Q2 2019 Earnings Call
Please standby we're about to begin.
Ladies and gentlemen, thank you for standing by good day and welcome to the Northern Trust Corporation's second quarter 2019 earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the call over to the director of Investor Relations Mark Bette for opening remarks and introductions. Please go ahead Sir.
Thank you Paul.
Good morning, everyone and welcome to Northern Trust corporations second quarter 2019 earnings Conference call. Joining me on our call. This morning are bit Bowman, our chief Financial Officer, Lorne, all not our controller and Kelly learned a hand from our Investor Relations team, our second quarter earnings press release and financial trends report are both available on our website at Northern Trust Dotcom.
Also on our website you will find our quarterly earnings review presentation, which we will use to guide todays conference call. This July 24th call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this call is the replay will be available on our website through August 21st.
Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor statement, what we say during todays conference call May include forward looking statements, which are northern trusts 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 results is subject to many risks and uncertainties that are difficult to predict I urge you to read our 2018 annual report on Form 10-K , and other reports filed with the Securities and Commission Exchange Commission for detailed information about factors that could affect actual results.
During todays 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 queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining US today, let me turn the call over to Biff Bowman.
Good morning, everyone.
Let me join Mark in welcoming you to our second quarter 2019 earnings Conference call.
Starting on page two of our quarterly earnings review presentation. This morning, we reported second quarter net income of $389.4 billion earnings per share were $1.75 and our return on common equity was 15.9%.
This quarter's results included $4.9 million severance related and restructuring charges within expenses.
This compares to 12.3 million in the prior quarter and 6.6 million one year ago.
Before going through our results in detail I would like to comment on some of the macro factors impacting our business during the quarter.
Equity markets performed well during the quarter, but were mixed on a year over year basis compared to the prior year. The S&P 500 ended the quarter up 8.2%, while the M.S.C.I.E. <unk> was down eight tenths of a percent on a sequential basis and that period markets were favorable with the S&P 500, and E indices, increasing 3.8% and 1.6% respectively.
Recall that some of our fees are based on lagged pricing and those comparisons were favorable on a sequential basis, but mix versus one year ago.
On a month lag basis, the S&P 500, and eco were up sequentially, 6.7% and 4.9% respectively.
On a year over year basis. The S&P 500 was up 6.7, while April was down 2.1%.
On a quarter lag basis, the S&P 500, and deeper were up sequentially 13.1, and 9.6% respectively.
On a year over year basis, the quarter lag S&P 500 was up 7.3% well, but was flat.
U.S. short term interest rates were lower during the quarter on average as seen by the sequential declines in average one month and three month LIBOR of six and 18 basis points respectively.
Currency rates influenced the translation of non us currencies to the U.S. dollar and therefore impact client assets and certain revenues and expenses.
The British pound and euro versus the U.S. dollar ended the quarter down four and 3% respectively compared to the prior year the year over year declines favorably impacted expense, but had an unfavorable impact on revenue.
On a sequential basis, the British pound ended the quarter down 2%, while the euro increased 1%.
Let's move to page three and review the financial highlights of the second quarter year over year revenue was flat with non interest income down slightly from one year ago, and net interest income up 1%.
Expenses increased 1% from last year, the provision for credit losses was a credit of $6.5 million in the current quarter compared to a provision of 1.5 million one year ago.
Net income was flat year over year.
In the sequential comparison revenue increased 2% with non interest income up 3% and net interest income down 1% expenses declined 2% compared to the prior quarter.
Net income increased 12% sequentially.
Return on average common equity was 15.9% for the quarter down from 16.5%, one year ago and up from 14% in the prior quarter.
Assets under custody and administration of 11.3 trillion increased 6% compared to one year ago and were up 4% on a sequential basis.
Assets under custody of 8.5 trillion were up 5% compared to one year ago and up 4% sequentially.
Both the year over year and the sequential performance was driven by favorable markets and new business.
Partially offset by the impact of unfavorable moves in currency exchange rates.
Assets under management were 1.2 trillion dollars up 3% on a year over year basis, and up 2% on a sequential basis.
The year over year performance reflected higher markets, and new business, partially offset by lower period and securities lending collateral.
The sequential increase was driven by higher markets, partially offset by outflows.
Let's look at the results in greater detail starting with revenue on page four.
