NTRS - NASDAQ

Good day, and welcome to the Northern Trust Corporation Fourth 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.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2025 earnings call. Let's discuss the financial results of the quarter starting on Slide twelve. This morning, we reported fourth quarter net income of $466 million, earnings per share of $2.42, and our return on average common equity was 15.4%. Our fourth quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. 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 140 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment, and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 7% increase compared to last year. Net interest income on an FTE basis was up 10% sequentially, to $654 million, a new record, and up 14% from a year ago. Our assets under custody and administration were up 3% sequentially and up 11% compared to the prior year. Our assets under management were up 2% sequentially and up 12% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded an $8 million release of the credit reserve in the fourth quarter, largely reflecting refinements to factors used to estimate losses for the C and I portfolio. Our effective tax rate was 26.5% in the fourth quarter, up three ten basis points over the prior year's rate, largely as a result of higher tax impacts from international operations. We expect the effective tax rate in 2026 to be approximately 26 to 26.5%. Our results included $69 million in net unfavorable notable items, including $19 million in expenses associated with our Visa swaps, recognized within other operating income, $59 million in severance-related expense primarily recognized within compensation expense, and a $10 million release of our FDIC special assessment reserve recognized within our other operating expense. Relative to the prior year period and excluding notable items, revenue was up 9%, expenses were up 5%, our pretax margin was up 250 basis points to 33.2%, we generated over four points of positive operating leverage, earnings per share increased 19%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on Slide 13. Wealth management had a good quarter with strength in both GFO and the regions. GFO won three of its largest wins of the year in the quarter. Priority markets delivered their best overall quarter of the year, and the regions posted their best quarter for flows. Assets under management for our wealth management clients were $507 billion at quarter end, up 13% year over year. We saw healthy incremental flows late in the quarter, including $5 billion within GFO. Trust investment and other servicing fees for wealth management clients were $578 million, up 6% year over year, primarily due to strong equity markets as the favorable flows occurred late in the quarter. Trust fees within the regions were up 5% year over year in the quarter and were up 6% for the full year, with strength mostly attributable to favorable equity markets as strong advisory fee growth was mostly offset by continued product pressure. Within GFO, trust fees were up 6% in the fourth quarter relative to the prior year, showing healthy improvement from the third quarter's more muted performance. They were up 5% for the full year. Wealth management average deposits were up 5% sequentially, reflecting year-end portfolio repositioning coupled with new business momentum. Average loans were down 4%, reflecting the repayment of a large GFO loan. Including severance charges of $15.2 million, wealth management's pretax profit decreased 3% over the prior year period's record levels, and the pretax margin contracted by 300 basis points to 38.9%. Excluding these charges, the pretax margin was down 120 basis points. Moving to asset servicing results on Slide 14. Our asset servicing business also had a very strong finish to the year. Transaction volumes accelerated, capital markets activities were robust, while new business generation continued to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17.4 trillion at quarter end, reflecting an 11% year over year increase. Asset servicing fees totaled $730 million, reflecting an 8% increase over the prior year. Custody and fund administration fees were $496 million, up 9% year over year, 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 12% over the prior year. Investment management fees in asset servicing were $166 million, up 6% year over year, largely due to favorable markets. Asset servicing average deposits increased 3% sequentially, reflecting normal seasonal patterns, and were up 6% year over year. Loan volume increased 6% from third quarter levels but remained down 8% year over year, albeit off a small base. Asset servicing pretax profit grew 23% over the prior year or 40% excluding severance charges. The pretax margin expanded two ten basis points year over year to 25.5%, an increase of five fifty basis points excluding severance. The segment level margin benefited from the NII associated with the seasonally strong deposit levels, the pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, which translated to a pretax margin on our new business that was above 30%, as well as our efforts to streamline our operations. Moving to Slide 15, and our balance sheet and net interest income trends. Average earning assets were up 3% on a linked quarter basis, as higher deposits drove an increase in cash held at the Fed and other central banks and in our securities portfolio. We issued $1.25 billion in new debt in November, $500 million in senior and $750 million in sub debt. The debt was swapped to floating and proceeds were invested in floating rate securities at a positive carry. As a result, the fixed percentage of the securities portfolio dropped to 52% from 54% in the third quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.48 at the end of the quarter, and the duration of our total balance sheet continued to be under one year. Average deposits were $119.8 billion, up 3% compared to third quarter levels, reflecting normal seasonality. Deposits performed largely as expected throughout the quarter, but we saw a higher than usual surge in the last two weeks. We expect deposit levels to normalize in the first quarter. Within the deposit base, interest-bearing deposits increased 2% sequentially and noninterest-bearing deposits increased by 10%, climbing to 15% of the overall mix. Net interest income on an FTE basis was $654 million, up 10% sequentially, up 14% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, a greater proportion of noninterest-bearing deposits, and the ongoing impact from deposit pricing actions we've taken outside of rate cuts. Our net interest margin increased sequentially to 1.81%, reflecting the favorable deposit pricing actions taken coupled with a more favorable deposit mix shift. Turning to our expenses on Slide 16. Expenses increased 9% year over year in the fourth quarter, but excluding the notables listed on the slide, they were up 5% over the prior year. Excluding both notables and unfavorable currency movements, expenses were up just 3.8% in the quarter and 4.3% for the full year. This translated to an expense to trust fee ratio of 110.8% excluding notables, and our sixth consecutive quarter of year over year improvement. Turning to Slide 17 and our full year results. Including notable items listed on the slide, full year revenue decreased 2% and EPS declined by 11%. Our ROE was 14.4%, and we returned 111% of our earnings to shareholders. Relative to 2024, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 60 basis points. Our full year results included $69 million in net unfavorable notable items, all reported in the fourth quarter. 2024 results included $536 million in net favorable notables recorded in quarters one through three, including an $878 million gain related to the Visa B share monetization. Excluding notable items in both periods, 2025 revenue was up 7%, expenses were up 4.9%, or 4.3% excluding unfavorable currency impacts. Our pretax margin was up 160 basis points to 30%. We delivered over 200 basis points of positive operating leverage, and earnings per share increased 17%. Turning to slide 18, 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 12.6%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 7.8%, down 20 basis points from the prior quarter driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available for sales securities was $401 million. For the fourth quarter, we returned $522 million to common shareholders through cash dividends of $152 million and stock repurchases of $370 million. For the full year, we returned $1.9 billion, including a record $1.3 billion in share repurchases. This reflected a 113% payout ratio in the fourth quarter and 111% for the full year. Turning to our guidance on Slide 19. As I've been signaling, we're moving away from an expense growth target instead focusing on positive operating leverage, which is our North Star. We want to maintain the flexibility to opportunistically invest in growth initiatives when top-line growth is more favorable and dampen expense growth when the market environment is more muted. But generally speaking, I can assure you that the direction of travel for expense growth will be down. As shown on the slide, we now expect full-year 2026 NII to grow by low to mid-single digits over the prior year, which is up from our previous guidance. This assumes current market implied forward curves and relatively stable deposit mix. We expect to generate more than 100 basis points of positive operating leverage and we expect to return more than 100% of our earnings to shareholders. And with that, operator, please open the line for questions.

Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up in order to allow everyone an opportunity to ask a question again. Press star 1 to ask a question. And our first question is going to come from Brennan Hawken from BMO Capital Markets.

Right. Okay. Thank you for the timing around that. And definitely really encouraging to see it. I it was great. Maybe one on the balance sheet. So the deposit cost trends were encouraging here in the quarter. Can you speak to what drove the lower cost on the IB side? We saw the net the NIBs, the noninterest-bearing balances move higher, but sometimes that's seasonal. So you spoke to I think, stable deposits in the outlook. For the NII, does that mean that that include maybe the IB composition normalizing and how sustainable is the ability to drive down the interest-bearing deposit costs? Thanks.

Yeah. So there's a lot to unpack in that question. I would say generally speaking, fourth quarter growth in NIB particularly, I think had a lot of definitely seasonal, but also keep in mind that the government was closed for forty-three days during the quarter. And I do think there was some cash stockpiling during that period because of the lack of economic data. So I think it may have been a little inflated because of that. And going forward, into Q1, you should expect the seasonality of that to fall. Too soon to say when and how. Usually, it happens sort of after audit season when they when the funded admin companies decide that they've spent all their money for that particular quarter. So it will normalize at some point during Q1. I would just say that Q4 is definitely not a jumping-off point. For NII going forward into Q1. It will Q1 will definitely be lower in terms of total NII. In terms of the deposit pricing, we continue to spend a lot of time through our liquidity solutions efforts to look at our deposit pricing. We still have a lot of tools in our tool shed to continue to lower that going forward. We also had in the quarter, though, some expensive wholesale funding that rolled off, and we need to replace it. And so because of that more stability there, we're able to bring down our deposit cost accordingly.

Okay. Thanks for that color, Dave.

Sure.

And our next question is going to come from Ebrahim Poonawala from Bank of America.

I guess, maybe Paul, if you could just start on the fee growth side. And just talk to us, I appreciate you don't want to sort of pin down the guidance if we assume a relatively sort of a steady state macro backdrop, one, what does that imply for fee growth this year? And then you and just talk to us in terms of, like, one or two areas you think drives trends. You talked about GFO ending 25 on a strong note. Would love to get some color around sort of the two or three drivers of growth that you are seeing on the fee side. For 2026? Thank you.

And our next question is going to come from Michael Mayo from Wells Fargo.

And our next question is going to come from Steven Chubak from Wolfe Research.

