Q3 2019 Earnings Call
Good day, everyone and welcome to the Northern Trust Corporation third quarter 2018 earnings Conference call Today's conference is being recorded.
Well, let's turn the call over to the director of Investor Relations Mr. Mark for opening remarks and introduction. Please go ahead.
Thank you ran a good morning, everyone and welcome to Northern Trust Corporation third quarter 2019 earnings Conference call. Joining me on our call. This morning, our best Bowman, Our Chief Financial Officer, Lorne, All <unk>, our controller and Kelly weren't a hand from our Investor Relations team.
Our third quarter earnings press release and financial trends report are both available on our website at Northern Trust Dot Com also on our website you will find our quarterly earnings review presentation, which we will use to guide today's conference call.
Since October 23rd call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this call is the replay that will be available on our website through November Twentyth Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor statement.
What we say during today's conference call May include forward looking statements, which are northern trust current estimates and expectations of future events or future results. Actual result of course could differ materially from those expressed or implied by these statements because the realization of those resolved it's subject to many risks and.
Certainties that are difficult to predict I urge you to read our 2018 annual report on Form 10-K , and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.
During today's question and answer session. Please limit your initial query to one question and one related follow up this will allow us to move through the Q and enable as many people as possible the opportunity to ask questions as time permits.
Thank you again for joining US today, let me turn the call over to just Coleman.
Good morning, everyone. Let me join market welcoming you to our third quarter 2019 earnings conference call.
Starting on page two of our quarterly earnings for your presentation. This morning, we reported third quarter net income of $384.6 million earnings per share were $1.69 and a return on common equity was 14.9%.
For the quarter, our effective tax rate of 24.4 was higher than prior periods, primarily reflecting higher U.S. taxes payable on the income of the corporations non U.S. branches.
Our current expectation is that this quarter's tax rate is indicative of our ongoing core rate for future quarters. Although it is possible that clarifying guidance from the IRS could favorably impact corporations affects the effective tax rate, if and when issues [noise].
Before going through our results in detail I would like to comment on some macro factors impacting our business during the quarter.
Equity markets performed well during the quarter, but were mixed on a year over year basis compared to the prior year. The S&P 500 ended the quarter up 2.2% well the M.S.C. I thought was down 1.5%.
The sequential basis end of period markets were favorable what the S&P 500, and YFA indices, increasing 1.2% and 1.1% respectively recalled at some of our fees are based on like pricing and those comparisons were favorable on a sequential basis that mix versus one year ago on a month like basis.
S&P 500, and people were up sequentially 3.7.
<unk>, 0.9%, respectively on a year over year basis. The S&P 500 was up 4.9% while people was down 2.3%.
Quarter lag basis, the S&P and eco were sequentially 3.8 at 1.6% respectively.
And on a year over year basis, the quarter lag S&P 500 was up 8.2% well equal was down eight tenths of a per se.
You as short term interest rates were lower during the quarter on average as reflected in the sequential declines in average one month and three month LIBOR of 26, and 31 basis points respectively.
Currency rates influence the translation of non U.S. currencies to the U.S. dollar and therefore impact client assets and certain revenues and expenses the British pound euro versus the U.S. dollar both ended the quarter down 6% compared to the prior year.
The year over year declines favorably impacted expense, but had an unfavorable impact on revenue.
Sequential basis, the British pound and euro ended the quarter down three and 4% respectively.
Let's move to page three and review the financial highlights of the third quarter.
Year over year revenue increased 4% with noninterest income up 5% from one year ago, and net interest income up 2%.
Expenses increased 3% from last year.
The provision for credit losses was a credit of 7 million in the current quarter compared to a credit 9 billion one year ago.
Net income was up 3% year over year.
In the sequential comparison revenue increased 2% with non interest income up 3% and net interest income flat.
Expenses increased 3% compared to the prior quarter net income declined 1% sequentially.
Return on average common equity was 14.9% for the quarter down from 15.1%, one year ago and 15.9% in the prior quarter.
Assets under custody and administration of 11.6 trillion increased 7% compared to one year ago and were up 2% on a sequential basis.
Assets under custody of 8.8 trillion were up 7% compared to one year ago at up 3% sequentially.
Both the year over year at sequential performance was driven by new business and favorable markets.
Partially offset by the impact of unfavorable moves in currency exchange rates.
Assets under management were 1.2 trillion dollars up 3% on a year over year basis at up 2% on a sequential basis the year over year performance reflected higher markets and new business, partially offset by unfavorable currency translation.
Let's look at the results in greater detail starting with revenue on page four.
Third quarter revenue on a fully taxable equivalent basis was $1.5 billion up 4% compared to last year at up 2% sequentially.
Trust investment and other servicing fees represent the largest component of our revenue and were $976 million in the third quarter up 4% from last year at up 2% sequentially.
Foreign exchange trading income was 60 million in the third quarter down 17% year over year end down 1% sequentially.
The year over year decline was primarily related to lower foreign exchange swap activity in our treasury function.
Other noninterest income was 85 million to the third quarter up 54% compared to one year ago at up 16% sequentially. The year over year increase was driven by income relating to a bank owned life insurance program implemented in the prior year higher brokerage related revenue and an $8.1 million.
Yes that impairment recorded in the prior year.
The sequential performance was driven by the full quarters impact of the bank owned life insurance program as well as strong brokerage related revenue.
Net interest income, which I will discuss in more detail later was 425 million in the third quarter, increasing 2% year over year and was flat sequentially.
Let's look at the components of our trust and investment fees on page five.
For our corporate and institutional services business fees totaled 560 million, the third quarter and were up 3% year over year end up 2% on sequential basis. The translation impact of changes in currency rates reduced year over year seen ASV growth by just over one another half a percent.