Second quarter revenue on a fully taxable equivalent basis was $1.5 billion flat compared to last year and up 2% sequentially.
Trust investment and other servicing fees represent the largest component of our revenue and were $955 million in the second quarter up 1% from last year and up 3% sequentially.
Foreign exchange trading income was $60 million in the second quarter down 23% year over year and down 9% sequentially.
Both the year over year and sequential declines were driven by lower volatility as well as lower foreign exchange swap activity at our treasury function.
Volumes were also down on both a year over year and sequential basis, but the mix of trades at a favorable sequential impact.
Other non interest income was 73 million in the second quarter up 3% compared to one year ago and up 15% sequentially.
The year over year increase was primarily due to a valuation adjustment to visa related swaps in the prior year quarter and income relating to a bank owned life insurance program implemented in the current quarter.
Partially offset by lower brokerage and Treasury management fees.
The sequential performance was driven by the bank owned life insurance program and lower visa related swap expense.
Net interest income, which I will discuss in more detail later was $425 million in the second quarter, increasing 1% year over year, but down 1% sequentially.
Let's look at the components of our trust and investment fees on page five.
For our corporate and institutional services businesses.
Business fees totaled $549 million in the second quarter and were down 1% year over year, but up 3% on a sequential basis.
The translation impact of changes in currency rates reduced year over year CNS fee growth by almost one of that per se.
Custody and fund administration fees, the largest largest component of CNS fees were $385 million and were up 2% year over year and up 3% on a sequential basis. The year over year performance was driven by new business, partially offset by both unfavorable currency translation and unfavorable markets on a sequential basis, the impact of favorable markets and new business was partially offset by unfavorable currency translation.
Assets under custody and administration for CN I as clients were 10.6 trillion at quarter end up 6% year over year and up 4% sequentially.
Both the year over year and sequential performance was primarily driven by favorable markets and new business, partially offset by the impact of unfavorable moves in currency exchange rate.
Recall that lagged market values factor into the quarters fees with both quarter lag and month like markets impacting our CNS custody and fund administration fees.
Investment management fees in C.. It is up $111 million in the second quarter were down 2% year over year, but up 6% sequentially.
The year over year decline was primarily due to adjustments in the prior year due to a change to gross revenue presentation.
Partially offset by favorable markets.
The sequential performance was primarily different driven by favorable markets.
Assets under management for CNS clients were $887 billion up 3% year over year and up 2% sequentially.
The year over year increase was driven by favorable markets and new business, partially offset by lower securities lending collateral levels.
The sequential growth was primarily driven by favorable markets.
Securities lending fees were $22 million in the second quarter down 28% year over year and down 4% sequentially.
The year over year decline was primarily driven by lower volumes as well as lower spreads the sequential decline was driven by lower spreads.
Partially offset by higher volumes.
Securities lending collateral was 163 billion at quarter end and averaged $164 billion across the quarter.
Average collateral levels declined 11% year over year and were up 4% sequentially.
Moving to our wealth management business Trust investment and other servicing fees were $406 million in the second quarter and were up 4% compared to the prior year quarter and up 3% sequentially.
The year over year performance was primarily due to new business and favorable markets. The sequential increase was mainly attributable to favorable markets.
Assets under management for wealth management clients were 293 billion at quarter end up 2% year over year and flat sequentially.
The year over year increase was primarily driven by favorable markets, partially offset by outflows.
On a sequential basis favorable markets were offset by outflows.
The outflows were mainly within cash products and in park were relating to a change in our product offering where we discontinued the suite of client deposits into off balance sheet money market funds.
Moving to page six net interest income was $425 million in the second quarter up 1% year over year.
Earning assets averaged $106 billion in the second quarter down 8% from the prior year.
Total deposits averaged $89 billion and were down 7% versus the prior year.
Interest bearing deposits declined 4% from one year ago to $72 billion.
Noninterest bearing deposits, which averaged $18 billion during the quarter were down 17% from one year ago.
Loan balances averaged $31 billion in the quarter and were down 4% compared to one year ago.
The net interest margin was 1.61% in the second quarter and was up 13 basis points from a year ago.
The improvement in the net interest margin compared to the prior year, primarily reflects our balance sheet mix shift and the impact of higher short term.
On a sequential quarter basis net interest income was down 1%.
