NTRS - NASDAQ

Good day, and welcome to the Northern Trust Corporation Third 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 Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our Third Quarter Earnings Press Release and Financial Trends Report are both available on our website at northerntrust.com. Also on our website, you will find our Quarterly Earnings Review Presentation, which we will use to guide today's conference call. This October 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 22. Northern Trust disclaims any continuing of the information provided in this call after today. Please refer to our Safe Harbor Statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our Third Quarter 2025 Earnings Call. Let's discuss the financial results of the quarter starting on Page five. This morning, we reported third quarter net income of $458 million, earnings per share of $2.29, and our return on average common equity was 14.8%. Our third quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense to trust fee ratio, which was down to 112% in the third quarter, and returned nearly 100% of our earnings. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth approximately 30 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust and investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Interest income on an FTE basis was $596 million, down 3% compared to the prior period and up 9% year to date from a year ago. Excluding notables in the prior year, other noninterest income was up 10% year over year, largely reflecting stronger capital markets activities, particularly securities commissions and trading, and FX trading income, reflecting our focus on driving growth in these areas. Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year. Our assets under management were up 4% sequentially and up 9% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded a $17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged. Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. Expect the full year's effective tax rate to be in line with the year-to-date effective rate. Relative to the prior year period and excluding notable items, revenue was up 6%, expenses were up 4.7%, our pretax margin was up 200 basis points, earnings per share increased 14%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on page six. Wealth management had a healthy quarter with particular strength in the regions. Assets under management for our wealth management clients were $493 billion at quarter end, up 11% year over year. Trust investment other servicing fees for wealth management clients were $559 million, up 5% year over year, primarily due to strong equity markets. Trust fees within the regions were up 7% year over year and are up 6% year to date, with strength mostly attributable to favorable equity markets. Within 1% year over year and are up 5% year to date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of $2 billion in September alone, and new businesses on pace to break last year's record levels. Average wealth management deposits were flat, and average loans were up 2%, both relative to the second quarter. Wealth Management's pretax profit increased 11% over the prior year period, and the pretax margin expanded 250 basis points to 40.5%. Moving to asset servicing results on page seven. Our Asset Servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remained robust, on pace to beat 2024's record levels, and new business generation continues to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset servicing fees totaled $707 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $483 million, up 7% year over year, largely reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 9% over the prior year. Investment management fees with asset servicing were $160 million, up 5% year over year, due mostly to favorable markets. Average deposits within asset servicing declined 6% sequentially, while loan volume decreased by 7%, albeit off a small base. Asset servicing pretax profit grew 14% over the prior year period, and the asset servicing pretax margin was up 150 basis points year over year to 24.7%. This reflected the benefit from favorable markets, that pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline operations. Moving to page eight and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked quarter basis, as softer deposit levels drove a decline in cash held at the Fed and central banks. At the same time, we opportunistically added fixed price securities to the portfolio to provide downside protection. Fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years, and the duration of our total balance sheet continued to be under one year. Net interest income on an FTE basis was $596 million, down 3% sequentially but up 5% as compared to the prior year. Sequentially, NII was unfavorably impacted by the lower deposit levels. This was partially offset by favorable deposit pricing actions we have taken outside of rate cuts. The quarterly contribution from transactional and other one-time items normalized in the third quarter following elevated second quarter levels. Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix. Deposits performed largely as we expected. Average deposits were $116.7 billion, down 5% compared to second quarter levels, reflecting typical seasonal patterns coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5%, and noninterest-bearing deposits decreased by 3%, but remained at 14% of the overall mix. Turning to our expenses on page nine. Expenses increased 4.7% year over year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%. Turning to page 10. 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 one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 8%, up 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $437 million, and we returned $431 million to common shareholders in the quarter, through cash dividends of $154 million and common stock repurchases of $277 million, reflecting a payout ratio of 98%. Year to date, we returned over $1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year. Turning to our guidance. Continue to expect our operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. We now expect full year NII to grow by mid to high single digits over the prior year. And with that, operator, please open the line for questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your tone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Ebrahim Poonawala with Bank of America.