Custody and fund administration fees, the largest component of C and I asked fees were $392 million and up 5% year over year at up 2% on a sequential basis.
Year over year performance was primarily driven by new business, partially offset by the impact of unfavorable currency translation.
On a sequential basis, the impacts of new business and favorable markets were partially offset by unfavorable currency translation.
Assets under custody and administration or CNS clients were 10.9 trillion at quarter end up 7% year over year end up 2% sequentially.
Both the year over year and sequential performance was primarily driven by new business and favorable markets, partially offset by the impact of unfavorable moves and currency exchange rates.
Recall that lag market values factor into the court foresees with both quarter lag in month bike markets impacting RC and I ask custody and fund administration fees.
Yes, the management fees in CNS of 115 million in the third quarter were up 6% year over year end up 4% sequentially.
Both the year over year and sequential performances were driven by new business and favorable markets.
[noise] assets under management for CNS clients were $901 billion up 3% year over year at up 2% sequentially.
The year over year increase was driven by favorable markets, new business and an increase in securities lending collateral levels, partially offset by unfavorable currency translation.
The sequential increase was primarily driven by sequential growth in securities lending collateral levels and favorable markets, partially offset by unfavorable currency translation.
Thirtys lending fees were 20 million in the third quarter down 17% year over year and down 8% sequentially the year over year and sequential declines were primarily driven by lower spreads securities lending collateral was 170 billion at quarter end and averaged 176 billion.
Followers across the quarter.
Average collateral levels increased 4% year over year and were up 7% sequentially.
Moving to our wealth management business Trust investment and other servicing fees were $416 million in the third quarter and were up 4% compared to the prior year end up 2% sequentially.
Assets under management were 300 billion at quarter end up 2%, both on a year over year and sequential basis.
The year over year and sequential performance is for both fees and they are more driven by a combination of new business and favorable markets.
Moving to page six net interest income was $425 billion in third quarter up 2% year over year.
Earning assets averaged 105 billion in the quarter down 7% from the prior year.
Total deposits averaged 89 billion and were down 5% versus the prior year.
Interest bearing deposits declined 2% from one year ago to 72 billion.
Non interest bearing deposits, which averaged 17 billion during the quarter were down 14% from one year ago.
Loan balances averaged 31 billion in the quarter and were down 3% compared to one year ago.
The net interest margin was 1.61% in the third quarter and was up 14 basis points from year ago.
Improvement in the net interest margin compared to the prior year, primarily reflects a balance sheet mix shift the impact of lower foreign exchange swap volume and the impact of higher short term interest rates versus one year ago.
On a sequential quarter basis net interest income was flat.
Average, earning assets declined 1% on a sequential basis as deposit levels were down slightly from the prior quarter.
On a sequential basis, the net interest margin remained flat.
Looking at the currency mix of our balance sheet for the third quarter U.S. dollar deposits represented 69% of our total deposits. This is flat versus one year ago and up from 67% in the prior.
Turning to page seven expenses were 1 billion in the third quarter and were 3% higher than both the prior year and sequentially.
The impact of favorable moves and currency translation benefit expense by almost one percentage point on a year over year basis.
Compensation expense totaled $458 million and was up 5% compared to one year ago.
The year over year growth was primarily relating to higher salaries, driven by staff growth and base pay adjustments, partially offset by the impact to favorable currency translation.
The sequential basis compensation was up 1%.
Staff levels increased 5% year over year, and 1% sequentially. The majority of staff growth continues to be attributable staff increases and lower costs locations, which include India, Manila, Limerick, Ireland and Tempe, Arizona.
Employee benefit expense of 88 million was up 2% from one year ago and was down 2% sequentially. The year over year growth was driven primarily by higher payroll withholding and medical costs. While the sequential decline was primarily due to lower with holding costs, partially offset by higher medical costs.
Outside services costs of $194 million were up 4% both on a year over year and sequential basis year over year growth was driven by higher technical services consulting and legal expense, partially offset by lower some custody expense.
The sequential increase was primarily due to higher technical services, which had included a $6 million vendor credit in the prior quarter as well as higher third party advisor consulting investments.
Partially offset by lower so custody expense.
Equipment and software expense of $152 million was up 4% from one year ago and was up 3% sequentially. Both the year over year and sequential growth was driven by higher maintenance and support costs and higher depreciation and amortization costs.
The year over year growth was partially offset by higher software disposition costs in the prior year.
Other operating expense of 92 million was down 5% from one year ago and up 20% sequentially.
The decline from a year ago was primarily relating to lower FDIC premiums.
The sequential increase was driven by higher business promotional spend primarily associated with the Northern Trust Golf tournament, which was held during the quarter.
As we have discussed on previous calls through our value for spend initiative, which we started in 2017, we have been realigning our expense base with the goal of realizing $250 million expense run rate savings by 2020, we continue to embed a sustainable expense management approach.
Our third quarter results reflect approximately $56 million, an expense savings, reducing the year over year expense growth rate by approximately two and a half points.
This would equate to approximately 225 million on an annualized basis.
Against the 250 million dollar goal.
Turning to page eight a key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we have made in recent years to improve the expense the fee ratio pre tax margin and ultimately our return on equity.
The ratio of expensive fees is particularly important measure of our progress as it addresses what we can most directly control we remain focused on continuing to drive organic growth in our business and managing our expenses to improve our efficiency and productivity.
Turning to page nine our capital ratios remained strong with our common equity tier one ratio of 12.9% under the standardized approach and 13.7% under the advanced approach.
Supplementary leverage ratio at the Corporation was 7.6% and at the bank was 7.0% both of which exceeded 3% minimum requirement.