Average, earning assets declined 4% on a sequential basis as deposit levels declined 2% from the prior quarter.
It is worth noting that more than 85% of the sequential decline in deposits was related to lower wholesale deposits, which we use for leveraging purposes within our Treasury group.
These accounted for approximately 3%.
Of our non us office deposit balances in the second quarter.
Client deposit levels were down less than one half of a percent on a sequential basis.
On a sequential basis, the net interest margin increased three basis points, primarily reflecting a balance sheet mix shift partially offset by lower short term interest rates.
We did not see the opportunity for foreign exchange swap activity within our treasury function to the extent we have seen in the last several quarters. The activity. This quarter resulted in approximately $2 million of foreign exchange trading profit.
With a slightly less amount that we gave up in net interest income.
This quarter's results were more in line with business as usual results.
For comparison in the prior quarter, we saw additional foreign exchange trading income of $13 million offset by $10 million less in net interest income.
Looking at the currency mix of our balance sheet for the second quarter US dollar deposits represented 60% of our 67% of our total deposits.
This is down from 69% in both the prior year and prior quarter periods.
I wanted to highlight two items for you to note as we look at our sequential trends.
First during the quarter, we implemented a bank owned life insurance program that had the effect of moving 1 billion from earning to non earning assets.
The program was in place for approximately one half of the quarter and resulted in an approximate $3.5 million decline in net interest income and a $4.2 million increase within other operating income as well as a tax benefit on an annualized basis. We would expect the program to benefit net income by approximately $14 million with a $36 million increase within other operating income offset by a decline of an estimated $29 million in net interest income and a tax benefit of an estimated $7 million.
Second as I referred to when we discussed wealth management assets under management during the quarter, we had a change in our deposit products, whereby we discontinued the suite of client deposits into off balance sheet money market funds.
This change resulted in an increase of approximately $4 billion in period end deposits that you should see on our savings money market and other line within our balance sheet.
Turning to page seven expenses were $1 billion in the second quarter and were 1% higher than the prior year and down 2% sequentially.
As previously mentioned the current quarter included $4.9 million in expense associated with severance and other charges for comparison purposes note that the prior year and prior quarter included 6.6 and $12.3 million in charges respectively.
Excluding the called out charges expenses for the quarter current quarter was up 1% from one year ago, the impact of favorable currency translation benefit expense by just under one percentage point on a year over year basis.
Excluding charges in both the current and prior year quarters. The following items were key drivers within the expense categories compensation was higher primarily driven by higher salaries due to base pay adjustments and staff growth, partially offset by lower expenses related to long term performance based equity incentives.
Employee benefits expense was slightly higher due to higher payroll withholding tax partially offset by lower medical costs and retirement expenses.
Outside service costs were up slightly due to higher technical services expense, partially offset by lower third party advisor in sub custody expenses.
Equipment and software expense was up year over year, mainly due to higher software related spend.
Other operating expenses were up from the prior year due to higher miscellaneous expense, partially offset by lower FDIC premiums and lower staff related spend.
Shifting to the sequential expense view, including the expense charges in both the current and prior quarters expenses were down 1% sequentially.
Compensation expense declined primarily reflecting lower expenses related to long term performance based equity incentives partially offset.
By higher salaries.
By higher salaries due to base pay adjustments and higher cash based incentive accruals. The prior quarter's equity incentive expense included $30 million and expense associated with retirement eligible staff.
Employee benefits increased sequentially, primarily due to higher medical costs.
Outside services declined sequentially due to lower technical services and legal related costs, partially offset by higher third party advisor fees and sub custody expenses the lower level of technical services did benefit from approximately $6 million in one time vendor expense credits during the quarter.
Other operating expense increase from the prior period, primarily driven by higher business promotion expense.
Staff levels increased approximately 6% year over year, and 2% sequentially. The staff growth was all true attributable to staff increases in lower cost locations, which include India, Manila, Limerick, Ireland, and Tempe, Arizona, partially offset by reductions within our higher cost locations.
As we have discussed on previous calls through our value for spend initiative, which we started in 2017, we have been realigning our expense base with the goal of realizing $250 million in expense run rate savings by 2020, we continue to embed a sustainable expense management approach.
We expect these efforts to slow our expense growth to be more closely aligned with our organic fee growth.
