Q1 2020 Earnings Call
Good day, everyone and welcome to the Northern Trust Corporation first quarter 2020 earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to the director of Investor Relations Mark Betty for opening remarks and instructions Sir. Please go ahead.
Thank you Katie good morning, everyone and welcome to Northern Trust Corporation's first quarter 2020 earnings Conference call. Joining me on our call. This morning, our Michael Grady, our chairman and CEO Chase, some Tyler our Chief Financial Officer, and learn all not our controller, our first quarter earnings press release in financial trends report.
Both available on our website at <unk> Dot Com also on the website you will find our quarterly earnings review presentation, which we will use the guide today's conference call.
This April 21st call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this calls the replay that will be available on our website through may 19th Northern Trust disclaims any continuing the 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 in Northern Trust current estimates and expectations of future events or future results actual results of course could differ materially from those expressed or implied by these statements because the realization of those resolved is subject to me.
Any risk and uncertainties that are difficult to predict I urge you to read our 2019 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 it's possible the opportunity to ask questions as time permits.
Thank you again for joining US today, let me turn the call over to Michael greedy.
Thank you Mark let me join Mark and welcoming you to our first quarter 2020 earnings call. Let's this crisis I Hope you and your families are healthy and well I also want to acknowledge and thank all the healthcare workers other first responders and the entire community of essential workers for their heroic efforts during this pandemic.
Inside Northern Trust, we often speak of our four key stakeholders clients employees community and shareholders I know will devote a lot of this call to discussing the impact of the crisis on shareholders, but I'd like to take a moment to describe our actions and how they relate to the other stakeholders.
We've been engaged with our clients more than ever despite dependent markets have remained open and our clients it needs to make investment decisions incomplete important transactions turbulent times such as these show the importance of a strong capital base and liquidity profile as well as robust technology and resiliency plants, we've been able to provide support to our.
Clients and the exceptional service they have come to expect from US we saw global transaction volumes increased 70% in March compared to February and 60% compared to one year ago, we were able to utilize our global operating model to transfer work around the globe to manage peak volumes.
During the first quarter in support of our clients, we thought deposit growth of over 22 billion in funded loan balances increased by over 6 billion.
In a short amount of time our team also created a solution to provide access to the pay paycheck protection program and we began processing applications.
Whether it's through video conferencing her phone calls and into board rooms are living rooms are clients want the advice and counsel Northern Trust.
The vast majority of our employees, we call partners made a significant shift to working away from our offices with over 90% regularly working remotely.
For the critical functions that require a small number of our staff to be in our offices. We are taking extra measures to ensure their safety throughout the duration of the crisis for certain eligible partners, we're providing supplemental compensation to support them and their families. During this difficult time.
We're also offering increased flexibility for alternative work options due to mandated school closures and other impacts to the pandemic the commitment expertise and professionalism of our staff has been extraordinary so I'm pleased weve been able to provide the support.
Northern Trust businesses and therefore the communities we reach are truly global with over 20000 partners across North America, EMEA and APAC, we announced philanthropic support to several nonprofit organizations around the world and created a kobin 19 matching gift program to support the efforts of our partners.
Our guiding principles of service expertise and integrity have guided our actions over the last several weeks and we'll continue to focus our efforts as we navigate the difficult environment. We all face Northern Trust has endured crises before and we are extremely confident in the resiliency of our business in our staff my sincere appreciation to everyone working so hard.
Throughout this crisis and our sympathies to everyone impacted by this disease.
Our annual meeting that's taking place later this morning, so I have another opportunity to speak to our performance in strategy, but for now I'll turn the call to Jason to review our results for the quarter and discuss the financial implications of this endeavor.
Well. Thank you Mike fresh start I want to take a brief moment to recognize all those affected by this crisis, especially those working on the front lines. Our thoughts are with you and we hope you and your loved ones remains safe and healthy.
I'd also like to express my sincere gratitude to all Northern Trust partners for their continuing hard work resiliency and flexibility in these uncertain time.
I'm extremely proud to be part of this team that achieves greater for all of our stakeholders no matter the adversity.
Now, let's delve into the financial results for the quarter starting on page three.
This morning, we reported first quarter net income of $360.6 million earnings per share $1.55 and our return on common equity was 13.4%.
You can see on the bottom on page three the macroeconomic environment became more challenging during the sports first quarter. However, recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels and thus the current quarters fees are not fully reflect the impact to the decline in equity markets during the quarter.
Now turning to page four and review the financial highlights of the first quarter year over year revenue on an F. T basis increased 7% with noninterest income up 11% and net interest income down 3% expenses increased 4% the provision for credit losses was 61 million in the quarter, while net income was up 4%.
In a sequential comparison revenue increased 2% without interest income up 5% and net interest income down 3% expenses decreased 1%, while net income declined 3%.
The provision for credit losses of $61 million during the quarter was primarily due to an increase in the reserve driven by current and projected economic conditions, resulting from the ongoing pandemic.
And the related market in economic impact the largest increase in the commercial and institutional and commercial real estate portfolios.
Return on average common equity was 13.4% for the quarter down from 14% a year ago and 14.8% in the prior quarter.
Assets under custody and administration of 10.9 trillion were flat compared to a year ago and were down 10% on a sequential basis.
Assets under custody of 8.3 trillion were up 1% compared to a year ago and down 11% sequentially.
Assets under management were 1.1 trillion down 4% on a year over year basis, and down 9% on a sequential basis.
Let's look at the results in greater details starting with revenue on page five.
First quarter revenue on a fully taxable equivalent basis was $1.6 billion up 7% compared to last year and up 2% sequentially.
Trust investment and other servicing fees represent the largest component of our revenue, reaching a record $1 billion into first quarter up 8% from last year and up 1% sequentially.
Foreign exchange trading income was $89 million in their first quarter up 34% year over year and up 38% sequentially.
The increase is primarily due to higher client volumes and increased market volatility during the month of March.
The remaining components of other not noninterest income were $87 million in the first quarter up 37% compared to a year ago and up 24% sequentially.
Securities commissions, and trading income increased 79% compared to a year ago, and 50% sequentially driven by higher interest rate swap in core brokerage related revenue.
Prior quarter. Other operating income included a 20.8 million dollar loss relating to the sale of leases.
