Q2 2020 Northern Trust Corp Earnings Call
Please standby were thought to be.
Good day, everyone and welcome to the Northern Trust Corporation's second quarter 2020 earnings Conference call.
Today's call is being recorded.
I like to kind of the caliber to the director of Investor Relations Mark study for opening remarks and introductions. Please go ahead.
Thank you Jennifer good morning, everyone and welcome to Northern Trust Corporation second quarter 2020, <unk> earnings Conference call. Joining me on our call. This morning, our Michael Grady, our chairman and CEO, Jason Tyler, Our Chief Financial Officer, Laurent All night, our controller and Kelly hard again from our Investor Relations team our second quarter.
Earnings press release and financing trends report are both available on our website at Northern Trust Dot Com lots on our website you will find our quarterly earnings review presentation, which we will use the guide todays conference call.
This July 22nd call is being webcast live on Northern Trust Dot Com see only authorized rebroadcast of this caused the replay that will be available on our website through August 19th Northern Trust disclaims any continuing accuracy of the information provided in the call. After today now for our Safe Harbor statement, what we say during today's call.
This call May include forward looking statements, which are in northern trust current estimates and expectations of future events or future result, actual result of course could differ materially from those expressed or implied by these statements because the realization of those results. It's subject to many risks 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 result.
During today's question and answer session. Please limit your initial theory to one question and one related follow up this will allow us to move through the Q and enables 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 Michael Grady.
Thank you Mark let me join Mark and welcoming you to our second quarter 2020 earnings call as the current public Health crisis continues I hope you in your families are healthy and well and I offer my condolences to all who suffered a personal loss.
Northern Trust, we remain focused on safeguarding our employees, serving our clients and supporting our communities. During these unprecedented times, we continue to operate and what we call resiliency mode, which means we are focused on providing continuity of service for our clients well over 90% of our employees are working remotely although we have developed plans.
Positioned ourselves to return to our offices when conditions permit we will only do so in a particular geography, when we are comfortable and confident in our ability to ensure a safe environment for all of our employees in points. As a result, we expect to remain in resiliency mode for some time to go.
And its operating environment, we've adapted how we serve and communicate with our clients as well as how we prospect for new clients in each of our businesses. This has resulted in engaging with clients and prospects more than ever and provides an opportunity for us to deepen our relationships.
The second quarter, our asset management business won several new mandates across different products and strategies, including receiving significant new inflows into our global money market Fund complex, which we've strategically positioned overtime.
And wealth management, we launched a new navigate the now digital marketing campaign, which is showing early promise and introduced the Northern Trust Institute a research center with 175 faculty covering 34 specialty areas designed to harness our expertise and experience and elevate our advice by bringing predictive insights.
To our clients.
In essence servicing we experienced a modest deferral implementations and new fund launches in the quarter. However, new business continues to be healthy as prospects become more comfortable conducting searches and due diligence virtually in the current environment.
Jason will discuss the low interest rate environment will continue to create meaningful headwinds and pressure our financial performance through this environment. We will stay focused on our mission beat our clients most trusted financial partner and on generating organic growth gains in productivity.
I feel it's also important to note that in Northern Trust, we have always been mindful that we have a duty to serve our communities as well recent attention to the civil social and economic in equities Black Americans face every day has provided us with an opportunity to reflect further on the service in the role we play to address in equity in our communities tore.
At this end, we've committed $20 million over the next five years to reduce the economic opportunity to get this opportunity gap encompasses all the obstacles created by race ethnicity, gender environmental and socioeconomic status that too often keep people from achieving their full potential our goal is to help shrink this gap by provide.
<unk> increased access to essential human needs food housing healthcare and education, so that each person may grow with dry personally professionally and financially.
Finally, I want to express my sincere appreciation for our staff, whose commitment excellence and professionalism throughout these extraordinary times has been exceptional now let me turn the call to Jason to review our financial results for the quarter.
Thank you Mike before I start I'd also like to take a brief moment to recognize all those affected by this ongoing crisis, especially those working on the front line.
I'll answer with you and we hope you and your loved ones remain safe and healthy health crisis, and cultural issues were facing the vote. Both big sadness, but also holds an optimism of what we can be I'd also like to express sincere gratitude to all the Northern Trust partners for their continuing hard work resiliency and flexibility in these uncertain times.
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 dive into the financial results for the quarter starting on page two.
This morning, we reported second quarter net income of $313 million earnings per share were $1.46 per share and our return on average common equity was 12.2%.
As you can see on the bottom on page two the macroeconomic environment with mix during the quarter.
Well equity markets performed well during the quarter 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 were unfavorably impacted by the lagged market performance interest rates have of course declined significantly with one month and three month LIBOR rates down.
Finally, as well as versus the prior year.
Let's move to page three and review the financial highlights in the second quarter.
Year over year revenue on an F. T basis was flat with non interest income up 4% and net interest income down 11% expenses increased 3%.
Provision for credit losses was $66 million in the current quarter net income was down 20%.
The sequential comparison revenue declined 5% with noninterest income down, 4% and net interest income down 9% expenses decreased 3% net income declined 13%.
Provision for credit losses $66 million during the quarter was primarily due to an increase in the reserve evaluated on a collective basis, driven by downgrades in the portfolio and more severe projected economic conditions.
The largest increases are within the commercial and institutional and commercial real estate portfolios.
Underlying credit metrics remained strong during the quarter with net recoveries of $2.6 million and a 6% decline in nonaccrual assets, which totaled $99.4 million at quarter end.
Return on average common equity was 12.2% for the quarter down from 15.9% a year ago and 13.4% in the prior quarter.
Assets under custody administration of 12.1 trillion grew 7% from a year ago and increased 11% on a sequential basis.
Assets under custody of 9.3 trillion grew 9% from a year ago and increased 13% on a sequential basis.
Assets under management.
Or 1.3 trillion up 7% from a year ago and up 12% on a sequential basis.
Let's look at the results in greater detail starting with revenue on page four.