As Northern trust progressive through fully phased in Basel three implementation there could be additional enhancements to our model.
And further guidance from the regulators on the implementation the final rule, which could change the calculation of a regulatory ratios under the final Basel III rules.
During the third quarter, we repurchased 3.4 million shares of common stock at a cost of $307 million. We also increased our quarterly dividend to 70 cents per share.
Two actions combined represented a payout ratio of approximately 125% for the quarter.
In closing Northern Trust performed well in the third quarter.
Our 4% year over year growth rate for both trust investment and other servicing fees and total revenue compared to our 3% growth and expense.
Generated positive fee and total operating leverage.
Our results produced a pre tax margin of 33.4% and a return on average common equity of 14.9%.
Our balanced business model continues to generate organic growth and we remain focused on providing our clients with exceptional services proving our productivity and driving profitable growth.
A personal note I just want to offer quick. Thank you as recently announced I will be stepping down from my role as CFO effective January onest and retire from the Northern Trust on February 28.
Enjoyed by five plus years as CFO and working with each one of you.
Jason Tyler was currently the CFO of our wealth management business will become CFO as of the first of the year.
I wish Jason the very best as he takes on this new role and I'm confident he will be very successful in that role.
Thank you again for participating in Northern Trust third quarter earnings Conference call today, Mark and I would be happy to answer your questions. Ana. Please open the line.
Yes, Sir thank you.
Good question now by pressing star one on your telephone keypad.
We are using speakerphone, please make sure your mute function as well.
Hi, or second alternate Gerry.
Thank you please limit yourself to one question and one of relevant follow up question.
That is our mining.
Good question.
I'll pause for just a moment.
Well now take a question from Glenn score with Evercore.
Hey, thanks very much.
Question on net interest margin. This comes up in conversation I don't know if this is even a good way to look at so I want to throw to you.
If you look at you versus your peers. Your NIM is is highest relative to prior cycles when rates were near zero.
Versus peers, now I don't think where even going towards zero rates to their rates, but whatever.
Do you think that that's an okay wait a even evaluate things and b.
If so what do you think explains that it's just that your duration is a little longer than you used to I'd. Just curious on what you think is changed in the mix too that you would have been able to sustain that better.
That our NIM is higher than than other peers. That's your question or sort of low versus prior cycle lows in other words, where everybody bottomed out when rates were zero.
Yes in the range of like you know 30 740 basis points above that others are like a lot closer to it now.
I I believe that's probably the mix of our clients and the mix of our balance sheet is probably the difference there are they.
Hey, our retail deposits at our wealth business make up a greater proportion of our balance sheet.
You've got to look at a mix between our on our foreign office deposits and U.S. deposits and then the loan portfolio relative to the size and I know, it's been flat for us, but all of those combined I think produce a slightly different net interest margin.
Versus peers, because we're not.
Yes, absolutely the same and look and feel as all of those so I would say thats, probably a difference in the mix of the balance sheet that lends itself to that because on the institutional side.
The pricing is competitive so we would we would likely have deposit costs.
Have a similar nature, but we have a little bit bigger piece of what I'll call them. The wealth side of the business and I think that.
May help mute the a close.
Maybe just a follow up but as you look forward, there's a lot of puts and takes on deposit betas not being as.
Close to 100% as everybody hoped it would be on the way down but.
You know knowing what we know today with four hours with what's expected and for the rates just how do we have yet help us think about.
Next year and beyond.
Given all those puts and takes around around the NIM.
Yeah, I think you have to probably coal our balance sheet apart a little bit to understand the beta. So if you look at.
For instance on on the retail side of our deposit betas, the beta would look low lowish, but we had some.
The discontinuation of our anchor suite that we had some promotional pricing so the.
The beta would be quite low on that if you look at the foreign office deposits and remember about half of the foreign office deposits aren't in dollars, but.
But if you look at the move down and then extrapolate how much of that was dollars. The beta was actually quite high.
I would say the beta was relatively symmetrical with what we saw underway, where we were as we had rates rising so it's coming down I think in general along that rate, it's a little cloudier to see this quarter because of some of the promotional things we had in the wealth space and others that work themselves through at the end of the third quarter.
Order and we would anticipate a more symmetrical beta for that.
In the fourth quarter, but I think if you look at that the beta was actually fairly high on what I would call institutional dollar based deposit.
Awesome. Thanks, so much bus.
Thanks.
I'll now take a question from Brian Bedell found.
Hi, Brian .
Okay, and congrats and best of best of luck.
The.
It's a question is on the net interest income.
Deal, obviously, then being one of a better than we thought.
Can you talk about the drivers on the I'm on the short term side of the balance sheet says the asset yields.
On the on the short towards that seemed to go down less than.
So maybe talk about the resiliency of that and sort of how should we think about that you know going into the fourth.
Okay.
I Hope I hope that was your phone breaking up there I couldn't tell if that was you or.
You can you hear us okay your phone.
Okay can.
Can you hear me a better now.
Hi, Ken Yes, sorry about that you want your Michael.
I think it was around the short term can you repeat it.
Sure yet yeah, the yields on the short term side of the balance sheet.
On the asset side seems to go down less than we had thought so just wondering you talk about some resiliency in that relative to short term rates basically.
And then you know is there a catch up coming in the fourth quarter.
Assuming we have a obviously in October said guys.
Yeah. So if you if you think about that on the rates in the resiliency. One you still have to remember that our rates are lapping a period, where in general a year ago, they're higher today than they were a year ago. So that that's part of it and then if you look at the sequential resiliency or how that would hold.
I think there's probably a series of factors in there and so one is.
We've extended some of the duration in our portfolio, which I think has helped.
Mitigate some of that.
Across those yields.