Excluding this prior period lost the sequential decline was primarily due to lower income associated with supplemental compensation plans and a market value adjustment for seed capital investments, partially offset by lower visa related swap expense and the impact to a full quarter run rate of the bank owned life insurance program.
A year over year basis. These categories increased primarily due to the bank owned life insurance program implemented during 2019 and lowered visa swap related expense, partially offset by the market value adjustment for seed capital investment and lower income relating to supplemental compensation plans.
Year over year, and sequential declines relating to the supplemental compensation plan, resulting in a related decrease in staff related expense within the other operating expense line.
Net interest income, which I'll discuss in more detail later was $416 million in the first quarter down 3% both year over year and sequentially.
Let's look at the components of our trust investment fees on page six.
Corporate and institutional services business fees totaled $574 million in the first quarter and were up 7% year over year end up 1% on a sequential basis.
Custody and fund administration fees, the largest component of seeing I asked fees were $395 million, an up 5% year over year end down 1% sequentially.
The year over year performance was driven by favorable markets, new business, partially offset by unfavorable currency translation.
The sequential decline was primarily driven by unfavorable currency translation, partially offset by favorable markets in new business.
Assets under custody and administration for CNS clients were 10.2 trillion dollars at quarter end flat year over year end down 10% sequentially. The year over year performance reflects a new business offset by lower market levels and unfavorable currency translation.
The sequential performance was driven by lower market levels and unfavorable currency translation, partially offset by new business.
Recall that lag market values factor ended the quarter seized with both quarter lag and month lag markets impacting RCN I asked custody and fund administration fees.
That's an management fees in CNS of $121 million in the first quarter were up 16% year over year on up 4% sequentially. Both the year over year and sequential performance was driven by favorable markets and new business.
Assets under administration for CNS clients were $843 billion down 3% year over year end down 8% sequentially.
Both a year that both the prior year and sequential comparisons were impacted by lower markets and favorable currency translation, partially offset by new business flows.
The sequential decline was primarily driven by markets, partially offset by new business and an increase in prior in period and securities lending in period end securities lending collateral levels.
Similar to custody and fund administration fees note that lag market values factor into C. and I asked investment management fees.
[noise] Securities lending fees were $23 million in the first quarter up 3% year over year and up 4% sequentially. The year over year increase was primarily driven by higher volumes, while sequential increase was primarily driven by higher spreads and volumes.
Securities lending collateral was $167 billion at quarter end and averaged $171 billion across the quarter.
Average collateral levels increased 9% year over year and 4% sequentially.
Moving to our wealth management business Trust investment and other servicing fees were $429 million in the first quarter were up 9% compared to the prior quarter and up 1% sequentially. The year over year increase is driven by favorable markets in new business, while favorable markets were also the driver of the sequential growth.
Both month lag and quarter lag asset lab levels impact wealth management fees.
Assets under management for were $277 billion at quarter end down 6% year over year on down 12% sequentially. The decreases were primarily driven by unfavorable markets, partially offset by new business flow.
Moving to page seven net interest income was $416 million in the first quarter end down 3% from the prior year.
Earning assets averaged 11 $111 billion in the quarter flat versus the prior year.
Average deposits were 95 billion and were up 4% versus the prior year. The net interest margin was 1.51% in the first quarter and was down 7.7 basis points from year ago. The net interest margin decreased primarily due to look lower short term interest rates, primarily offset by a balance sheet mix shift.
On a sequential quarter basis net interest income was also down 3%.
Average, earning assets increased 3% on a sequential basis, while the net interest margin declined 8%.
Eight basis points.
Looking at the currency mix of our balance sheet for the first quarter U.S. dollar deposits represented 69% of our total average deposits. This was flat to a year ago and up slightly from 68% in the prior quarter.
Turning to page eight expenses were $1.1 billion into first quarter and were 4% higher than the prior year and 1% lower than the prior quarter.
Compensation expense totaled $500 million in was up 4% compared to one year ago and up 8% sequentially last year's compensation expense included $10 million relating to severance severance related charges.
Excluding these charges the year over year growth was mainly driven by higher salary expense driven by staff growth and base pay adjustments as well as an accrual for supplemental payment to certain employees in response to the Tobin 19 pandemic.
The sequential increase was primarily due to higher expenses related to long term performance based incentive compensation due to the vesting provisions associated with grants to retirement eligible employees and the current quarter as well as the previously mentioned supplemental payment, partially offset by lower cash based incentive cost.
The quarters compensation included 34 million an expense associated with the tech retirement eligible staff compared to 30 million in the prior year.
Employee benefit expense of 98 million was up 14% from one year ago, and 6% sequentially. Both increases were driven by higher retirement plan expenses and payroll taxes.
Sequential growth was partially offset by lower medical costs.
Outside services of 130, that's 193 million were up 2% on a year over year basis, and down 6% sequentially. The year over year growth was primarily driven by increased third party advisory fees and technical service costs.
The sequential decrease was due to lower consulting legal and technical services.
Equipment and software expense of $162 million was up 9% from a year ago and down 2% sequentially the year over year growth reflected.
By higher depreciate reflected higher depreciation amortization and software support costs.
Sequentially. The decrease was driven by lower software disposition charges, partially offset by higher depreciation and amortization.
Occupancy expense of $51 million decrease the 1% from year ago, and was down 11% sequentially. The sequential decline was primarily due to the renegotiated renegotiation of a lease resulting in a $7 million reduction of related asset retirement obligation.
Other operating expenses $62 million was down 15% from a year ago and down 30% sequentially. The year over year decrease is primarily driven by lower staff related expense, partially offset by increased contributions to the northern Trust charitable Foundation.
Sequentially. The decrease was primarily driven by lower staff related and business promotion expenses, partially offset by increased contributions to the charitable foundation.
The lower staff related costs related to a decline in supplemental compensation plan expenses and resulted in a related decline and other operating income.
As we've discussed on prior on previous calls through our value for spend initiative, which we started in 2017, we've been realigning our expense base with the goal of realizing $250 million, an annualized expense run rate savings with our results. This quarter, we surpassed that goal.
Well, we've exceeded our goal $250 million, our efforts around our value for spend and overall productivity.
We will broadly not seats and we further embed a culture of sustainable expense management across the concept across the company.