Second quarter revenue on a fully taxable equivalent basis is $1.5 billion flat compared to last year and down 5% sequentially.
Trust investment and other servicing fees, representing the largest component of our revenue totaled $961 million and were up 1% from last year and down 4% sequentially.
Foreign exchange trading income was 71 million in the quarter up 18% year over year and down 20% sequentially increase compared to year ago is driven by higher volatility and increased volumes, while the sequential decline was mainly due to lower volumes.
Remaining components of other noninterest income totaled $102 million in the quarter up 38% compared to one year ago and up 16% sequentially.
Securities commissions in trading income increased 41% compared to a year ago and was down 21% sequentially.
The year over year growth was driven by success within our integrated trading solutions product as well as higher referral fees and interest rate swaps. The sequential decline was driven by lower interest rate swap activity in core brokerage.
Other operating income increased 46% compared to the prior year and 64% sequentially. Both increases were impacted by higher income expense associated with supplemental compensation plans at a higher market value adjustment for seed capital investments, partially offset by higher visa swap expense.
The year over year performance also benefited benefited from income related to a bank owned life insurance program that was implemented during 2019.
Higher income on the supplemental compensation plans resulted in a related increase in staff related expense within other operating expenses.
Net interest income, which I'll discuss in more detail later was $380 million in the second quarter down 11% from one year ago and down 9% sequentially.
Let's look at components of our trust investment fees on page five.
For our corporate and institutional services business fees totaled $566 million in the second quarter and are up 3% year over year end down 1% sequentially custody and fund administration fees. The largest component of CNS fees were 376 million up and down 2% year over year and down 5% on a sequential basis.
The year over year performance was primarily driven by unfavorable lagged markets and currency translation, partially offset by new business and transaction fees. The sequential decline was primarily driven by unfavorable lag markets as well as a decline from currency translation, partially offset by new business and transaction fees.
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Assets under custody and administration for sand I ask clients were 11.3 trillion at quarter end up 7% year over year in up 11% sequentially the year over year performance reflected in new business and favorable market impact, partially offset by unfavorable currency translation.
The sequential performance was driven by higher market levels, new business and unfavorable currency translation recall that lag market values factor into the quarters fees with both quarter lag and month lag markets impacting our C and I ask custody and fund administration fees.
Investment management fees in CNS of 128 million in second quarter were up 16% year over year end up 6% sequentially. Both the year over year and sequential performance was driven by strong flows within our money market funds.
Assets under management for CNS clients were 5.9 hundred $54 billion up 8% year over year and up 13% sequentially. Both the prior year and sequential comparisons were impacted by strong flows.
As well as higher markets during the quarter.
Similar to custody and fund administration fees note that lag market values factor into CNS investment management fees.
Securities lending fees or 27 million during the quarter up 25% year over year in up 17% sequentially. The year over year increase was primarily driven by higher spreads and slightly higher volumes, while the sequential increase was primarily driven by higher spreads, particularly in the beginning of the quarter.
Securities lending collateral was 166 billion at quarter end in averaged 167 billion across the quarter.
Average collateral levels increased 2% year over year and were down 2% sequentially.
Moving to our wealth management business Trust investment and other servicing fees were 395 million in the second quarter and were down 3% compared to the prior year quarter and down 8% sequentially, both a year over year and sequential performance were impacted by unfavorable lag markets.
For the year over year comparison, new business, partially offset the market declined both market lag and quarter lag asset levels impact wealth management fees.
Assets under management for our wealth management clients were 304 billion at quarter end up 4% year over year end up 10% sequentially.
The year over year growth was driven by net flows while the sequential increase was driven by favorable markets and net flows.
Moving to page six net interest income was 380 million in the second quarter and down 11% from the prior year.
Earning assets averaged 125 billion in the quarter up 18% versus the prior year.
Average deposits were a $111 billion and were up 24% versus the prior year than it is net interest margin was 1.22% in the quarter and was down 39 basis points from a year ago.
The net interest margin decreased primarily due to lower short term interest rates as well as mix shift within the balance sheet.
On a sequential quarter basis net interest income was down 9%.
Average, earning assets increased 13% on a sequential basis the growth in the balance sheet was driven by 17% sequential increase in average deposits. The net interest margin declined 29 basis points, driven by the impact of lower rates as well as mix shift within the balance sheet.
Looking at the currency mix of our balance sheet for the quarter U.S. dollar deposits represented 71% of our total average deposits. This was up from 67% one year ago and up 69% in the prior quarter.
As we look at the third quarter, the impact of lower rates, particularly LIBOR.
We will be more fully reflected in our run rate both one month and three month LIBOR has come down significantly from their second quarter averages based on our current view of the balance sheet volume and LIBOR levels continuing at the current levels. We expect third quarter net interest income to be down 13% to 16% on a sequential basis.
Turning to page seven expenses were $1 billion in the second quarter and were 3% higher than the prior year and 3% lower than the prior quarter.
Compensation expense totaled $460 million, it was up 1% compared to one year ago and down 8% sequentially.
The year over year growth was driven by higher salary expense due to staff growth the base pay adjustments, partially offset by lower cash based incentive accruals and lower long term performance based equity incentives.
The sequential decline was primarily driven by lower costs associated with long term.
Performance based incentive compensation due to divesting provisions associated with grants to retirement eligible employees in the prior quarter.
Delta year over year, and sequential comparisons were impacted by lower payroll taxes and lower medical costs.
Year over year comparison was impacted by higher returns retirement costs relating to pension expense.
Outside services costs of $176 million were down 5% on a year over year basis, and down 9% sequentially. The year over year decline was driven by lower costs across a number of categories, including data processing third party advisor fees consulting and sub custodian fees, partially offset by higher.
Technical services the sequential decline was primarily due to lower technical services costs and third party advisor fees.
Equipment and software expense of 164 million was up 12% from one year ago and up 1% sequentially.
The year over year growth reflected higher depreciation and amortization and software support cost. The sequential increase was driven by modest increases in software and equipment rental support and maintenance cost.