Currency mix and other things can help.
Mitigate some of the currency yield impacts that you see across the portfolio and then just a variety of investment strategies that we have in the instruments. We have have held up pretty well cross the.
The short term and as the portfolio.
We've had we've got more insecurities than we do sort of shorter duration money market type. Thank rates at this point. So all of those have held up and then lastly, I'd add is.
From our own projections from where we thought we would have in the quarter the spread between LIBOR in fed funds was actually a little bit better even though it compressed our own projections it didn't compress as much as perhaps we had forecasted.
In terms of the fourth quarter I think you had asked.
We just storing this up for the fourth quarter I think perhaps it might be beneficial if we give you a quick thought on the fourth quarter as we move in right now we would suggest that.
And there's obviously a lot of puts and takes in the fourth quarter.
Yet to come but.
If we assume one cut from the federal reserve this month.
We would think that our net interest income would be down.
Approximately 1% to 3% sequentially. So while there is still pressure on the asset yields insensitivity to that we still think it's it's.
Relatively modest in terms of its impact sequentially. There's obviously a lot of underlying assumptions in that forecast and we're going to give you an update on that in December as we see the size of the balance sheet and other factors.
Be much more clear two months into the quarter and in fact, whether we get a hike or not we'll obviously be in there, but that 1% to 3% is off of the 425 billion. We had this quarter.
And it assumes one cut in October and Brian . This is mark just to add one comment when you're really looking at the real short end of the balance sheet. So the short term, let's call. It interest bearing deposits. So that would be the interest bearing deposits with banks the central bank deposits the mix of U.S. currency within that that's cost money market.
Kind of category is actually more like a third of the total.
So the lower U.S. rates will not have as much of a.
Drag when you're looking at the very short end of the balance sheet for those line items.
Right right to the yet the geographic diversification definitely helps you [noise].
Great and then just on expenses.
The way through the program another 25 million I know you've said in the past a this is going to be an ongoing effort. So.
Just on just on the third quarter I think expenses were up 3% sequentially versus 2% revenue, but was that all due to the.
It wasn't just open.
When related expense and then.
And then going forward are we still in that position, where you're trying to achieve expense growth at a pace that is.
Higher than your.
Organic revenue growth and maybe if you wanted just comment on an organic revenue growth in the corner.
Yes. So the last part of your question is our thinking we still are having our organic growth rate.
Provide if you will as the governor over the organic expense growth rate that the firm.
Good and can sustain to produce that.
The Northern trust on a sequential basis drives about half of the growth rate of expenses, a they'd be a little less than that but in the vicinity of about half of that so you can take about half of the growth rate out because of a sort of a one time.
Seasonal event, but probably more important to your question was around the organic expense growth rates that were seeing.
Again in line I think with a generally in line with our organic expense growth rate. We've we've done a good job of getting the organic growth rate and the firm in the organic expense growth rate in the firm.
Better aligned and that continues to be an internal a target and goal that we strive to get those very much in line. If we see organic growth slow that we tried to do as quick as we tend to increase the pace of.
Saves in our expense base to achieve that organic leverage or at least organic neutrality and we are trying to get organic leverage.
Lastly, I think you asked about organic trends in the quarter again on the fee side, we saw good new business a good growth and generally in the ranges we've talked about are at or near the ranges, we've talked about and so.
I think you've kind of see that to our numbers and the growth rate is outstripping markets and is pretty strong versus the competitors.
Lot of that as organically driven.
And that's that's about mid single digit a pace in terms of what Jim said organic or is that correct.
I think we've talked about a four to five range, yes exactly okay.
Over overtime I think we've explained to you in the past we have years that it's three we have years that its five and we've tried to circle that range. It's in that what do you want to call that low to mid single digit range is yes.
Where we're tracking that I think if you, but you can back markets out and currency out probably get there.
And your own analytics.
Perfect perfect. Thank you very much.
<unk>.
Okay.
Well take our next question from Ken.
Jefferies.
Hi, Ken Hey, Thanks, a lot. Thanks, a lot and best of luck Beth can I ask couple just cleanup ones.
Can you help us understand the amount that the ball, we increased in both and I and fees what the visa expense was and if there was any change in premium amortization sequentially. Thanks.
Yeah, Oh I got to write those don't make sure we get all those the beauly impact.
In the third quarter, probably reduced net interest income by about $7 million, but it produced $9 million or so in other income and then it has a tax benefit to it helps the tax rate by.
Approximately two tenths of a person and that was about half reflected in the prior quarter, Ken. So if you're looking at it sequentially you we picked up another about four and a half million another operating income and.
I would have had a drag of costs three and a half million on YY side sequentially.
So you see wanted beauly that can make a them.
Yeah, the visa and if there was any change in premium EM.
Yep.
On FISA on a year over year basis, the Mark for visa was pretty comparable or it was actually I think slightly lower this year on a sequential basis.
Mark on visa was up just a little under $7 million sequentially and that was driven by its.
The factors that we evaluate our the visa stock price the time to maturity of the of the litigation and then our ownership interest in that or the conversion factors and.
Those can move from time to time and so it was.
It was a seven this quarter, but three last quarter settlement the number but yes. So full level. It's for sequential was a 4 million dollar increase it was seven in total in the quarter.
At a 4 million increase sequentially and year over year roughly flat.
Understood.
Thank you and then just last yeah. Good just got.
Premium amortization.
Yeah, so with the premium amortization for US we've given you guys a range of 10 to 12.
Our portfolio. It has a series of exposures Ginnie Mae Freddie Mac, Fannie Mae exposures that.
By and large have a larger concentration of securities that have structural.