Turning to page nine our capital ratios remained strong with our common equity tier one ratio of 11.7% under the standardized approach and 12.9% under the advanced approach our tier one leverage ratio was 8.1% under both the standardized and advanced approaches.
In the first quarter as previously announced the proceeds from the issuance or series E preferred stock were used to redeem all outstanding shares of series C preferred stock deferred issuance cost the loving and a half million dollars are recognized upon redemption, which are included in our first quarter results on their preferred dividend line and arriving at net income allocated to common.
Shareholders.
During the first quarter of 2020, the series E preferred stock dividend was approximately $7.6 million covering the period from November 5th 2019 through March 30, Onest of 2020, the ongoing series a dividend will be approximately $4.7 million per quarter with the seriously dividends still occurring semi annually and the.
First and third quarters of each year.
Also during the first quarter, we declared cash dividends totaling $149 million to common stockholders.
On March 16th we announced temporary suspension of repurchases of common stock under our share repurchase program consistent with broader industry Africa efforts to mitigate the impact of the cold 19 pandemic by maintaining strong capital levels and liquidity in the U.S. financial system.
Part of the suspension, we repurchased 3.2 million shares of common stock at a cost of $297 million.
Let me take a.
Make a few comments just summarizing the quarter as well as comment on some of the headwinds that we're facing as we move through the remainder of 2020.
Despite the impact of a mixed global macroeconomic environment, we performed well during the quarter generating a pre tax margin of 29.4% and a return on average common equity of 13.4% or.
Our performance reflects the momentum we carried into 2020, and we were able to generate positive fee operating leverage and positive total operating leverage on a year over year basis.
Our balance business model continued to generate organic growth.
With each of our client facing reporting segments of wealth management, and see and I ask contributing approximately 50% of our earnings.
Looking ahead to the remainder of the year the macroeconomic environments is going to certainly create headwinds for certain revenue lines first as it creates as it relates to lower expenses, we will of course see pressure on our net interest margin a net interest income as we move forward through the year.
We're currently anticipating the second quarter net interest income will decline seven to not 7% to 10% on a sequential basis.
[noise] next as I've mentioned in my comments throughout the presentation, it's important to remember that lagged markets impacted calculation of our trust fees.
While month lag in quarter lag equity markets were mainly favorable for first quarter, we'll see an impact on our fees going forward. One indication of this is our period end assets under custody administration and assets under management declining sequentially by 10% of 9% respectively. As a reminder, approximately three quarters of our.
These are sensitive to asset levels.
Finally.
The newly adopted accounting standard for credit loss for credit losses makes our reserves or credit losses sensitive to changes in the macro economic environment.
Economic conditions continue to worsen over the course of the year, we can expect to recognize additional provision.
We cannot ignore the macro headwinds pressuring our revenues as we move forward into 2020.
We remain laser focused on managing our expense base and driving further productivity improvement.
It's times like these that show the importance of a strong capital base and liquidity profile to support our clients activities and we continue to provide our clients with the exceptional service and solution expertise they've come to expect.
Thank you again for participating in Northern Trust first quarter earnings Conference call today, Mike Mark Loren and I are happy to answer any of your questions. Katy will you. Please open the line.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speakerphone. Please make sure the mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question well pause for just a moment to allow everyone the opportunity to signal for questions.
As a reminder, please limit yourself to one question and one relevant follow up.
Thank you our first question will come from Alex Blostein with Goldman Sachs.
Hey, good morning, everybody. Thanks for taking the question on so I I wanted to start with your guys. His thoughts around the organic fee growth in the current environment. So.
I think in the past you talked about low to mid single digit growth across institutional and wealth businesses I'm wondering how the currency set sales cycle I will likely be an extended how is that impacting that fee growth outlook from an organic basis.
And as a kind of follow up to that obviously importantly, wanna get your costs and expenses, while he got similarly, you talked about aligning expense growth with organic fee growth against sort of call. It 3% to 5% range. How low can you guys take that given the current environment and any thoughts around 2020 expense growth would be helpful. Thanks.
Sure. Good morning, Alex Let me I'll start on the first dynamic of organic growth. It was a deal was a strong organic growth period, and I think both year over year and then sequentially. It was nice to see we had organic growth both in the CNS business and stood at a.
Hi level it was a little over 1% of.
Pure net new business that contributed to the growth and and seen I asked and then we also had overall positive.
Growth in the from an organic perspective in the wealth management side of the business and you don't see it but that did the asset management business on its own also provided some positive organic growth, which is nice to see a lot of it was driven by very strong movement into cash and I was looking at over the weekend I think there's over 30.
Billion dollars in flows.
Overall into that category and our NIM Treasury fund is number one and its peer group and investment performance and just that those that set of funds alone has a AUM of over $60 billion right. Now. So lot of was things are things are going well.
I think it's also important just take a second to to think about some of the interactions Weve had with our business in this I think feeds into your question about how we should think about this in the longer term.
And just take wealth management for example, I was talking to some of the leaders there and just some interesting notes one their call report volume just activity with clients is really skyrocketed.
Over 100% increase in call reports just from our Central region, just gives a sense of the activity there.
We do these webinars to teach clients about and talk more from our experts about what's going on we typically get about eight or 900 people show up for those virtually there at record levels now has over 3000 people consistently coming in to that.
And then even the marketing material, we track things is granularly as the page views that we get from the marketing material was we send out that's that averages about 1200 page views and over the last several weeks, we've been averaging six to 10000 and so I think in the short run it was interesting.
To see that we were able to actually close good good pieces of new business that was already in the pipeline I think the very long term bodes very well for us given some of the the statistics I just throughout the engagement we've had with clients.
I think if there is an area of caution it's going to be in that mid term pipeline I think theres just not as few clients that are going to be spinning up new opportunities whether it's on the scene I asked side. They feel the same way or the wealth side. So I think we're going to close all the business that we that we can that was already in kind of the one not funded late in the pipeline.
Line and I think the long term looks very good and we can talk about the the more counter cyclical dynamics of outsourcing that lead into help on the new business I foresee and I asked but the long term feels good I think the short term, we obviously have to be cautious about.
And then on expenses, all start, but maybe Mike or Markel join in as we speak about that we we want to bucketed in a few different categories and I'd, probably the best way to think about it might even be just to look through if you go to page seven of the of the earnings releases.
That outlines expenses pretty well and.