Occupancy expenses $60 million increased 18% from year ago. It was up 17% sequentially the year over year growth was driven by higher rent and the building operation costs related to our workplace real estate strategies.
The sequential increase was primarily related to a 7 million dollar reduction recorded in the prior quarter, resulting from a lease renegotiations.
Other operating expense of 86 million was up 12% from one year ago, 39% sequentially.
The both of the increases were driven by higher staff related expenses and higher charges associated with account servicing activities, partially offset by lower business promotion expenses due to reduced business travel.
The higher staff related costs were related to an increase in supplemental compensation plan expenses and resulted in a related increase in other operating income.
Turning to page eight our capital ratios remained strong with our common equity tier one ratio of 13.4% under the standardized approach and 13.9% on that the advanced approach.
Second quarter increase in the common equity tier one ratio was driven in large part by a decline in risk weighted assets as financial market conditions stabilize versus Q1.
Additionally, the absence of share repurchases allows further capital accretion from net income and other comprehensive income from the investment securities portfolio.
Our tier one leverage ratio was 7.6% under both standardized and advanced approaches.
During the second quarter, we declared cash dividends 70 cents per share totaling $148 million to common stockholders.
As announced yesterday, our board of directors approved our third quarter dividends of 70 cents per common share.
As a result of the stress test published by the Federal Reserve at the end of June our stress capital buffer requirement for the 2020 capital plans cycle was set at 2.5%.
The 2020 stress capital buffer is effective October one 2020 and result in a common equity tier one capital ratio minimum requirement of 7%.
It's times like these that show the importance of a strong capital base and liquidity profile to support our clients activities. We continue to provide our clients with the exception service and solution expertise they come to expect.
Our competitive positioning wealth management asset management and asset servicing continues to resonate well in the marketplace.
Thank you again for participating in Northern Trust second quarter earnings Conference call today, Mike Mark Loren and I would be happy to answer your questions. Jennifer We please open the line.
Thank you.
A question please.
Pressing star one.
Keypad.
If you are using these speakerphone. Please make sure your mute function is turned off to a liar signal to reach our equipment.
Hi, yourself, one question and one follow up.
Again press Star one to ask a question.
Well pause for just a moment hello, everyone and opportunity.
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We'll go first to Alex Blostein with Goldman Sachs.
Alex.
Hi, Good morning, guys. Thanks for taking the question.
I guess my first question.
Related to money market funds I'm curious you guys can give us your latest thoughts on outlook for money market fee waivers and doesn't look like there is really anything in the quarter, so far but clearly rates have come down quite unusual so to train the maybe as we think about akorn prevailing market rates and second quarter.
Any markets on balances. If you are kind of go through the repricing mechanism can you give a sense with a few areas could be as we look out in next few quarters.
Sure so personal you're right the quarter doesn't have a lot and so let me give you a couple of facts and then I'll get to.
What the outlook could look like so first of all in second quarter waivers were less than half a million dollars.
As we think about the current run rate as we sit today.
There are about two and a half million dollars a quarter.
That said, we're we're going to start to see this ramp a little bit as the portfolio gets repriced and so as we look out to the end of fourth quarter and even into next year assuming rates stay the way. They are today, we could see waivers getting in the 20 to 30 million to.
Our a quarter range now.
Those are the facts I also wanted just to provide a little bit of significant framework to your question about how people should think about it. We've we've had a lot of growth in the money market Fund business, obviously, we talked about that earlier and even if you look at the Treasury fund that's among the top three in size and investment returns in the.
Traverse it's grown from it was at $55 billion at year end and it's about $90 billion today overall.
Overall, the complex has about 30 funds and they totaled $275 billion to $300 billion in aggregate.
Now that whole complex is geared toward a very institutional and high net worth client base, that's very important to realize because it means the pricing on average is lower than our retail complex.
That complex of funds has.
A fee rate ranging in general think about 15 to 20 basis points. There are exceptions on either side, but thats, where the bulk of the assets are.
If I take those 30 funds and Buoylink in boil it down to the ones that are most likely to have waivers, there's really a handful or half dozen funds that have both large a win but also have yields that are within 10 to 15 basis points to the fees.
Those handful of bonds totaled $125 billion, plus or minus the gross yield on those funds is about 30 basis points and the stated fee on them, probably 20 basis points now each one of those strategies is different and expected yields and fees and so.
That's just a high level guide to give you a sense of how the the overall complex might come into fee waiver mode as they reprice the portfolio, but thats all given two caveats one the existing yield curve stays the way. It is and secondly, there are times when we will.
Do promotional pricing in some of those funds.
The analysis I just went through with you excludes that this is purely waivers based on.
Yield curve coming down.
Great that's a deficit for how right Mark.
Okay, and just I guess to clarify the 20 $30 million you mentioned, that's that's a gross revenue and back are there any expense offsets.
That that are kind of.
More and more directly related to that before you guys, taking any action from an expense perspective that we should be backhaul as well or the revenue back is putting Mexican tax effect.
Super minor.
For minor.
Should really think about that that gross impact as being pretty fall.
Great.
Second question around that and I are again appreciate the guidance going for quarter.
Given the short term incur a northern balance sheet and just curious I think about how the trajectory could evolve from there. So is most of the repricing.
Don Center in Q3, so that should really be pretty costs close control trial and I are.
Or you guys think theres incremental pressure now thanks.
Sure so.
Now on provision in general all it actually let me give a couple of numbers and that I actually think it'd be helpful to provide a sense of the process because I think thats important did a good and bad Cecil is that it's a very forward looking mechanism and so let's let's try to separate the credit results from.
The most factual to the ones that are more for forecast dependent so started on the factual side and on the extreme you'd just say, we're going to look at we're going to get charge offs.
And we had $2.6 million in net recovery in the quarter. So charge offs were actually benefit of 2.6 million.
If you come in from that spectrum. The next thing you'd look looked at from a quantitative only factor basis would be wouldnt nonperformings look like and even there nonperformings were down down $4 million in the quarter and they currently are less than $100 million on a 35 30 $35 billion loan portfolio. So it's.