Attributes for the loan balances that helped minimize prepay variability. So we don't see maybe as much as you might see across other portfolios, where you've seen maybe greater movement. It's just the nature of the instruments, we hold in our securities portfolio, So that range.
It's still we can see it may be widened a little bit we might see it move closer to between eight and 12 than than that but.
Generally we trade continually in that range into there hasn't been.
I think a market impact in terms of a this impact on our in ice. So hopefully that explains that I know intuitively you may have thought.
You would see some pickup in that but the nature of the portfolio we have.
In some of the features of that portfolio or.
Still tend to be keeping the amortization in a in a band that is generally in line with what we've guided you guys too.
Got it alright, thanks for all that.
Yeah.
Okay next question.
Bloodstain with Goldman Sachs.
Hi, Alex.
Hey bit Hey, Mike Congrats on retirement as well.
Real quick on and I are they thanks for the other there I guess, if I look at the size of the balance sheet and your guidance. What are you guys sort of contemplate there for Q4. So in other words like balance sheet kind of stays flattish is is that the idea and then if the bulk of the decline is really driven by the NIM.
Contraction sequentially, if we sort of look at LIBOR fat on spread in the quarter. So far and you kind of look at the forecast it actually looks to widen it was flattish for the last couple of quarters.
Not looks like sort of a positive spread about 20 basis points is a crazy to think that the NIM could actually be a little bit better than what you guys are contemplating because of this a wider dynamic between LIBOR and that's on spread thanks.
Yeah. So.
Alex what I would say as we've made an assumption about that spread that you just talked about.
The indicators would be.
That it could widen out wider than our forecast. So if that holds true your comment about our assessment of the balance sheet is generally right about the size of it.
And if that spread turns out to be closer to what you described which is what the markets are indicating.
We will compare that to what we forecast and to your point that would probably lead to a little higher NIM. So.
Could there be upside variability there could but there are awful lot of variables. That's why we will give you guidance that the Goldman Sachs Conference in December where we'll have a lot greater line of sight into the quarter.
That will make sense.
And then my follow up around expenses, a little bit again sort of bigger picture maybe beyond this year, but as you guys are kind of coming close to the end of the 250 program.
Are there additional areas of savings you can help us sort of ring fence as we think about.
So to the levers you can pull on to make sure that beyond 2019, the expense growth remains kind of in this I guess low to mid single digit range as you try to align that with organic fee growth.
Yeah, there certainly are and there's programs underway and I think it's important.
We've talked we really are embedding a discipline here of.
When we look at our expenses of looking at it.
I'll call. It four categories. One is we need a certain amount of expense growth to support the type of organic revenue growth. We've talked about so some of that is just needed. So we've got that factored in we've got inflation in our business that comes about you can put your own inflation factor on that we add that to that amount needed to grow our.
Business and then we've got investment and when you add all that up I will tell you that generally adds up to greater than the organic growth rate that we see for fees. So we are driving there has to be productivity.
I didnt to any expense planning that will drive us back to that organic leverage amount and so there has to be productivity.
Of some level, probably at least equal to inflation.
So to make our business model works or whether we call it value for spend or something going forward, there's that level of expense driver in our business.
To tie that into your to your question are there still buckets or opportunities in the expense base and the answer is absolutely and I would say, there's there's still lots of areas of procurement or that are and we cited lower sub custody expenses in the quarter. We've done some good work around our sub custody expense for.
Since in the quarter, that's meaningfully change some of the trajectory there from a procurement perspective, we still have many projects and capital investments to help drive automation and robotics into our business and we're doing one in our finance group as we speak right now modest in size, but it's the type of thing that we think are still available.
To help drive those expenses down so I think there's there's the opportunity to drive that productivity that's necessary in the model I outlined for you.
Got it great. Thanks again.
Yes.
Yeah.
Well now take a question from Michael carrier with Bank of America.
Hi, good morning, and thanks for taking the questions.
If over the last year so.
Hi, guys. It in interest, earning asset growth has been weaker versus organic growth trends I realize partly the rate backdrop, but any other factors that are driving that and then what do you think could potentially shift.
Maybe the demand by clients.
Well I think that deposit growth has flattened out you're absolutely right or maybe even gone and slight decline, but I think again, you probably have to pull apart.
Our businesses here, a little bit on the wealth side some of the initiative or the initiative, we did around the discontinuation of our anchor suite products is actually brought.
If you look go back to first quarter somewhere a little over three three and a half billion dollars of deposits its actually probably slightly higher that but the part that's most visible to see on the balance sheet is probably a little over three so we have grown that side on the institutional side I think we can see the type of variability you'll see there, particularly in foreign office deposits is.
Normal course of business, we've seen these cycles before as as people may be shipped currency they shift investment strategies, particularly in reasonably volatile markets. So we have seen some of that playing itself out in particularly the foreign office deposits in the institutional deposits, where we've seen that we don't have.
Feedback that it said pricing related issue, where pricing is either not at market, we get that feedback pretty fast.
And pretty clearly from our clients. So it's not a pricing related items and added generally overtime will.
Grow with our organic growth rate.
So I would say there's not any other trends what I will say is what you've seen as I think you've seen the rundown of.
Some of the what were excess deposits are those things that we're sitting here for rate related reasons. The second part of your question is what could change that trajectory.
I would suggest it's early but some of the actions the feds, taking now and if rates continue to be aggressively lower.
As a general rule the lower they get the more likely we are to see balance sheet growth. That's what's happened historically.
I don't know if that will play out the same way this time through that would be speculation, but historically.
Quantitative easing or further easing moves.
Trust banks tend to be the recipients and balances that so that that could drive growth had an outsized rate versus say organic growth and then Mike. It's mark if I could have one other thing when you're looking at the deposit trends one thing that.