That's great. And for my follow-up, just on the NII and maybe the NIM outlook more specifically, NIM in the quarter reached a post GF high. You guys have been very focused on optimizing the balance sheet. Was hoping you could unpack as we think about the glide path towards a 33% margin, how much of that is a function of continued benefit from rate tailwinds versus volume? Just trying to gauge what's gonna how you're thinking about sustainable NII growth over the next couple of years, so beyond 2026?

Yeah. So a couple of things. The NIM in the quarter, of course, was artificially boosted by about three points because of the FTE true-up that we did. So think more high high one seventies than one eighty one. The second thing would be that as we go forward, we have a lot of levers we can pull both on the asset and the liability side. And we don't see a lot of compression in the NIM until we get to much lower interest rates. And so from our perspective, we think during the course at least of 26, would never wanna do an estimate of 27 at this point. But in '26, we think we can keep the NIM pretty stable during the course of the year in the January. And that's how we're looking at it going forward. So obviously, deposit growth something that we're looking at. Quite carefully and in particular in the wealth management business. There is an effort going on to get our loan to deposit ratio higher within that business. And so from that perspective, we're trying to drive more deposit growth, but we're also looking at both sides, asset and liability side, to make sure we have offsetting measures. And we really feel like we have a lot we can still do I would also tell you to keep in mind that a lot of deposit pricing actions that we took we took in the middle to the end of last year. And so we haven't lapped those yet. So as we go into the first and second quarters, it gives us more confidence around our NII guide, and our ability to continue to kinda grow that line going forward.

And our next question is going to come from Betsy Graseck from Morgan Stanley.

Thank you. Just one follow-up on the deposit question here. I know you indicated there was a bit of a boost in the quarter with the government shutdown. And when I look at the balance sheet, it looks like most of that boost came from non-US offices and interest-bearing. I just anticipate that the q q increase that we got there around $7 billion comes out over the course of the quarter. As you've been discussing, it's gonna take some time to flow out. Is that the level about that you see as being unusually high from the government shutdown.

No. I mean, I think the increase in the noninterest bearing was around 3 I do think there was a lot of new business as well that we grow with new business, but I think there was also some cash hoarding as I mentioned previously, because of the lack of economic data. So I wouldn't take out the entire $7 billion. A lot of that was just normal growth that we would have in the quarter.

Okay. Perfect. And then follow-up question here is on the buyback. You indicate, you know, over a 100% payout ratio. And I just wanted to understand, what's the governor on the buyback? Which capital ratios are you thinking about with regard to how high and how long you let that over a 100% ride? Thank you.

Yeah. It's a good question. And, you know, the variables the number of variables in that decision are many. It's regulatory capital. It's earnings power. It's ROE, loan growth, dividends, m and a. You go through the entire menu of what you're looking at, and then share price obviously has a role. But at the end of the day, if we feel there's an opportunity to reinvest in the business, that's also compelling. But right now, we feel as if we'll have that ability going forward into 2026 sort of the same way we did in 2027. That's how we're looking at it.

And our next question is gonna come from Glenn Schorr from Evercore.

Let's start with an easy one. FX trading was strong, better than peers. In the text, you talk about lower FX swap activity on your part. Could we just break down what's what's you driven versus client driven and just so we can get our expectations going forward? Thanks.

Okay. I don't wanna put words in your mouth, but does that mean this quarter is as good as we got as a jumping-off point?

But, know, obviously, dependent on the markets. Yeah. I mean, volatility is gonna play a huge role there. I do think it's gonna steadily tick up because of the additional clients we're bringing in. So I would just say that in that business generally, there is more traction than just waiting around for clients to make a decision around their hedging. There's proactive sourcing of new business going on as well.

And our next question is gonna come from Kenneth Michael Usdin from Autonomous Research.

And our next question is going to come from David Charles Smith from Truist Securities.

Okay. I mean, just in your base case, though, if you're doing about five points of efficiency, and net expenses are growing something like 4%, you know, of those 9% of, like, gross expense growth approximately, could you break it down for us how much of that would be volume and revenue related versus new investments to grow the bank?

Well and obviously, a large part of our expense base is compensation. Right? And then it's gonna be our technology spending. If you look at equipment and software as an example of that, you know, depreciation is two-thirds of that. So when you think a little bit about the additional investment we're gonna be making in the course of the year, a lot of that is gonna be growth investment. Right, from the business perspective. So that's really what I'm talking about is the growth investment. So if we're able to free anything up, during the course of the year, it's going to go towards the business growth. Not towards the, you know, the operate the bank growth, for example. We feel like we've got a very good handle on our tech expenses, on our modernization expenses at this point. So that additional dollar flow would go into those growth levers.

And our next question is going to come from Gerard Cassidy from RBC Capital Markets.

Good morning.

And there are no further questions in the queue at this time. I'd like to turn the conference back to Jennifer Childe for any additional or closing remarks.

Thanks for joining us, and we look forward to speaking with you again soon.