They just 30 basis points of loans.
And then next even look at delinquencies and delinquencies in the period were actually down and so all of the factors that are most quantitative only our all in very good shape.
But then you start to look further down the spectrum.
What are the qualitative related factors and what drove our increase in provision.
In our overall provision for the quarter really two big factors one downgrades in the portfolio that added about $40 million to the reserve and then secondly, the macro scenarios, which added 20 to 25 million and so.
All of the increase that we've had is related to more of these qualitative factors and even the downgrades are instances, where our credit team is looking in trying to be forward looking about organizations industry dynamics that they think are going to reflect credit quality. So those that's a background.
And on how the provision number wound up with Lauren you spent a lot of time is why do you get 30 seconds on on governance and process.
Okay, and the provision methodology and go through a very robust governance process, which killed on best practices that will develop in other internal forecasting exercises governance covers everything from the data that is used to.
Validation of model to the forecast assumptions to the outlook for vision outside there are many levels even challenged out the quarterly processes participation from multiple disciplines around the company such as economic research credit risk Treasury.
Foreign exchange controllers and expertise markets.
Unfortunately had ample opportunity to pressure test process over the last two quarters, and we feel confident that the governance robot.
This is a reserve that not only well supported but also the thoughts as to the changing economic.
Well go next question.
Yes, we'll go next year can Houston with Jefferies.
Okay. Thanks, guys good morning, Jason.
Question on net interest income so understanding the reset of lie bore into the third quarter and the guidance that you gave for can you give us a sense of whether or not third quarter gets your towards stabilization of Eni and how we get rates hold Sam Moore from here.
Do you have any thoughts on how third to fourth on book. Thanks.
Sure.
We have looked at that frankly closely and the answer is it does get us very very close to flattening out and.
So let me just provided couple of thoughts to give you a little bit more color on that guide we take the 380 that we announced in the 13% to 16% down to gives you kind of a $50 million to $60 million down.
I think it's important we will realize how how much LIBOR has come down in first quarter. It averaged 139.
In April it was 69 basis points in May was 19 basis points.
In June it averaged 18 basis points, so really flattening out and as of today, it's kind of it that 18 basis point level as we sit mid July and so.
Very much flattened out at 18, but then you got to compare that to what that the the the average was across second quarter and the average cross second quarter was was 36 basis points and so you just think about it.
The loan portfolio of 33 $35 billion.
We're assuming some of that comes out and we've already seen you can see from the average.
That's in the release and the period end and I can tell you today, we're sitting just under 34 billion in loans and so if we come down a little bit more we might see two two and a half maybe $3 billion in loan decline you take.
And 18 point basis, 18 basis point differential between second quarter, and third quarter on that and that and in of itself is going to get you over $10 million in the 50 million dollar decline and then.
You start to look at just the impact is.
Yes.
The volume coming down 10.
Rates in itself again, 10, and then you so but just in the loan book you'd end up with $20.020 billion in decline.
And then you got to look at the Securities book and there is you got $50 billion to $55 billion in securities that are repricing and the dynamic here that you're getting at is that a lot of the repricing is actually starting to happen now worse, we're experiencing now and weeks.
Specter less going forward and so we think third quarter is going to be the significant decline and then we should start to see very very much.
Leveled off maybe not a 100%, but but very close to fully leveled off going forward from there.
Okay. Thanks for that color and on the on the expense side.
With the decline in NII and then the fee waivers coming that's a lot of kind of high margin revenues that won't be around next year on a run rate base. Since you guys have done a good job getting the cost growth rate down to 3%, but how do you think about that dynamic not so much in operating leverage for just about absolute cost levels and cost growth and what levers are there to to Paul how you're thinking about path.
Well thank you.
Sure so.
Maybe looking at page seven of the release of kind of.
Sure I always go to just think about how things are are moving and.
If you look at that.
First of all you get a sense in to your point things have on an aggregate level leveled off at 3%.
I will say in general as you know we went through a very full replan.
That stripped out.
Call it around $50 million in expenses just to be just to be open about it and some of that was predictable from the macro environment, but some of it wasn't.
We then went through a full capital investment Replan and then finally, just this past week, we reviewed with our board strategic Replant strategic plan replant and so we're taking in this environment extremely seriously and devalue for spend we hit it the $250 million target was read.
But the foundations of that are far from over we're talking about it all the time, it's very much embedded culturally and you are here I think you'd get a sense the priorities here around.
First in this resiliency mode that Mike talked about safety to resilience and preparation in support of clients and then third expense discipline. So.
You look at page seven other release in a details in the NIH and you can see how a lot of these line items have flattened out even comp which is down a lot you take out the equity incentives from first quarter.
Offset by base pay adjustment that line item flattening and employee benefits you see across the board.
Some some leveling in these areas and all I can say is at this point laser focus on it value for spend has not stopped and we understand that in this environment organic revenue growth is going to be it's going to be hard. It's money in motion is less there are less RFP that are going to be tossed into the environment and so.
We have to ensure we're focusing in a laser like fashion on expenses.
Got it thanks.
Okay.
Well go next to my carrier with Bank of America.
Hi, good morning likely in the questions all right.
You need you started the given the current environment in the work from all just trying to get you just some.
Color on the impact you guys, having on client activity.
Transactional activity is strong, but more in terms of GE business.
You mean, if you're seeing significant delays or at the pipeline still building and its just.
I kinda prolonged implementations.
Just trying to get a sense line.
Much of a drag you environments, creating new business.
Sure Yeah, maybe I'll start with a couple headlines and then the really good to hear from Mike on Us So Peter on if I just split it on the wealth side.
Lost business is down and I think thats.
Really important to realize not that it was ever large but it just gives a reflection that everything we've done engagement. We've had with clients has cemented relationships. They are doing weekly online client events that are called insights goals driven wealth management is a great technology to be able to engage with clients very key.
Customized approach in lifetime on video and it's going well if I could just one anecdotal advise us talking it as the head of our Central region last night and he is talking about this.