Isn't clear looking at it externally if you were to look at the non U.S. office deposits say on average as of the fourth quarter of last year compared to where we are now three quarters later, a little bit more than half of that decline has actually been from some of the leveraging activity, we do and our and our Treasury group. So that's.
Doing some short term borrowings that will show up on the short term borrowing line, but it also shows up in the and the mix of when we go out and get wholesale deposits in the trade there has not been.
You know the spread that you can get on that has narrowed quite a bit. So we've actually kind of pulled back on some of that activity. So like I said over the last three quarters. When you look at average non U.S. office deposits about a little more than half of that decline has been lower leveraging activity.
Okay makes sense and then just a small follow up on the security Commission revenues came in stronger realize there's more volatility in the quarter, but I think you've also been investing.
Some of the areas or that offering so just any color on what drove the increase this quarter.
Yes, good question so.
It is we've talked here about for instance, in our brokerage business the integrated trade solutions, where a SEC effectively we can take on the trading functionality of some of our clients who we may also have relationships with as a funded administrator, others and we've seen that grow meaningfully the number of clients has grown.
Meaningfully and it was a prime driver of of that growth so that that line.
As you know is really made up of what I would say brokerage activity, it's made up of.
Fees that we get around certain credit relationships that we have and it's made up of.
So it yeah interest rate swap interest rate swap, which also saw all three of those thank you I had to think of a third when there for a second interest rate swaps.
All three of those saw growth in the quarter, but.
Two of those are more episodic in nature interest rate swaps are probably triggered by rate movements and I would say generally the brokerage business that we saw some of that is client growth not just activity in the market. When we looked at about that when we looked at sequentially and we noted in the release that.
Core brokerage activities interest rate swaps in referral fees, it's probably one third one third one third and certainly the last two of those are our more episodic and sometimes we have transition revenue that comes through that's a little bit more episodic too although that was fairly.
Comparable this quarter versus prior.
Okay. Thanks, a lot.
Your next question comes from Betsy Greene with Morgan Stanley .
Hi, Betsy Hi, Hi, good morning.
So I'm going to Miss you [noise].
[laughter].
Yes.
I'll sit in the conference just [laughter] that'd be great.
Okay, well, thanks, so much for all the time and insights over the years. So a couple of other questions a little bit of clean up in a little bit if strategy question. So on the cleanup questions. You know the long term debt or cost of funds coming down nicely I'm. Assuming that's all swapped is is that we're seeing you know almost a lock step with the rate cuts here and.
So as a result, we should expect that's continuing to move down is that accurate statement.
It is swapped at.
Yes, okay.
Yes, okay.
Okay and then.
On the fed growing the balance sheet I mean, they've obviously been doing some temporary up in market operations, just recently going to the promos.
I heard you said about the Q, we have you seen any benefit from this I mean, it's been about a month or so.
I would say not we've not seen any extraordinary sized close from that at this point. So I'd say, that's still a pretty early would be my intuition, it's pretty early to see and hopefully.
In a couple of months, we will have a better line of sight to that but right now I would say no not seen any.
Impact okay.
Okay, and then just lastly, little bit more strategic question, but we talked a little bit about how you're investing in a very different technologies to improve your own processes as well as in some areas, especially in a growing more rapidly I wanted to understand the rationale for.
We're transferring the private equity block chain technology platform to Broadridge, you know how is that enhancing your strategic.
Yeah focus and drive.
Yeah.
That point in time, I think we felt that the distribution opportunities and the growth opportunities with Broadridge were just.
Better move through their pipe if I can say that then they work through ours, but.
We know we have a client base that helped us.
Ah deliver that product and capability and it's one that we think we.
Ken and have commercialize inside our own group, but the ability to grow that I think more of a assertively through broadridge was really beneficial for for everything Mark. If you got anything else I think that's the best color. It was the best commercial decision for us and and that's what we decided on.
But you are.
You know focus on using block chain technology or are you either utilizing it are enabling a for your clients is.
Still intact is that accurate, even though it will transport this.
Theories on their platform right, yeah, sure and I want to be clear that was just one application as it related to sort of self pay the private equity feel we're using it in much broader applications than just that field, but that was one where we thought there perhaps a commercialization that wouldn't be better enhance drew that vehicle.
And ownership structure than than directly owned by US If you will okay, but we're using it in a variety of other type of clearing and product capabilities for our clients.
Thank you.
Thanks.
Well now taking questions time, Brennan Hawken, where can you be.
Hi, Brendan.
Good morning.
And best Congrats on your retirement wish you the best I'm sure the golf game will improve.
Yes, you'll get tickets tickets to the northern open and the future.
Yes, Scott, it's got a lot of room to improve Brett it [laughter] only about it.
So.
On and I, just circling back there.
Thanks for all the color on that really appreciate it I'm.
Curious about a couple of different components number one when looking forward curve it looks like.
Before could suggest also cut in December .
So I know that will be late in the quarter, So probably wouldn't have any big impact on for Q.
But you should we count on impact a comparable <unk> impact going forward or.
Our your assumptions around beta [noise] such that.
Further cuts beyond to the next one well have an increasing impact because.
Youre getting them you would be getting a little bit lower on the deposit cost side and therefore, it's less room on that front just any additional color you could give their great.
Okay. So I'll try to Peel that apart a little bit so a December a cut.
Would have nominal fourth quarter impact a you're right on that but it wouldn't have zero impact and want to be clear and that's why we gave a range earlier because.
It depends on the pricing started to.
Anticipate that earlier than the actual cut itself.
You know how that works in terms of the.
Impacts in the.
2020, we're not going to give guidance out to 2020 at this point there just so many variables to that.
But that being said.