Hey, good morning. Morning. I guess maybe this first Dave, where you ended on the NII outlook. The mid to high. Maybe address it two ways if you could. One, on the deposit trends, it felt like this the runoff was more than we expected. Are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet the Fed were to cut three or four times in quick succession? Does that put negative pressure on the NII? As we think about the first half of next year? Thanks.

Yeah. Sure. Happy to answer that. You know, deposits actually did perform pretty much in line with what we had previewed. And they're actually up from last year at this time. So from that perspective, may be less than you had anticipated, but I think generally, in the area we we had anticipated. You know, we've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at $135 billion. But we think that Q4 deposits are gonna be, I think, a little bit higher on average during the quarter. You know, and since we've already posted a 9% year to date year over year NII growth, that's why we feel comfortable tweaking our our guidance a bit to mid to high single digits in NII. And then which would imply, frankly, that would be about flat to marginally one to 2% up in the fourth quarter. As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have a rate cuts built into our in into our projections. We not anticipating more than two rate cuts, in The US, next year, for example. We have carry in, that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are gonna be rolling off in in that quarter in the in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be you know, flat to up one to 2%.

That's good color. Thanks, Mike.

We will take our next question from Kenneth Michael Usdin with Autonomous Research.

Thanks. Good morning. Just wanted to ask you to talk a little bit about just some of the the the moving pieces of this quarter. I know it might just be temporary, but, AUCA up 1%. I know you're talking about new business wins. You saw also in the press release some some outflows. So is that just kind of a the normal state of kind of getting some wins and some losses every quarter? Just a a dynamic for this quarter that you saw just relative to the market strength that we saw? Thanks, guys.

Yes. I would say that you take a look at the AUCA growth, there were you know, a number of individual clients that drove those, AUCA numbers. And had they not done that, we would have probably been on par with our peer group. These are asset management clients, and there was one client in particular that represented know, two thirds of, I think, of the degradation in the in the AUC. You have to remember that not all AUC is created equal. You know, not all AUC creates the same level of fees. And in this particular case, the vast majority was a was a restructuring that an asset manager made you know, moving from mutual funds through a like kind conversion into a CIT structure that's less expensive to the participants. And so still we didn't lose clients. We lost assets. And that happens, as you as you mentioned, the the the sort of puts and takes. Of the asset manager space. One other loss was really just a redemption by one large client as part of a fund. That fund has actually started to fill back up again. And so you add it all up in terms of impact, the total AUC that we're talking about is is the fee realization on that AUC is gonna be less than 10%. What we would normally see on a normalized AUC. And so, you know, you have to just take into consideration the type of business that is. And so you wanna translate that into dollars, all combined, all the degradation that we saw won't amount to more than 3 to $400,000. You know, a month of, of, you know, of of fee changes. You know, of fee decreases. Some of that could be earned back by the next quarter. So, yeah, I I think it's it's a lot of ebb and flow in the asset manager space is the way I would put it.

Great. That that's that's really great. Helpful, Dave. Second point, you're obviously firmly committed to that sub five. We saw it again this quarter. And just as you're starting to think about looking forward, I know you've said that you're strongly committed to it inclusive of FX translation. I just any any any incremental thing we should think about, you know, that as we go forward just know you're gonna be thinking about positive operating leverage. We don't know what the markets will do from here. They've obviously been a big helper. But as you continue to kind of, you know, hone that messaging around the expense base, Any new thoughts about, like, where you can kinda try to hold that level on expense growth overall? Thank you.

Yeah. So for fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to flex if necessary. And so I'm sticking very strongly to the below 5% growth number for for Q4 and for the full year. So I think we feel very good about that. Nothing nothing in particular that I would really cite We're just starting to think about 2026. We're we're just getting into the the the planning of that. And I one thing I would say is that, you know, we continue to bend the cost curve down on expenses. If you if you look at where I started, I think we were coming off a 6% growth. Down to 5% or five and a half. It's been grinding down every quarter and without currency, we would have been closer to four than we are to five. Right? So and we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we have have are going to realize in twenty five, is great, but '26 will probably be greater. And and so I think that we're just know, we're we're still seeing some opportunity there to keep grinding that expense curve down going going forward.