Ultra high net worth client that has a split relationship with us in one other institution they had a session with and explore how to take advantage of.
Of the low low market values and low interest rates. They worked very complete complex that unique wealth transfer opportunity with his kids and grandchildren.
Executed it was thrilled he's consolidated his whole relationship now at northern because he feels like where the trusted advisor any wants us to have a better lens. The news whole financial picture and then CNS side, you mentioned really early even things like integrated trading solutions starting to come onboard the pizza.
Where would you talked about 10, Onboardings 10, new wins, just in that environment and so some good news there, but also some caution about what the the future holds in terms of RFP.
Sure I would just add to it that if if you start with the question of whether Theres still a need for the service and what we do and the demand for it.
Frankly, thats not only there but in many respects has gone up in this environment. So there's pressure on every.
Company and institution, that's out there and so just as we talked about how can we become more efficient how do we rethink our operating model well our clients are doing the same thing and then often present opportunities for us primarily around things like outsource services, whether it's on the trading front or it's in the middle office. So the demand.
Randy is there for the services and then second I would say static analysis would tell you that the environment changes, but the way that we offer our clients and prospects go about things don't change, but the fact is a matter is people adapt and so in the same way that I.
We had northern.
Went from doing things in person and then maybe conference calls now as you know everything's on video and the same way with the search process. The RFP process. The due diligence process. These activities have moved online or in some of virtual so that they can continue so as much as it's a different invite.
Firemen and it presents new challenges I would say that we've changed.
The prospect in client base, a change and as a result, it's just a different set of opportunity.
Okay. That's helpful and then.
A follow up just given your strong capital position and then some clarity on the Greg structure.
What's the macro backdrop, you does get better in the industry has more flexibility clarity sorry, you guys thinking about capital management, including maybe STP, one internal our management minimum or buffer.
Maybe investing in new growth areas in capital return.
Sure low.
We always take our capital levels not just is single topic, what we think about it in conjunction with the with our overall engagement strategy, our our approach to the market and so we want to ensure that as we look across.
Peers, that's one lens to make sure we look good on that basis and then we also are talking thinking about the regulatory environment and the optics of what to do there and then we have very meaningful engagement with our board of directors and about what we should do from a capital perspective, and I think even this past.
Past several months is given indication that coming into an environment like what we experienced with strong capital levels. It helps us not just in a short run but it provides really good illustration for clients and prospects. It was strong balance sheet means for us as we compete in the market.
Okay well call.
Well go next to Jim Mitchell with Seaport Global.
Jim.
Hey, good morning.
Just a quick follow up on your thoughts on deposit trends so far in a quarter I hear your sort of and I guide overall, but help maybe you can help us more specifically on the balance sheet.
That seems like deposits have been sticking.
And how you think about the prospects for growth and NCR rate environment.
Yes, and so.
So first of all on that you're right deposits are sticking and I don't think I mentioned earlier, but even post close of the period deposits or are sticking at the same level. So if you. If you look at our balance sheet and add the interest bearing deposits plus the DTA.
You should still you'd see us somewhere 110 range and and 110 120, we're still actually at that level now thats in some ways. The good news and that drives the size of the balance sheet for sure that determines how we're going to end the quarter at $151 billion. It.
As much less of an impact on Eni and NIM.
On the on the margin as we have that incremental dollar coming in it's often going to go into Iowa. We are at the fed at 10 basis points or even if it's an another currency, it's going to go to a central bank deposit with not a lot on it and that's why I keep coming back to trying to encourage piece.
We also look at and start to predict what's going to happen with loan volume and rates and Super importantly, the via the info. The mini walk forward I went through earlier super dependent on rates being the way. They are today everything we're talking about is now and we were per day.
Acting accurately a decline in LIBOR as we said 90 days ago at this point, we're assuming that lie before is flat from air and it has leveled out hopefully doesnt compress relative to fed funds, if that happens things to change, but the deposits will absolutely impact.
The size of the balance sheet much less of an impact on NIM and Eni.
Okay.
Makes sense and then maybe just a question on wealth I know that's an area that you guys were targeting for accelerating organic growth I think if you look at this quarter the market impact it was hard to kind of see a lot of organic growth there.
Hi.
I guess, maybe just give us an update on how that as that effort to kind of accelerate growth and wealth is working maybe it's being slowed by by co bid.
Okay. That's it just curious.
Well to start we tended we tend to look at organic growth on a year over year basis, and much less on a quarter to quarter basis, just because it's such a tight timeframe on on close cycle that happen over longer period of time, secondly to your point within wealth specifically the seat.
In.
He to takeaway is that the GE AFFO businesses continuing to be the driver of growth there and the regions are growing less quickly and over short periods of time might even show areas of decline nothing that we're worried about from a strategic perspective, but but with.
And well Gee FFO is certainly the area is continuing to grow more.
Okay. Thanks.
Sure.
Well go next to Brian the Dallas with Deutsche Bank.
Great. Thanks, good morning folks.
Maybe just a lot of color on the.
Distributor so I appreciate that Jason just one question on that for the loan.
Yields repricing I know.
They mostly I believe repriced to one month LIBOR or predominantly and.
Henry price I think within a quarter, but if I recall, some do reprice with a lag of.
I think three to four quarters, but if you could just talk about that and whether we could see some.
Repricing down the road based on that and if that's true.
Yes in general you think about that portfolio is about 70, 70, 570, 75% floating and against either 30 day, LIBOR 90 day LIBOR or prime.
And you mentioned yield at the beginning which is something I actually I'm not sure I mentioned earlier, but I think it might be helpful. Does I would imagine you guys are going to trying to predict dissect the balance sheet.
Think about a yield in that in that component of the balance sheet very roughly around 200 basis points and so as we as you think about the impact of converting if we if we do have a decline in loans and we see loan volume coming down and you see.
I think on Ned if that has to be reinvested in Iowa. We are just think about.
That type of difference in yield.
Yes.
Right.
Yes, but sir.
Yes.
Okay Thats why this that's why this dynamic of looking at loan volume is so important.