I think we've talked about the basis, we think being relatively symmetrical and I think we think that's how it is and they are as you will pull apart. If you look again at the institutional dollar.
Betas, they were pretty high and that's where they were on the way up they were pretty high now.
I think they would have some symmetry on the way down so they would probably start to pull back a little bit I don't know if that's.
With.
One or two or three high excited that would be speculation I don't know where that point of.
Symmetry sort of hits, but I think we would just sort of model something that looks relatively symmetrical from what you saw the way.
Okay.
So and just to clarify like on the way up we saw the ramp in beta is steadily increase and so therefore, you guys are starting high and then would you'd see the and in a mirror image of that so betas would decrease.
Yeah. So I think Brendan if we go back if you remember the betas were quite low for several hikes.
And then they see the curve start to steepen right.
For all the symmetry around that so perhaps the betas are quite high for.
Some period and then.
Start to come down I, just don't know is that one hike away is that two hikes away as art should be one cut to cut or three cuts away I don't.
That would be speculating I don't want to do that but I think it's a symmetrical up to the way they float on the way up and then way down.
Got it okay.
That's clear and totally logical.
My next question is on the excess reserves commentary.
Just curious it seemed like northern didn't really get hurt.
Especially versus some of the larger trust bank competitors when reserves were getting drain from the system. So.
Kind of curious as to why you would think the inverse would happen.
But you know why would it.
You all benefit with an expansion of reserves, especially relative to some of the larger competitors. Thanks.
I think as a general rule as the rates get closer I think this is your question as the rates.
Pull back down closer and closer to zero, because we're a asset servicing provider to 11 trillion dollars of assets under custody and administration, we become somewhat of a natural home for what I will say, our cash balances that may be in different but what a very financially strong led.
With provider so there's just some natural.
Benefit of that.
The tide floating all boats kind of thing like that in coming with it and so you've got large hedge fund clients or others, who say I've been different [noise].
A series of investment options I will say this time Brennan what I think is different is money market reform has happened and government funds and things that like gates and other things that were in place.
Some of those things have been addressed in money market reform. So the ability to have those balances not sit on a bank balance sheet that go to a fun.
So they can get paid roughly zero it.
Financial institution or get paid roughly zero on a fun they may be.
They may consider that more than they have in past cycles, where rates have gone well so.
We'll have to see how that plays out and depends on how low rates get I think the rates have to get lower.
And then one or two more cuts before we would see that kind of impact it would have to be something that gets back close to where we were.
Right after the crisis.
Thanks for all the color bets and good luck on the golf course.
Thank you.
Well now taking question from Brian Kleinhanzl with KBW.
Hi, Brian .
Good afternoon are good morning still.
Quick question on the comp expense. He said it was up and staffing was up 1% quarter on quarter. If you look back the past couple years, you see an uptick for Q3, Q as well and comp expenses or any reason to think that wouldn't be the same case this year.
So I'd have to look to see I mean, there may have been there is some incentive compensation that's variable at some points in the fourth quarter.
It might be driven by how pretax income goes as far as the comp.
Sequentially. This quarter on one thing that definitely is different than prior years is that we and prior years ahead.
You know we've had I think last year about 10 million of equity retirement eligible expense that was in the second quarter that fell off in the third quarter. We did not have that this year all that was in the first quarter. So second to third this year as a different picture than what it would have been in 2017 in 2018.
The other thing I would I would say about compensation as well.
Last quarter, we did mentioned that we had charges 5 million of charges.
Hi.
Only 2 million of that wasn't compensation about 3 million of it wasn't outside services. We didn't have charges this quarter as well now we've gotten away from calling those out because we think were more in a business as usual environment with those charges, but I would say when you look at compensation. The charges this quarter were actually pretty comparable to what we.
And in the prior quarter.
So that's that's another part of them so.
If you were expecting a decline because of charges rolling off we did have some charges in the quarter, but like I said.
Until they if they were to rise up again to a higher level certainly we'll call them out but at this point, we feel like it's more just business as usual activity.
Okay, and then just a separate question in CNS is there anyway to kind of give any color on what new business wins were in the quarter Uninstalled pipeline.
I know you Gotta gravitated away from doing that in the past, but a difficult we greatly appreciate it. Thanks.
Yeah. We as you are right we have gravitated away from that we don't provide that I would say.
We continue to see a strong.
New business wins installed in the quarter, we continue to see a very solid and strong pipeline really across the globe, but.
Particularly we've seen a real strong interest in a in the Asian market in Australia in particular.
And he has substantial when the I think we've published.
We we did press release World Bank as a win so that was a very high profile when that was a issued a press release in the quarter. So we we continue to have strong.
Growth in this week, we said, we really look at it more as an organic growth story for us across the fee line and.
We were pleased with where we.
We're from a trajectory standpoint in the quarter.
Thanks, and best of luck, but.
Your next question comes from.
Buckingham research.
Hi, Jim morning.
Hey, maybe just one last kind of a follow up on on.
And just thinking through it seems to me that there has been pretty high betas in Europe . So just.
Kind of your view on if there are further cuts there is that actually you actually liability sensitive in Europe or neutral and then when I think about looking further out do you have any you've talked about extending duration.
Offset something like that you have any further kind of ability on the asset yield side to kind of offset some some lower rates.
Good how conservative balance it's been.
Yes, so in Europe , you're right on the Euro in particular, the beta was was high and that can be both the factor. If we moved obviously a relatively high beta.
We're very high beta with with the Euro move and some of that could have been that our rate was actually attractive in that market and that we were catching up from the rate being slightly ahead of the market, if you will or slightly better than the competitive landscape, which could move that beta.
A little bit higher than perhaps even the move that you saw there, but so that's a driver there and then.