In more detail and first of all we added a lot we had a long list of different paths, we could take on this from just saying, let's let expenses play through.
To let's go ahead and do a full replan of of expenses and we took the latter approach. We took a very aggressive detailed approach to unwrapping our expenses based on what we knew the environment was going to look like in the short run at least and so we on Bucketed things the way, we traditionally do inflation pro.
Activity business growth and investments and we've been very aggressive at outlining where we can address expenses. If you look at page seven that the areas that are more related to client activity or markets have to do with outside services and equipment and software.
And you know Super high level, roughly you get kind of 30% to 40% of those have that that type. They have some correlation to markets in new business. Those are the areas. We've been laser focused on but even on an ITC investment. We're just re rationalizing everything that we've committed to do.
Do.
Yeah. This is Mike I would just add to what Jason said that there are a near term actions that we've already taken in continue can continue to take a which I definitely looks to bring down the expense run rate from where we were in the fourth quarter and then where we are now and.
Then just given that the the world has changed and will change there are new opportunities for productivity over the long term made if you think about real estate costs and other costs that come with.
Having everybody in facilities versus now as I mentioned earlier, we're roughly 90% people working from home, it's not going to stay at that level, but I also don't think the operating model will be the same I once we get through this.
Great Great that's helpful and and I don't I want to put awards and you guys now to maybe just to clarify I guess in the past you talked about expense growth aligning with organic growth and in the near term organic you grow sounds like it's obviously going to moderate pretty considerably. So I think about the total expense.
Business I expense base to be flattish year over year or is there a way to bring that down just just hoping they got some more granular.
So you are.
Correct in characterizing the way that we have talked about the organic expense growth rate.
For expenses aligning with the fee growth and so yes is that comes down.
The growth comes down the organic expense growth rate comes down as well and then beyond that as you're saying Alex Yes. We're also saying outside of the organic part just looking at total expenses were trying to bring those down I and I wouldn't put a specific stake in the ground as to whether that.
You know flat or up or down because again some of those expenses are affected by the environment, but that's what we're trying to drive too. So it is as Jason said, it's a re plan. There's no part of this did says you know we're just plowing through with the same plan that we had.
You know at the beginning of the year.
Thank you. Our next question comes from Glynn score with Evercore.
Hi, Thanks very much.
But if I could ask the question.
Actually I could use some bolt on this on the provision on the loan book.
So so if you could talk generically what types of economic backdrop, you wrote that provision to because the world is changing a lot right around.
Quarter end and then if we could talk about the loan book that.
Produce most of that I'm assuming.
It's almost all in see an eye on C. I read so maybe you could talk about.
Yes, what ill say office retail and construction.
Where that is derived from how much of that its clients that are across the firm versus.
Things are syndicated.
Really appreciate we normally don't have much discussion about your loan book. Thanks.
Sure Glenn will let me just start with <unk>.
Due to some of the assumptions that went into the forecasts I think like a lot of firms. We do the fccs very specific and saying you've got to you got to pick it use your end of period date use your forecast at that point to drive Youre.
Your increase or decrease in reserves and so we obviously followed that if you like it right at the ended the period.
We were looking at unemployment of 10%, we had a peak to trough change in GDP of just over 6% and then is as you likely no. That's not it it's not like we have those assumptions and then its spits out the 61.
Million dollar provision number we have a variety dozens of factors that go from there and from the number of forecast that we use the weights and the priorities of those forecasts the downgrade assumptions of the underlying.
Credits, which drive the expected loss assumptions and so you go through a very rigorous governance process to take the output of the of the forecast and the models to drive to a final number for provision. So after we did that like all other financial firms we went through.
A new forecasting period the.
The economic inputs in the market were changing dramatically we're watching that closely so within the next couple of weeks. We went through a forecast that went to an unemployment peak of 14.5% and.
Peak to trough GDP change of 7.5% and so that gives an indication that directionally. The provision number if we were to go through that same governance process would have yielded a higher provision number at that point.
That said, we didn't go through that same finalization of the governance process after that second forecast was wrong.
We could do that every day, it's very to very rigorous process, but we followed the letter of what the FCC and what the accounting guidelines provide provide us to do and so we will continue to do those updates as we always do with our forecasting process and we'll have that that rigorous process added.
To it as we get into the next reporting period.
And then if we want to touch on the loan book itself. We why do we go through some headlines and I'll start and then maybe mark can jump in.
I think the the key is it's Theres no.
Dramatic difference between what we told you before about the loan portfolio and what it is today theres a lot of other even qualitative assumptions that go into that the number that drives the Cecil accounting provision number, but why don't we provide a little bit more information so mark I'll turn it over to you for that yes looking at the entire loan.
Portfolio.
Over 20% of loans or does it to private client secured by marketable securities primarily and those are primarily capacity that northern trust.
You do have.
About 20% of the portfolio, which is residential real estate.
Again, the nature of those Obligors and somewhat unique I mean for example over 75% of those would have FICO scores of seven for your higher when you start to look at the commercial and the commercial real estate. The commercial is predominantly investment grade.
And on the commercial real estate side.
You know the lending is too.
Investors as opposed to developers and over 95% of those commercial real estate loans have personal guarantees as well so a pretty high quality. When we look at the C and I portfolio as far as where the the high impact or or low impacts might be from the current.
Situation that we find ourselves then.
We would say we're very much predominantly in what we would hope is in the lower impact when we look at the kind of industry.
Segmentation there.
Yes.
Hey, guys, just one tiny clarifying case on the on the GDP numbers that you mentioned is that full year 20.
Our second quarter.
Oh no that's for the full year, that's the that would be the peak to trough change for the full year.
So at a high level the assumption that we use had very sharp second quarter decline and then.
And then we're relatively strong recovery, but not to the current levels of GDP.
Thank you. Our next question comes from my carrier with Bank of America.
Good morning, and thanks for taking the questions.
First can you provide a bit more color on the net interest income outlook, particularly given the rising deposit.
In expectations in this backdrop with a lot of liquidity out there and then for the NIM.
How you're thinking about portfolio and reinvestment rate.
Sure. Thanks, Mike.
All start well first of all that.
The more time, we spend around and I think it would jumps out to me is.
But the key is actually less the size of the balance sheet, which has driven so much by the deposit growth.
It has much more to do with what's happening with loan volume.