Because the conversion of a dollar of loans to the alternative investment is significant.
Right right I mean could kind of and then can be just spoke to some of the.
I I call them, one off items, but things that influence curve other operating income and.
Our operating expenses, just trying to get a sense of what you are more normal run rate is for those who.
Instead of comparing year over year quarter sequential quarter growth basis, maybe just constructive on absolute basis for it.
Drove those.
Theres two line items.
56 million and a half and the 80.
5.8 million or any other expenses.
Yeah, well I'll do the new will do the the expense side Mark maybe you can do the.
The revenue side, but on the other operating expense side, we've got the supplemental comp there and.
And then we've also got it when we have account servicing losses, that's where that line item shows up and then business promotion travel entertainment. Those are the big buckets I think about for other operating expense Mark is going to do the other side, yes, Brian its mark I, one thing to keep in mind is in the first quarter.
If we talk about other operating income we had a negative drag from the seed investment mark to market that kind of came back this quarter.
Similarly, with the supplemental compensation plans that impact both income and expense.
A negative last quarter because of the Mark a pretty significant positive this quarter. So one way again I think we've talked about this a little bit and one way you can almost average looked at the first and second quarter on other operating income more as an average but you do have other things like hedging and VSOE related things that happened there.
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If you were to look at the average over time and I think weve in it kind of holds true here you're about in the mid Fortys now that the.
Bully program that we put in place is at a full run rate as of the first quarter and continues to that and the second quarter.
If you if you stripped out the items, we've called out over time and looked at the average you are probably more in the mid mid Fortys, which is actually.
Close to what the year to date average for the other operating income would be as well.
At the seed capital positive Mark was how much number.
Okay.
Yes.
Yes.
Okay, and then just just left from the outside services.
I forgot to ask on that once you on that line item and anything onetime in there or basically right now from a run rate basis I guess.
Okay drop from Q to Q.
I wouldn't necessarily call out anything one time that line will move around certainly I think some of the some of that drag impacts we saw on the revenue side.
You know that are a little bit lag that benefited us and outside services to a certain extent this quarter.
So I don't know that I would look at this quarter as a run rate.
And Jason I don't know, if you would add anything to that but.
Nothing onetime necessarily to call output.
But certainly there were some things that when our way with the revenue length lines.
Third party advisor fees.
But nothing that.
We'll go next to Brennan Hawken with yes.
Hey, good morning, Thanks for taking my questions I actually just wanted to follow up a little on that because the outside services expense line looked a little funky it seems like what you're saying is.
That that be run rate. This is not the right run rate, we should instead as does that mean, we should instead look at like the average of the past four quarters and can you give a little bit more color on.
Some of the drivers of the downside to the quarter. It said like third party advisory fees is that what you meant mark when you said the lag effect as in there was a lag to the rally.
Yeah.
Right right I mean, there's a few things that we had some of the market data cost that we had were down.
Again, some of that ends up being timing some of our data processing costs.
We had consulting expense was down during the quarter.
So it's hard to.
It was a pretty favorable quarter. There, it's just hard to pin down, but thats, the new run rate going forward because those those will.
Have some fluctuation to them certainly consulting based on timing of engagements et cetera.
Okay, and then when we're thinking about.
Investing services and got some services and the strength there could you can you parse that out a little bit was that timing to or was there something more sustainable driving that.
You're asking about the increase in investment management revenue and CMS.
Yep.
Yes so.
As.
Two important dynamic I think is it's really is added I think to the base of business and.
So first of all that hinted earlier.
The treasury funds, but in that business. It's not just that we've had flows in the asset management business done a lot over the last five years to position the business for growth and the liquidity fall and first of all invest most everything starts and ends with investment performance and and their investment.
Performance has been top five over the last several months secondly size and.
Clients, there want to ensure that they're investing in a product in upon that Scott large size to it so that they don't represent a high percentage as they feel better about the liquidity fund the treasury funds added $90 billion. They worked on cut off times to ensure they are more competitive they hired a dedicated distribution team.
They launched a portal and that's up to.
Almost $10 billion in assets and.
Decent amount of that as with northern product and then they re approached the third party portal. So im sure when treasuries are looking at opportunities to par cash we look very appealing and so the if you think about the increase that we've had there.
The treasury and focusing a lot on the treasury funds, because that's where a lot of the growth has happened, but just in the last quarter is been.
As a 39 $40 billion in growth into those strategies.
About 34 that was on the institutional side and those funds or 15 to 20 basis points, and so very very meaningful and.
And now the flip side to it is those are part of that watch list that I referenced earlier that could be part of fee waivers and so we're.
Try to maintain humility about what that might look like but very good news is that the base of business. There has increased significantly.
Okay and thanks for predicting my follow up about the fee waiver. So [laughter] appreciate.
[laughter] absolutely.
Well go next to Betsy Graseck with Morgan Stanley.
Hi, good morning.
Can you hear me.
Yes, we got you all.
Okay. Thanks.
I had two questions first on deposits I think average deposits in the quarter was up somewhere in the teams, but end of period with down I know you traditionally say like typically say count don't look at you know and curious I wanted to understand how we should think about deposit growth over the next quarter at least if not for it.
If we could talk about.
The drivers of whats deposit growth has been seem to be seating. So I would think it slows down but we'd like to get your understanding about.
Yeah, So you're right we were kind of in the in the teens and one in the one teens and it's held in there and watch it daily basis, and we're still seeing deposits at around that level and so.
Often we will see a significant decline from quarter end and.
Certainly saw some come down, but we've seen at level off.
Around that level, we are still anticipating that over time, our clients will look to put some of that money to work and more risk on trades and come back to what I mentioned earlier that is it is important to watch to the extent you're trying to predict the size of the balance sheet, but those.
Positive, particularly that layer that we think is not necessarily a sticky doesn't have as much of an impact on eni or NIM.
Yeah, and what percentage of the deposits as that in your opinion, that's not a sticky.
That's really hard to tell I mean, it's.
And.
Go back to maybe the beginning of the.