I think it's important to understand our client base. We have clients that are on summer on standard rates and some that are on I call. It more specialized rates.
Custom rate.
Some of them move immediately with sort of central bank rates I O E. R. E. C. B, so they'll move really with almost 100% beta right with those in terms of the duration of the balance sheet.
We moved the duration of the portfolio out to about 1.6 years.
From an index duration perspective, which as you know we typically have brought a very short duration portfolio closer to one 1.1, but we have done some things in light of what we think could be a you know the continued.
Decline in rates and so we have moved that duration out in the portfolio.
To help soften some of that and help or deal with asset yield issues that you talked about.
And is there room for that too.
Anything else.
Let's see duration out more slipped some your cash into.
You asked rates out of from you from Europe , how do we think about.
You can do and your mix to help.
Sure.
So the answer to the first part of that is yes that.
As a decision that are Alco Committee makes every month, but there is I think still room to take that duration out and from the benefit of the call. We're really not taking any credit risk and that duration. We typically extend the duration of our balance sheet through the use of longer dated treasuries. So that's the way we get.
There and we we do but we evaluate that through our Alco Committee a regularly but there is still capacity to take that duration.
Out in terms of swapping currencies, you know into dollars or whatever to get the yield enhancement.
No the swap rates on that have made and the cost of doing that quite frankly have made that in many cases, an attractive trade. So and we always had excuse me we have generally.
Try to invest largely in the currency in currency in support of our clients for the balance sheet. So they've invested in euros they'd like balances off in euros devout balances would be in euros or sterling et cetera, but there are as occasionally opportunities that we can do that swap, but right now swap rates would make that.
All right neutral John is that right yeah.
Right.
Thanks.
Thanks.
Well now take Mike Mayo with Wells Fargo Securities.
All right. So I think I've heard that value for sand is 90% done and that you're spending initiatives for revenues inflation and technology should outpace organic growth. Therefore, you need to find productivity savings. So got that so under the category of productivity savings what do you have in the way.
You have potential technology dates.
For example, how many data centers do you have wherever they peak where could that go or maybe you want to measure that in terms of number of servers.
Moving to the cloud what percent Alright, you and you asked unable to get to where are you now where we'd like to go but just more generally what are the technology driven product sales productivity savings that you could see going ahead, especially now that value for status in the late stages.
There's a lot that question Mike.
So.
You're right. So we have absolutely have an ongoing process to look at all the things that you described in there for instance number of data centers.
We outsourced and managed services for instance, so we've talked about here, where we have looked at things like our mainframe maintenance and others that weve used it there's opportunities to do that technologically with someone else at a lower cost we're looking at.
Very strategically with our our board and our Technology group is is the cloud strategy for the firm.
Not going to commented on in this call, but thats something that is actively.
Engaged with the board and and others. So.
It's going to be the primary driver.
Of our productivity has to be in the space of technology, because it's the largest part of our spend so I know that's obvious to you Mike, but I mean, if we don't get the kinds of savings you talked about consolidating data centers.
Cloud based solutions et cetera, I will say, we've done a pretty good job Mike is not running as many duplicative systems I think we've looked and consolidated across our organization and where we were running a multiple applications to do similar.
Uh huh.
Services I think we've done a pretty good job of consolidating that although I know that we're still looking at the number of apps that we have if you will inside the firm and and trying to maximize and reduce that so.
Probably probably the single largest effort we have right now it's around understanding that technology spend and how we can guide drive that through productivity.
Well that perhaps you get some useful context around that and just one more time ones specific numbers or.
I think many do but the number of asset you happy that number of data centers that have where at least like mean, when you say mainframe maintenance moved to like a third party.
And it provider.
Data center provider thinking using one of those.
Oh, that's so the.
For instance, if we use a a provider of that mainframe we had our own staff that did the upgrades and maintenance on that there are firms who provide the hardware and other items for that mainframe, who also have staff that can provide that maintenance, we've done that instead of having our own staff.
That's a productivity picked up for us because we had our own staff to do that and there's others, who can do it for better cost advantages. So that's how I would describe that is what that means.
Okay, all right. Thanks, a lot.
Well now take question from Rob well with autonomous research.
Hey, Rob.
Morning, guys, one more on organic growth and appreciate the commentary on the alignment of expenses and revenue growth there, but can you remind us on the level of organic growth, where those to start to decouple little more and positive operating level leverage would really start to show up.
Can you ask that one more time I want to make sure I follow that.
I think you're talking about aligning expense growth and organic revenue growth and so I'm wondering if there's a given the level of.
Revenue growth, where you know the expense growth might not need to stay as closely aligned and anything really see some operating leverage.
Yeah Okay.
I don't know exactly where that point would be but in general in our.
Two businesses that can be a little bit different so in our asset servicing business for instance.
There's a required level of expense to generate probably every point of organic growth right now for most of that it depends on which business line. If its traditional custody. That's highly leverageable, there's less expense needed. If its fund administration fund accounting it needs more expense it.
As a little bit more I'd say, a larger expense base it needs to go with it in the wealth space.
Pretty highly leverageable there so the expense required to grow that point of organic growth there could be different. So I think that's what you're asking is.
We could get continued growth I don't know that there's ever a point, where the expense growth stops and the organic revenue continues I think theres always a piece of that that's needed to get that through that so it but but there is.
Certain lines of businesses that are more leverageable than others that widen that gap out.
And we've had great success and some of those lines, particularly wealth is had a.
Strong growth rate that you can see in their line versus the their industry and their competitors.
That's helpful. Thank you.
Thanks.
[noise] that Catherine no further questions. So we would like to thank you all for your participation you may now disconnect.
Thanks, everyone.