.

Got you. That's helpful. And just a follow-up on NII. I heard the guidance for the full year, obviously implies something in the maybe $5.70 range per quarter, I guess, from here on. As you look at the balance sheet, I think I heard you say a little bit less than 1-year duration overall with rate cuts kind of how you're thinking about the trajectory from NII off of that jumping off point? And are there any things you could do today to mitigate the effects of potentially lower interest rates in the U.S.?

Yes. So as I've said to you guys before, we have about $1.5 billion of securities that roll off every quarter, and we can reinvest those at, I think, 100 basis points over the yield, the runoff yield. So that's one area to do it. The second area, obviously, is we've been very focused on our deposit pricing and things of that nature. We are not just in U.S. dollars and deposits as well. So we take a look at opportunities across all the different currencies. And there are rate cuts that are going to be, I think, realized with some of those currencies as well. So from our perspective, it's really going to be a question of the reinvestment going out a bit longer when we have the opportunity, not just to protect Q3 and Q4, but to protect '26 as well.

And up next is Ken Usdin with Autonomous Research.

Dave, I was going to ask you to follow up on your comments about the Asset Servicing fees. You mentioned that the transaction activity was really strong. I'm sure part of that's just the core business, but was part of that just in relation to the April dislocation? And I guess kind of how would you help us understand the push and pull between organic growth and market health that you already have baked in for the third quarter versus some of the stuff that might have been like above trend just given the environment?

Yes. So yes, it was because of that. I mean, transaction volume was higher than it would be traditionally, if you look at the averages during the quarter, which wasn't surprising to anybody. You also have to take into consideration in Asset Servicing. When you look at the growth side, and you guys know this, we had 2 large client losses in Q2 and Q3. And one of those losses, which is they took the business in-house. We've not lapped that yet. And so, I would say 0.5% of the growth got nicked by that. So as we get beyond those 2 client losses, you'll see some more realistic numbers in terms of year-over-year comparisons on that. So that's the way sort of the way I think about it.

And will those be out? Do you know when those will be lapped? Are they lapped in the third quarter or after the third quarter?

Yes, so after the third quarter, those have been lapped definitively. So right now...

No, go ahead. You follow up...

No. So I mean, basically, the quarter was client neutral. I mean, when you think about it. So, from that perspective. And keep in mind, when you look at the Asset Servicing business, you know this, I'm sure it's on a quarter lag basis, right? So you've got to take that into consideration as well. that also affected the Wealth business. Wealth is obviously on a month lag basis. And Q1, if you look at the S&P, it was down 5%, NASDAQ down 10.5%, so take all that into consideration as you're taking a look at those absolute levels.

And up next is David Smith with Truist.

Any color on what's driving the strength in deposits this quarter?

Yes, I mean we talked about it last quarter a little bit. Obviously, there was a bit of a risk-off trade that we took advantage of during the period. So from that perspective, they are running a little bit higher. I will say, in the current quarter, we're starting to normalize. And that's probably why I'm keeping the guide where it is. And when I look at third and fourth quarter, third quarter tends to always be a little bit weaker just because of a seasonal pattern. Fourth quarter picks up a little bit, but they're beginning to normalize back to what I would say is a more predictable run rate. We did have, in particular, and the swap activity was driven by this. We had a very extremely large euro deposits that came in. And this is why I always tell you folks that we want to have a flexible balance sheet because we have very large clients that come to us not just for loans, but for deposits as well. So we did have some deposit activity that was concentrated among some very large clients in the quarter as well.

Got it. So it's normalizing beyond typical seasonality so far in the third quarter?

Yes. I mean it's back to what we thought it would be. I mean the average is 122 for this quarter. I think if you take a look at our last 3 quarters, but before the Liberation Day and the risk-off trade, it's back to those levels.

Yes, I'd also add that AUM flows, which obviously impact both businesses were positive. And liquidity was a real standout. And that is biased towards the institutional business. But $8 billion in the second quarter, $19 billion year-to-date on the liquidity side, which represents our tenth consecutive quarter of positive liquidity flows, and that's obviously great for our business.

And our next question comes from Brian Bedell with Deutsche Bank.

Yes. I would just add to that, particularly on the GFO front. I mean access to top managers is not a problem. We have the client base that all the top managers want. I think we are extremely discerning and have a very high bar in terms of what makes it onto our platform and if it fits our client base accordingly. The other thing I would say is we're doing a lot more on the alternatives advisory front. A lot of our clients that got very heavy into alts have not seen a lot of realizations in the recent past and have come to us with a bent towards what do I have and what should I do with this existing portfolio. And so we've been restructuring a lot of that stuff for them, giving them advice on that to make sure they've got the right mix within their portfolio. So it's not just selling our own product, it's also taking a look at what they've done and giving advice on all that.

And up next Gerard Cassidy with RBC.

And our next question comes from Vivek Juneja from JPMorgan.

And the high 20s, Mike. Sorry, go ahead.

No. I would just like to emphasize particularly for the Family Office business that it isn't just about investments, right? So it's about operating alpha. And at the end of the day, a lot of these Family Offices don't want to be in the vendor management business. They would much rather go to a firm that has the scale and ability to help them operate the full infrastructure inside a family office. And that's what we've got. And we have that scale through GFO and by leveraging off our asset servicing business to do that. So when you think about a Family Office infrastructure, it almost looks and feels a lot like a very sophisticated investment office and a lot of the tools like front office solutions that are used by those sophisticated asset managers are also used by our Family Office clients. So that interlink is incredibly important.

And Dave, let me thank you -- join the course of applauding you on the increased disclosure has taken us several years to get there, but thank you for doing that.

I did it just for you.

And our next question comes from Brennan Hawken with Bank of Montreal.

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

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