Of the year and we saw client deposits in the mid Eightys and billions and so that absolute worst case scenario you could take the delta there, but a lot of our clients are clearly exhibiting more stability and stickiness at least thus far.
Yes, because stickier than more operational you can take duration with that so I guess I'm wondering how much of the deposit inflow that you've gotten over the past quarter. So has been deemed operational and put into duration versus you know over the next quarter or to it went there be incremental.
Paul opportunity or extend duration with deposits since they stick around more than collectible.
Some of that determination of whether their operational or not is actually a time test and we talk about those deposits having to season and so it's we can make a prediction or determination absent just time, but you're right in that at a point.
We can start to leg out on those or.
Go into non HQ outlay, and think about term and credit and and and achieve more at that point. We did talk on the last call about the fact that or you want it to be we wanted to be patient about doing that to ensure we weren't in a situation where we couldn't be there for clients.
This, particularly as loan demand increase significantly.
Thanks, and what kind of time tested that like is it you know three months six months is definitely feature phones.
Depends on.
It is different tasks and also their test.
Different if it's a retail deposits versus if its institutional and so.
Yes, so there's a range depending on which type.
And even within the institutional side the type of deposit or also influences the categorization of it.
And then well side to side, so theres a lot of different factors that go into it it's not it's not as it's it's not a single test just based on time, but.
But should my takeaway be there is opportunity to extend duration and deposits to meet the time test as we go into for Q4 Q or.
Pardon not.
Yes, there's opportunity there I.
I certainly wouldn't think about it is the 110 minus 85.
And that that volume level, but there would be some opportunity to identify situations, where we would want to extend more.
And then just my other follow up question.
Is regarding just agency RMBS and I think about the securities book, and where spreads could compress front Arab agency RMBS kind of this the top left because we recently got too.
I think historic lows and in that.
Mortgage rate.
So I'm wondering what.
How much did agency RMBS yield compression and pack to your second quarter results. How much do you think it is.
Pat how much is it contributing to the outlook you have for third quarter and a decline just get a sense that would be helpful.
Sure.
Sure we've done that level of detail about the exposure in the yield in that book.
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So wouldn't want to comment on it.
Okay.
Right. Thank you.
Well go next to Glenn Schorr with Evercore.
Hi, Glenn Thanks, very much Hello there.
Okay. So.
Let me hear your loud and clear on your comments all around net interest income little loan demand and a low yields in the public markets, but.
And you're not alone there, but many investors, let the pension fund sovereign wealth funds insurance companies. They look to the private credit markets for a source of yields you might have to give up some liquidity, but not necessarily taking on west credit.
You are probably the most conservative management team I've ever met but curious if you put a lot into the private credit markets.
Yes, we look at a very broad range of asset classes that we consider for investment and.
At this point, there's such a focus on ensuring that were we are there for clients were not just we're not taking incremental risk because the yield curve, it's come down and I think that's the that's the prevailing theme as we set and things from an investment strategy perspective.
That said, we're constantly thinking about risk and return and also the categorization of different asset classes and whether they are aged la non HQ all a level, one two and and trying to come up with the mosaic of of thinking about and evaluating those opportunities on a on a risk and.
And regulatory.
Adjusted basis.
But at this point you want to make sure we're not.
Looking to grab yield.
Just because the just because the yield curve has come down.
Yeah.
Okay.
Just a follow up.
You mentioned that growth in SEC lending on them and we can see that still up year on year quarter on quarter.
You mentioned.
Spreads as being a.
A big impacts.
Some of the spread there have come in can you talk maybe about an exit rate or forward thought on on on SEC lending for both spreads and volumes as we as we look forward from second quarter.
Yeah, I mean, it's interesting I.
You're right at the beginning of the quarter spreads were much lighter and and frankly volumes weren't great and then as we got later in the quarter. The spread started to spend that volume came back I think as clients felt more comfortable and so it's a tricky dynamic to triangulate I think that I think of.
All items in there and the spreads are actually correlated and so it's hard to give a sense right now of where that ends up landing Mark I don't know if you have other thoughts one thing you can look at is three month LIBOR versus overnight.
The plot of that out you would certainly see that like we've been saying earlier in the quarter, particularly April was a significant benefit there and then where you're exiting the quarter is certainly at a much tighter spread there so that that would be one way to look at ocwen.
And our view is.
Lot of or at least a little since may and May and June both 30, and 90 day LIBOR or flattened out.
Yeah, Okay. Thank you for all that.
Right.
We'll go next to Rob Wow Catholic Autonomous research.
Rob Good morning, guys little bit more of a big picture question I think back to the fourth quarter earnings call. When you talked about of demand for to increase scalability from some of your larger clients and I was hoping you could give us an update on your efforts there and what you've done and are doing to kind of meet that demand.
Sure, it's Mike I'll take that.
Absolutely a critical objectives for our business I'll say overall, but particularly within asset servicing and so we are also battling out everyday to make sure. We can provide continuity of service for our clients as Jason and Mark has gone through here in trying to navigate.
The financial environment, but at the same time, we are looking forward to 345 years ahead with the business model trying to determine how can we not only take care of clients and what their needs are but build in more productivity.
To the business model and as you have highlighted that's going to be through scalability, particularly in asset servicing and on that front.
We've made investments.
That have.
Begun to change the nature of the way that that business will operate and when I mean by that is.
Primarily our investments have been in what we're calling matrix or matrix platform on which essentially is a a data driven architecture I that essentially takes all of the data in.
Through one place if you will.
Ensures that that is clean accurate data if you will and then from there were able to utilize it in multiple platform for multiple services.
And it also shifts the service model to one that right now.
Requires.
Fair number of employees to provide that service to a model, where there's more either automation and how things happen how their process, but also self service.
Okay and self service in a way that is a positive from a client satisfaction perspective that they don't need to call in or faxon or E mail in.
A transaction or order or anything like that but rather they can put it in and it gets processed essentially straight through on so that improves both the efficiency.
What we're doing the scalability, because we can put more business on it but also the accuracy.