And if you think about it that the size of the balance sheet and the size of average, earning assets is going to be dominated by client deposits coming on.
On a different interest rate environment, that's going to have an impact on eni and but in the short run you think about it and on an incremental basis, we're not investing those deposits long and we're not investing in were not investing then with credit risk either and so the dynamic there is it effectively your brain.
The size is driven by.
Deposits that are going to be reinvested a lot in Iowa, we are 10 basis points, and maybe something a little somewhat different than that but not dramatically the things that are going to.
Dry then I'm more you'd be really two things one the volume of loans and then secondly, we've talked about this before but the spread of one month LIBOR or to the bottom end to fed funds are Iowa. We are very important it really gives you a sensitive.
Of the.
The Eni impact of the a lot of the earning assets and how those are going to behave and contribute to eni and so those are the those are really the big factors and so I mentioned that because I think it's just important to decouple and not try and predict eni based on where that one.
51 in NIM is going to go I think you have to have more of a bottoms up approach of thinking about particularly loans and then what is live we're gonna do LIBOR has been coming down a.
A couple of basis points, a day, effectively and where you think that the trajectory there's going to go is very important factor.
Okay. That's helpful. And then just as a quick follow up.
Can you help is just how we should be thinking about fee waivers you ahead and as you're right that crop.
Yeah, we you a lot of the information to out there.
I will help track that a little bit, but as we sit today.
None of the large funds are in a position where their yields are below their fee rates and if we look out on that a little bit. We you guys can see as much as we can you without a grilled contrarian approach you don't see that changing a lease in the next several weeks or so now that said yeah.
I mentioned early in the opening that you know Arden, if treasury funded at $60 billion to $70 billion.
You get if at 15 to 20 basis points in in fees. If we fall below those rates by even five basis points, you're talking about annual run rate just from a math perspective of potentially $30 million and now we're not there yet, but if we were to.
Tryone point, yet if something to track and between the time that we're able to talk publicly those would be the line items to to look at.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank.
Great. Thanks, very much for taking my questions.
Maybe.
Just sticking with the balance sheet for for a minute.
On that my board to Oh, I owe you are spread.
I guess down to 7% to 10% down in sad considering current life or one month LIBOR rates were that where are you factoring in.
Well I border compress a further would then if you could just remind us again on on the loan repricing mechanism I think it's three quarters of loans reprice quarterly to one month LIBOR with the rest lags.
For one year, if you could just remind us on that.
Sure. So just to start with the end, it's actually there's a little higher than that it's about about 80% of the loan book is actually floating at this point and that's tied very mostly to lie before us.
And then to what our assumptions are the down 7% to 10% number. We provided is reflective of a tightening of the spread between LIBOR at Iowa, We are and so we've looked at that and and and continue to think that that's going to compress a decent.
Now.
On a spot basis I haven't looked at it this morning, but last week. It was kind of that LIBOR at kind of 70 72 basis points against an eye or we are 10.
And we think that could continue to to narrow a fair amount and you think about where LIBOR was just a couple of weeks ago is significantly higher than that and so we certainly feel like that's got to be part of any any projection.
Yes, okay.
And to end deposit levels just in April versus.
The theory then.
And then in the 7% to 10%.
[noise] guidance.
No doubt.
No we you'll see the last page of the press release, even just where the balance sheet ended at.
$160 billion or so and again, that's all that's the size of the balance sheet is completely driven by the size by the size of client deposits and.
There were significant increase throughout the quarter and frankly, there there were increases significant increases and we ended not it where Pete and so.
We did balance sheet has had very strong growth in CPI, it's all about client activity as clients de risked and came out of larger.
Equity positions or other fixed income positions they wanted.
Balance sheets that they were comfortable with and they were comfortable with hours and we wanted to be there for them and since then we've had deposit levels come down significantly from those peaks.
And apply it had been more on kind of the 140 to 145 range and in that type of in that type of area.
Over the over the beginning of the second quarter.
But and that's still elevated relative to what where we experienced historically and.
At peaks or at the end of the first quarter.
Thank you. Our next question comes from Ken Houston with Jefferies.
Hi, Thanks, good morning.
On the balance sheet, Jason can you talk through where the.
Floating fix mixes of the balance sheet right now what the duration of the portfolios and just how do you decide based on your prior response about the ins and outs of deposits.
Or you're going with reinvestment yields so much slower in terms of asset side of earn earning assets distribution. Thanks.
Yes, Thank you Ken.
Yeah Weve.
We're reinvesting short.
The is the quick answers the question and we want to we don't feel that this potential the that the potential need from clients to have very spiky aggressive needs and desires to be on the balance sheet is necessarily over and so we want to make sure.
We've got plenty of dry powder and plenty of capacity for them on both the loans and deposits side and so we're taking a short term approach being there for our clients now our duration.
I think it at the beginning of last year of 19 problem. It was around 1.1, we had steps that out we told the investment community, we were going to step it out we'd gotten all the way out to about two.
And since then very recently as we're reinvesting maturing securities that'll come in a little bit as we position the portfolio to maintain maximum capacity.
Over the that's not reflective of a long term strategy, but it is reflective of our desire to be there for clients initiative in the short run.
And the fixed floating mix do you have out available.
Yeah.
Mark.
Yes, the split between the shorter securities book in the longer.
Weve, it's been running.
Closer to 50, 50, historically I think more recently the longer book was a little larger.
And then as Jason said as we reinvest.
Depending on where those reinvestments go that that can shift a little bit, but and balance a little bit tilted towards the longer side is where it was.
On average during the quarter, yeah, and the funding side. We think of is more 50, 50, and we try and state matched on that reflectively on on the reinvestment side. I think is we as we continue to go shorter in the in the near term that's going to that's going to lean a little bit more short, but but in the long run its about.
Of maintaining that maintaining the hedge.
Thank you. Our next question comes from Mike Mayo with Wells Fargo.
Hi, just my question was I answered, but just one follow up you said, 90% of people were working from home.
Can you elaborate more on what sort of more permanent business model change that might lead to.
Yes, Mike. This is this is Mike.
In the way that we've thought about the operating model over time, it's never been one that we thought in a stabilized way that we would be at 90% working outside of facilities.
You know frankly, what we've learned through this crisis is that we can meet client needs.
And I'd be able to to operate the business execute the business even at that high level of remote working.