Got it. Thanks, Dave.

We will take our next question from Brennan Hawken with BMO.

Great. Thanks for that, Mike. And then you you there's there's been a lot of movement in the markets. You you already spoke a bit to GFO and some of the changes that happened within some portfolios, but but we did see fee rates the way at least the way we're able to calculate them, and I know that that's sort of flawed given how you guys bill. Because we don't have intra quarter visibility. But but did you guys see fee rate pressure in some of the other businesses this quarter as well. Or was it just around the mass in how you bill and how much the markets moved? If you could help maybe disentangle that a bit. Thank you.

Yeah. So think about GFO, in particular, as resembling a little bit more of the asset servicing side of the business than the wealth management side of the business. They've got extremely strong pipeline, and and they're gonna produce a record year of new business. Off another a previous record year. And so what you do see in GFO is large shifts in portfolio composition. And a higher sensitivity to cash. And so Q2 is pretty volatile, and then there's a lot of movement going in there. Other thing I'd say about GFO is they're much they're less exposed, at least at Northern, to fixed income and equity, movements. They are very cash focused. And so unlike the regions, not as influenced as much. By the overall equity market. A better way to look at the business like a GFO business would be look at their year to date fees. So year to date fees are up 5% and revenues are up 9%. And then, you know, GFO had

We will take our next question from Michael Mayo with Wells Fargo Securities.

We'll take our next question from Betsy Graseck with Morgan Stanley.

Appreciate that. Thank you.

We will take our next question from Glenn Schorr with Evercore.

Hello. Small but interesting one, re regarding the deposit rate paid on saving money market. And other deposits. So so after going down for four quarters straight because rates have been coming down it was actually up six basis points, and we had a cut in the quarter, I think. So it's just a it's interesting. I'm more thinking about the go forward. But what what caused the the that saving in money market rate to go up in a quarter when there's a rate cut. And I know you gave us the the your thoughts on next year, so I appreciate that. I'm just curious what's going on on on these deposits.

Yeah. Well, deposits are also multicurrency. They're not just US dollar. Right? So may be some some differences there. You might wanna take a look at, but we could certainly get more granular with you. But on the top of it, I can't I can't say in particular. I'd have to look at each currency in each particular investment that we made to to kind of give you that read.

We will take our next question from Steven Alexopoulos with TD Cowen.

We will take our next question from David Charles Smith with Truist Securities.

We will take our next question from Gerard Cassidy with RBC.

Good morning, Dave. Good morning, Mike. Morning. Kinda different questions for you guys. I always like to get the perspective from folks like you because you know, I have a big exposure to this area. There's been a lot of talk this quarter about loans to nondepository financial institutions, and, of course, your in the top 20 banks. You're at the lowest. You've got the least amount of exposure. Can you give us some color on what you know, I'm not asking you to talk about other banks, but these categories that are within this NDFI whether it's private equity or mortgage, credit intermediaries, etcetera, What how do you guys look at that NDFI category?

Yeah. That's a good question, and I'll I'll start, and then maybe Mike can talk about the broader, industry, issues. There was a reclassification in the reporting methodology implemented by the FDIC that moved some loans into other categories, that were into the n FDI category. So when you look at Northern you know, the vast majority of what we do are subscription lines to private equity firms. And those are lines of credit backed by the LP's capital commitments. And on top of that, there's borrowing bases that reflect uncalled capital as well. And so that is not the same thing as lending directly to a you know, a private credit fund. Right? There's also sometimes loans to management companies that we do. But in that case, you've got the the management fees that secure your loan. Right? And then thirdly, on the wealth side, we have, obviously, some NAV loans that we do. The advance rates are extremely low. Like, I wanna say around 30%. Those could have some private credit funds in them, but they're highly across their entire private equity portfolios. We don't lend against one particular fund. So that that's sort of how Northern has looked at that business. Individually. I'll let Mike talk broader about the industry in terms of what's what's going on. But we don't have we don't have any of the similarities as you pointed out to what's going on with everybody else.

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, and thanks, everyone, for joining us today. We look forward to speaking with you again soon.