And consistency and reliability of how we process. So we're pretty optimistic on that.
We have rolled out.
Two releases.
Over the last several months here despite the environment so that continues to progress.
Thanks, Mike just quickly the integration you announced with Blackrock and Aladdin would use bucket, Matt as part of that scalability Golan and then I know, it's early but any sense for how clients are responding to the partnership's Paul.
Yeah, but broadly speaking I, absolutely would put that in the same it's part of the same strategy because what we're doing with Blackrock in that case is essentially further integration with Aladdin provider I and in which case.
By being more directly connected I it provides greater efficiency, so what's happening between.
Our platforms, if you will and Aladdin I is.
Directly linked I in which case you get the same types of benefits that I just talked about there.
Thank you.
Well go next to victory in Asia with JP Morgan.
Oh, Hi, hi, Thanks for taking my questions.
Quick question, which is just an update on the Northern Trust open.
Given the environmental.
Should we expect a similar kind of increase as guidance during the past any color on that and then I have a little bit circles.
Yeah.
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Headline as it wont see a significant decline relative to prior years and we typically see.
16, $17 million sequential increase and business promo as we look into into the into the quarter.
Sure.
Few thoughts on at one the tournament is going to be players only as you know.
Secondly, we don't get into specific cost around about the tournament, but with people should know most of the costs associated with the tournament are about television and the expenses related to tournament production and those actually aren't going to come down significantly and so and then the reality is.
The television ratings for PJ have actually been very very good and so there will be a modest savings as we think about reduction in travel and entertainment and some other things, but the reduction wont be meaningful.
[laughter].
Okay.
Still here sort of bigger picture question as it as I look out over the last say.
Yes.
If you would look Paul.
If you think about one luxoft asset servicing appliance or does that look blocked by type of client.
So funnel, so as long long hole vessels insurance vessels.
How's funds on off one of us waters that looks and there.
What does that change you've seen over the past year tool.
And we'll be at stuff decision.
So I'll take it and I'm going to do this effect without a.
Good.
Specific break down with the numbers and percentages of our client base because they don't have in front of me, but generally speaking over the last several years and that we continue through two last year.
The proportion of our business that is coming from asset managers as opposed to asset owners has gone up.
That's been a combination of just the business strategy overtime, but also because the demand of asset managers eyes for our types of services have been growing at a higher rate.
From a market perspective, and then also as you know we're taking share as we continue to expand that business. Both geographically, but also within particular segments. So geographically if you think about what we did in Luxembourg in Switzerland that primarily is.
Going to drive business with asset managers eyes, and then I, Switzerland is a mix between asset managers in asset owners. So so that's where our focus has been and that's where the greater growth has come from.
The thing I would say about the asset owner side and sub segments within that it really does vary with.
What's happening across the globe, just broader macro factors because as you would expect things like sovereign wealth funds.
And governments, we're working with them there there needs to.
To deploy investments into the economy changes over time versus their ability to invest those and its when they are invested globally.
That we see higher asset levels from them and it's when they deploy them into the economy that they'll reduce those levels. So it's just a higher level of variability.
Yeah.
And I would just sorry, just one other glass is just.
And then in the U.S.
Where the asset owners are largely pension funds.
That dynamic it's it's more of a share game than it is a market growth game and so there again, we've been able to picked up share, but you're doing it in a slower growing market.
Yes.
Mike enable clients to break this fall and build out and so Swansea 10, Ks I'm going to give us a sense.
Role going.
On on one of them all.
The fact that definitely something we can take onto to consider because obviously, it's something that we track closely. So if we can do it in a reliable way.
It's something we'll consider.
Okay. Thank you.
Sure.
Well go next to Brian, but though with Deutsche Bank.
Great. Thanks for taking my follow up I'm, just just wanted to come back to 'em expenses in the second half of those ranch with the Gulf.
But typically we do you see that season now seasonal increase in the second half and outside services and certainly equipment copper expensive just want to.
Check in and see if you still think that's the case obviously.
Because of an environment that could be fluid. This time around but just wanted to their check in on that and especially since before the downtick now I've got services second quarter.
Yes.
Couple of things, one you're right and that there are some there's some bounciness. So on one hand theres coded related expenses that are impacting things a lot. We've got investments to make there some of that will come through in capital that some of it will come through the income statement as Weve space.
Rent decently at this point and continuing to ensure that into resiliency mode. We're doing everything we can to make sure. We're there for client secondly, we want to make sure that we're investing appropriately and in a disciplined way, particularly around things like technology and inch.
Some of that will show up and outside services some of it shows up and in equipment and software, but some of it will show up in outside services and so this is we've got a high bar for where we're investing but the traditional.
View of what expense ramps look like in the third and fourth quarter I think are going to be less reliable. It's much more about what do we think is necessary to ensure resiliency and our strategy of being there for client.
Okay. That's good color and then just lastly, the I'm kind of provisioning.
And thanks for the of the color on that you talked about some internal downgrades across the book I guess it says we go into the second half as well if we if we do you have a situation where there's a second wave.
Of covered 19, that's you know that's that's now for not but worse then people were expecting.
Is that a significant part of your your credit assessment, even if you think the credit qualities are relatively good, but nevertheless could drive higher provisioning in second half.
You know we've run multiple macro scenarios and.
Some of those scenarios will incorporate that type of worsening or w. tight.
As opposed to.
Keith and so as things approach, we play with the weights of those factors and that has heavy influence on what the output is and so we monitor that closely if things worsen significantly just cycle, we experienced last quarter, frankly things things work worsen.
And from the end of March to the big to the beginning of April and this time, we haven't seen that type of dynamic shift between the ended the quarter and the time, we're talking to you, but there's so much time between now and then we're reliant on what those macro forecast look like and they'll always have influence, particularly in.
The Cecil environment on what provision looks like.
Okay, great. Thanks for over color on that I appreciate it.
Sure.
And at this time that no further questions.
Thanks, everyone stay safe and we'll look forward to talking to you about the third quarter.
This does concludes today's conference we thank you for your participation.
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Yeah.
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