Having said that I you know this is not the level that we want to sustained well have to be.
Careful as we have people returned to the office a that'll happen in a phased approach, but frankly you no longer term as I mentioned I think that there are opportunities because if even went beyond just the ability to.
Serve our clients I think about efficiency or we may have lost some efficiency. During this time period, but frankly, it's also I would say demonstrated that they're out there are inefficiencies in having everybody come in and out of the facilities around the globe.
And that there is certain work that is easier.
Good to have our partners our employees do remotely I'd or even if it's not completely remotely you know do they come into a facility for a portion of the week.
Things like that and you know that also alliance with some of that things we've been doing.
Over time.
About our work spaces.
As you would expect you know, it's not all about everybody, having an office or even a cubicle, it's more about open spaces and flexible work spaces and things like that and that fits in with I not having everybody reporting into the office at the same time. So we don't have the.
You know complete long term operating model at this point, but again I don't believe it will go back to the way it was and I think frankly, it will present opportunities for both greater efficiency and I think for our employees by additional satisfaction on their overall their overall work life.
And as it relates to customers I mean, you see schools going online you're seeing Zune meeting you seen tele medicine on other hand, your customers are very high long.
We'll probably won't close to full service.
What's your flexibility there.
Yes, without a doubt and and as you point out.
We have a high engagement model in wealth management and and yet if you. If you if someone thought it was all about the facilities. A then we would have been going the opposite direction for the last several years right in the sense of.
We actually have fewer offices now for wealth management than we did five years ago 10 years ago, and that's because that engagement at the higher level often happens at the clients office at the clients home I and also through technology, you know through using video conferencing I.
And just the ability for clients to interact directly.
With their account online on their phone et cetera.
So it's a multifaceted engagement model I and one that again, we think we can differentiate ourselves in this Jason talked about some of the okay, calling statistics, if you talk to our partners in wealth management as we said they've been more engaged over this time period.
And the three months lets say prior to it.
A lot of that because of all the activity, but also they've used different ways to do it. So we look forward to when we can meet more with clients, but that doesn't necessarily mean, it half has to happen in an office.
Thank you. Our next question comes from Steven Chubak with Wolfe Research.
Hi, good morning.
So you noted earlier in a question relating to credit you have lower exposure to the higher risk industry categories. Given some of the stress in energy markets. I was hoping you could speak to any direct exposure to the energy sector, maybe what specific energy categories in particular, such as MP, Mitch Scream et cetera.
Yeah, so at a at at a high level the exposure to energy is very very low and.
A lot of our we've got a lot of clients that have garnered or wealth from the industry, but our lending exposure specifically two to two oil and gas is very very low.
Okay, and just one follow up from me, Jason you gave lots of detail on deposits I'm, just given the significant growth how the bulk of that's being deployed entire we are.
I look at the balance sheet during the prior Threeq Recycles now you had a lot to see we driven deposit growth a lot of those deposits actually stayed on the balance sheet and your approach was pretty balanced in terms of how much was deployed securities versus Iowa. We are I'm, just wondering why would things play out differently. This.
Time, maybe just how you're thinking about the mix where for every incremental deposit how much of that should we assume goes and I are we are or versus security is that a new you're going to be short needed to ensure that you have greater flexibility from a liquidity standpoint.
Well frankly this is about trying to ensure were there for clients in the long wrong and we could make a short term call of saying, let's extend a little bit and even if we miss the yield curve a little we don't want to have stories from our.
Clients, where we weren't we weren't there for them. We've we have been able to to do a lot. We've got ample room from a tier one leverage perspective from liquidity perspectives, and but we talk all the time about our balance sheet being there for clients and so we want to live up to that or not.
Fall to temptation of trying to use the deposits and go and go very long now you're absolutely right that there is an element of these deposits its going to stick around awhile and that will enable us, particularly the wealth deposits are very valuable once those season and our here at enables.
Just to enables us to extend more and invest those more whether it's in loans or non high quality liquid assets and that creates a lot of value for us. We just want to be patient and make sure that we don't do that too early but some of the growth that we've had.
On the deposit side over the last year, even not just the last month and a half but over the last year. They reflects a higher base level of deposits and a lot of it on the wealth side, which is very very valuable.
Thank you. Our next question comes from Brennan Hawkins with CBS.
Good morning, Thanks for taking the question first question is a follow up on the expenses.
So you talked about some of the actions taken you helped us understand.
The pieces that were subject to.
Volumes and when I take a look at the midpoint of that I think you said it was outside services and if we're going to software 30% to 40%. So if you take the midpoint that's about 10% your annual expenses does that mean that.
Things outside of that.
Bucket of expenses, you're going to be able to calibrate.
And the that 10% we should grow.
Maybe at an elevated rate given some of the things that are going on you can you help us.
Think about what at least logically.
Might come into play when we try to calibrate how to forecast your expense growth there.
Yeah sure. So if we come back to that framework that page I'll give you a little bit more how I think about the sub categories in there so the outside services and some of the headline some of these things are going to be mix, some will be able to moderate lower and some are gonna have more activity is we've invested.
To make sure that we've got good operational resiliency and so with an outside services. For example, a lot of that as consulting and legal costs will go on the consulting side.
There there are going to be projects that we.
Had planned to do when we went through our original planning process that don't necessarily Chen the bar at this point or that we're just going to delay for a period of time or that we're going to do with a reduced scope and so those are the types of conversations we have there on legal we actually hinted very quickly I think in the script that we've had.
Add some benefits some things go our way on some on some legal matters and so that's part of the benefit that we've had in there if you think about equipment and software.
That's an interesting line item because even within their their items that will go both ways. We've also invested more heavily in infrastructure there, but at the same time, that's where there are some capital I T projects that we might not do.
And then there's also an overlay on both of these where we have to think about what's related to the core business either from an assets perspective, or just client activity things like market data third party advisory fees sub custody brokerage clearing those are the some of those line item.
That will add up to that kind of roughly 30% to 40% number that we're thinking about and then in occupancy just to refresh your memory on some of the things we've talked about we we had already been in late stages of some trends of some larger transitions and investments and we talked about the fact that in the.
Short run we might have some overlap and rent and investment and we think thats going to peak around second quarter, and then we should get the benefit of that more on the second half for the year.
Okay that helps thank you and when we think about it seems you mentioned the legal benefits that you've been receiving in some of these lines could you help us.
And maybe calibrate how much that helped one Q.
Yes, we should think about any of that I would think legal benefits are somewhat episodic but.
[laughter] is that's the right way to think about it or is that something is there some sustainability to those benefits.
Any any noise calibration would also be helpful. Thanks.
Yeah, Brian and this is mark I mean, I would start with.
With the outside services category you do get.
Consulting and legal as to expenses that I would say will fluctuate based on engagements.
So and when you look at.
In general how much they make up of the category, it's actually a fairly small percentage. It's just that they can be volatile from quarter to quarter. So they might make up 15% to 20% of the expenses, if even man of the category, but they do.
Based on timing of engagements they'll go favorable or or are they might pop up in a given quarter I would say this quarter was one where the engagements with were lower and there was some benefit in the expense that we realize but I don't know than I would.
Necessarily portrayed as a trend.
You know contractor expenses and things like that that go into things like consulting certainly.
Thats something that that can be an area that we can focus on managing.
Thank you. Our next question comes from Brian Kleinhanzl with KBW.
Okay. Thanks for taking my questions.
How would you say some of the I being down and the second quarter, but how do you think about it then after the second quarter is there a period of time at the liabilities will catch up on the repricing sign and kind of how we think about deposit betas moving part.
But I think the in the there's two competing factors. There one is our desire in the short run to make sure that we're maximizing loan capacity effectively for our clients I think and put in the longer run this space of businesses base of deposits that is more core will be.
Able to invest in a in a better way the counter to that is that the duration that we built in the portfolio will start to dissipate and it and so the more we're reinvesting some of the of the portfolio that we had coming into this year.
The more we are going to experience the impact of lower nominal rates and even so even if we're taking longer duration and to even if we're extending the portfolio from a reinvestment perspective, we'll be doing so with in a lower interest rate environment and so that.
At those competing factors will will operate and I think it's up to everybody to have their own determinations of what they think the interest rate environment, it's going to look like in the media in the intermediate term.
And then just the second question on the custody and fund admin fees is there any way to tease out what the pickup in activity meant for fees in the quarter like comparing fourth quarter due <unk> first quarter I know some clients our price based on activity levels. Thanks.
Yep.
Brian It's mark So I would say that when you look at the sequential performance for custody and fund services there was a.
There was some market benefit again, theres month lag and quarter lag fees that are more month lag than quarter lag and actually be YFA local was slightly negative on a month lag sequential basis. So there was a little bit of market pickup, but there was also.
To Jason's point earlier about the 1% sequential kind of organic one ish percent organic growth, we usually look at organic on year over year, but sequentially. That's that's probably in the right range a little more than that there was a drag from currency.
So.
Thats kind of those are the largest factors. There's also some other non asset level fees that were a little bit.
Down sequentially on things like account level fees and things like that but.
So overall kind of balanced out to flattish I would say.
Thank you once again, please press star one now if you like to ask a question. Our next question comes from Brian Patel with Deutsche Bank.
Great. Thanks for taking my follow up just wanted to just go over that.
Thing on the on the custody business and the and the wealth management that I know the mix has changed over time, because you've you've been servicing more people in the administrative basis, particularly in alternatives and that's.
We do a little bit more been averaging mix than it used to be historically, but if you could just review.
Within the CNS.
Asset servicing business for a portion of that.
It gets priced on a quarter end lag versus more of a you know in averaging basis and then just seem within wealth management a portion of that is priced on that one month lag I know there I think the capacity part of that that you don't manage in wealth management I think that's not that's kind of prior quarter like not mistaken.
And maybe if you're able to just review that pricing.
Yeah, Brian This is mark so yeah, it's pretty similar to what we've said before so with custody and fund administration.
First and this is in CNS. There was about 35 to 40 call 40% of fees that are not asset value sensitive. So that's that's the first part of the fees that are asset value sensitive. So the remaining 60% about three quarters of those are month lag and a quarter.
Our quarter Wag, which is similar to what Weve, what we would have updated a year ago I think last time, we had a.
A change in markets when we when we gave that update and then remember as far as the asset sensitive it's not all equity exposure because we have a.
On allocation across multiple asset classes, when you get to the wealth management side I would probably divided between the regions and the global family Office, The global family Office business, you're right there is a.
That is probably more lean toward the quarter lag, it's similar to the asset servicing business and see an eye on.
And there was also about a quarter of those fees that are asset sensitive more like what you see on the asset servicing side of CNS and the regions and I would combine the regions together then youre looking at.
About three quarters or more of those fees being month lag. So hopefully that gives an idea not not a significant change though from from what we've said before there.
Okay. That's perfect then just some I just missed to comment on the GDP assumption that you had in the.
So the credit provisions.
If you could just reiterate that.
Sure so that.
The baseline that we went with for the March 31st for the reporting cycle had a peak to trough down a little over 6% 6.1%.
And then the update subsequent to that is it down 7.5%.
Thank you. Our next question comes from Betsy Graseck with Morgan Stanley.
Hi, good morning.
Morning Betty.
I had two questions. One just on cost that you made earlier in the call around the medium term caution in the pipeline could.
Can you just get a sense as to the drivers of that and how long you think that well what what's your view of medium term is and then maybe you could give us a sense is too.
This is really just to push out not and evaporation. So maybe you could speak to how that comes back into your.
Run rate as as things open up.
Sure Betsy, it's Mike I'll add onto adjacent said earlier.
So if you think about the flow of new business Theres business that we've won I and it's a matter of transitioning that business on and what are the things that I again, I want to give credit to our team on is the fact that even in the month of March with everything that happened, we were able to transition the.
The majority of the business that was scheduled to be transitioned and so in that sense. That's why we say you know right. Now you know that will look good having said that there are a new mandates that were to transition in April for example, or may or June that it's not only that we're in.
You know caught the work from home mode, but that that clients are as well and so they've said, let's move our transition back further so they are deferred transitions. So when Jason talked about in the medium term that would be new business that would come on for example in the second or the third quarter that now has been moved back.
And then if you then also think about what's happening with the client base I you know certainly winning new clients is new business for us, but it's also the flow activity that they have whether that's an institutional clients and what they're doing what their funds are they more in a spending mode. If you.
Well I utilizing mode. If there are a sovereign wealth fund that's being impacted by the environment.
Or if they're an asset manager are they I in a part of the market that is a net gainer of flows or a net outflow I and that of course, then will impact.
Yes, as well as well and then the last piece is just well what about new business activity, where you're in the process of winning I, yes, theres, some slowdown I and I would say mandate type decisions.
But also with a lot of activity like this we do see plenty of our clients that are saying, we've been talking about outsourcing for some time period, whether that's the whole middle office or that's trading on you know what now that we've gone through this time period, we can see that you're in a better positioned to do that for us than for us to do and are not on our own.
So, let's let's continue that dialogue and then we can figure out when we'll decide to do it I and hopefully do it with us as well and so that happens that's why we say longer term.
We see a lot of opportunities, but that's not going to impact the third or fourth quarter. This year.
Right. So the medium term in the push out of the pipeline install is really a function of when you can get back into clients offices, which is a little bit TBD, but it's a push out not enough operation.
Right.
And then could you speak a little bit to how you're thinking about the buybacks I know that you stop them, but you obviously have a significant amount of capital I'm, just wondering how you're thinking about what the.
You know triggers will be for you to restart the op.
[noise] Betsy its Mike again, so with regard to capital management, and specifically I share repurchases I've, yet as you know there's been a tremendous amount of attention and rigor around capital management going back to the financial crisis. So in that sense I would say you know Wi Fi.
Very good about the process around capital management, and how we think about capital actions and the stress testing that we do et cetera on and the reality is that now we're in an actual stress and so I. It is an opportunity.
To be able to demonstrate that we can execute then on our capital actions or the way that we thought of when we were going through various stress scenarios, so being able to pull that lever on share repurchase like we did in say tremendous amount of uncertainty. We can we can stop that very.
Easily that's the benefit or share repurchases and we've said for the foreseeable future and that's just because you know the environment can change and there are many factors that go into it as you know, but looking at our capital levels looking at the profitability levels. The stress testing results with the fed you know all of that plays into the boards.
Vision on how they think about capital action. So I'm just as it was easy I would say to pull that lever to stop share repurchases technically it's very easy to push the lever. The other direction. It's more just I've been able to assess the environment in the outlook at the time to be able to determine when that's appropriate.
Thank you. Our next question comes from Gerard Cassidy with RBC.
Thank you good morning.
I'd like to scoring well off on the credit comments.
Northern Trust is obviously very well regarded when it comes to credit you guys have done phenomenal job.
In the last 20 years is interesting in 2001.
News exposure to Enron, which surprised everybody that normally would have that kind of credit. We discovered was as part of the employment benefits processing that you did for Enron.
You were asking joined revolving line into the time.
Are there in those outside situations today that we just wouldnt expect more than to have the credit exposure I'm not asking for specific names, but just to X Y Z companies like Wow.
How did that happen is there any of that on the books today versus what it was no one.
Well I appreciate the historical perspective on that I am going back to 2001 Andy.
I would say as far as the nature of.
How we think about credit I, it's still very similar I mean, it's aligned with our overall business in with holistic relationships. So that has not changed.
And specifically to clients, where we are the custodian.
For their pension plan, you know, we often than our participating in their credit facilities.
Now when you look at that portfolio companies.
It's still goes through a very rigorous.
Credit process and so it's a very high quality set of companies as well in high high quality set of credits.
There's no way that we can necessarily predict which sectors are going to be impacted.
By a particular stress scenario and so we wouldn't make the type of statement to say and we have no exposures to any sectors that are a you know troubled right now certainly we do but I you know all of that we try to to manage the the size of the exposures for that and that.
Just you've just identified one area, which is on the corporate side.
Certainly we work with asset managers, so we're providing credit to the different types of asset managers and then on the wealth side you know the nature of where wealth is developed I and so that can either be you know the companies that are owned by families.
But also I you know the individual credit needs as Mark mentioned about 20% of our portfolio. Overall, hi is basically no margin lending its collateralized by their investment portfolio and so that would reflect the nature of that credit needs for that part of the client base.
Mike Thanks, very much on accretion.
Sure.
Thank you. Our next question comes from Brennan Hawkins keeping yes.
Hey, Thanks for taking my follow ups just.
Click on fee waivers could you give us the breakdown of your money fund AUM mix in between Prime Covey immunity.
Sure.
Good.
As Andy.
Why don't we.
Yes, we can follow up here I mean, because it's it's plates.
Hello.
On the northern funds northern institutional funds website.
We could.
Follow up with that Brian.
Thank you. Our next question comes from Steven Chubak with Wolfe Research.
Hi, thanks, or accommodating the follow up I just wanted to make sure. It's a quick modeling question. The other income line. There was a lot noise. This quarter as we think about the right jumping off point or two Q.
Given with some of the Bali Tailwinds, how should we be thinking about the appropriate run rate beginning in the second quarter.
Sure Mark.
Yes, Stephen I can try to take that so.
It is a hard one because there is a lot that moves around within that category I guess.
One way that I've kind of talked about I think even on the last call. We kind of talked about it certainly you have bully that has come in incrementally in each of the last four quarters with this quarter being about 13 million.
So if you took bully out as well some of the things that we've had like last quarter, we had a lease loss of 20.8 million.
If you adjust.
Taking bully out of the last four quarters and adjust for the things we've called out and you kind of did the math, you're probably looking at an average run rate of call. It 33 34 million.
And then in theory, you could then say okay. We'll let me add the full run rate a bully in.
And as a 13 million to that so maybe that gets you to the 45 47 range I too would just caution though it is a very.
Is there is volatility in that line. So it's a hard one theres things like currency hedging that that flows through that that line.
We've talked about some of the things that this quarter some of the marks might flow through that line the VSOE related.
Income expense type of swap marks flow through that line as well. So it's certainly doesn't move around but if you looked at it over a longer period, you could you could use that potentially as kind of an average run rate.
Thank you and.
Great and really I'm going to save Mark a follow up calls because I do have the aon breakout. Okay. So cash you at about $235 billion at period end.
Fixed income about 150 billion and.
Slide seven a lump index and active equity at about 425.
And then called the rest other.
[noise] and leave it there.
Thank you ladies and gentlemen, this concludes today's culinary and teleconference. Thank you for joining US you may now disconnect.