Our second quarter results reflect approximately $47 million in expense savings, reducing the year over year expense growth rate by approximately two and a half points.
This would equate to just under $190 million on an annualized basis against the $250 million goal.
Turning to page eight a key focus has been on sustainably enhancing profitability and returns.
This slide reflects the progress we have made in recent years to improve the expense to fee ratio pre tax margin and ultimately our return on equity.
The ratio of expenses to fees is a particularly important measure of our progress as it addresses what we can most directly control we remain focused on continuing to drive organic growth in our business and managing our expenses to improve our efficiency and productivity.
Turning to page nine our capital ratios remain strong with our common equity tier one ratio of 13.6% under the advanced approach at 13.2% under the standardized approach.
The supplementary leverage ratio at the Corporation was 7.6% and at the bank was 6.9%.
Both of which exceed the 3% requirement that became applicable to northern trust effective at the start of 2018.
With respect to the liquidity coverage ratio Northern trust is above the applicable 100% minimum requirement.
As Northern trust progresses through fully phased in Basel three implementation there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules.
During the quarter, we repurchased more than 2.9 million shares of common stock at a cost of $271 million.
As we announced in June our 2019 capital plan received no objection from the Federal Reserve.
In it we requested authority to increase our quarterly common dividend to 70 cents 70 cents per share.
Yesterday, our board of directors formally approved the plan dividend increase which represents a year over year increase of 27% and a sequential increase of 17%.
The capital plan also provides the flexibility to repurchase up to $1.4 billion of common stock.
The timing and amount of shares repurchased will depend on various factors, including but not limited to Northern Trust business plan financial performance other investment opportunities and general market conditions, including share price.
In closing despite the impact of a mixed global macroeconomic environment, we performed well during the quarter, increasing our pre tax margin to 34% and generating return on average common equity of 15.9%.
Our balanced business model continues to generate organic growth with each of our client facing reporting segments of wealth management CNS contributing approximately 50% of our earnings.
We are excited about our competitive positioning within each of our businesses.
In wealth management, our holistic advice approach continues to resonate with prospects and existing clients. We continue to deepen our talent and expertise with key hirings across our business.
In CNS, we continue to have success in growing our asset servicing business as evidenced by wins announced during the quarter, such as magnet Tar capital Anchorage capital and the World Bank, our technology operational expertise client focus and flexible operating model continues support our strategy very well.
We remain focused on providing our clients with exceptional services, improving our productivity and driving profitable growth.
Thank you again for participating in Northern Trust second quarter earnings conference call today.
Mark and I would be happy to answer your questions.
Paula Please open the line.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Please limit yourself to one question plus a relevant follow up.
Again, Please press star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Well take our first question from Brennan Hawken with U.P.S.
Hi, Brent.
Hey, how you doing biff, thanks for taking the questions.
So curious about the.
Thinking about the deposit costs the interest bearing deposit cost for the non U.S. office line, you called out the reduction in wholesale deposits, which I'm I'm sure. It was helpful. But just wanted to confirm whether or not there was any other noise flowing through that line that we should think about and then thinking about deposit sort of broadly how should we think about the deposit costs for those 4 billion in interest bearing that you flagged in your end of period, resulting from the termination of the money market Fund program.
Okay on the it the additional color on the deposits in the foreign office deposit.
In addition to the lower leveraging amounts that we highlighted we really had to individual clients that had accumulated large deposits in the first quarter and they deployed them in the second quarter, we would consider that normal operating flow.
That we see from time to time in between quarters. So we can really identify that movement in the foreign office deposits, excluding those that were impacted by the lower leveraging.
In a handful of clients in the case I just highlighted two clients really made that move so.
Not uncommon for us to see builds in certain periods and then the deployment of that and in other periods. So we'd say normal flow there.
In terms of how should we think about the pricing.
Of the deposits.
In the retail space or in our wealth from the closure if you will of our anchor sweep product.
We did offer rates for those individuals.
Attractive rates for that that allow those to maintain that had a that has a finite period and when that rolls off and they will be at market rates.
On the competitive front.
And Brian I would just add if you look at the savings money market. Another line you did see a increase sequentially in the cost which is partly reflective of what this indicator. But then also the the fed increase in December there was a lag pricing impact in the retail deposits. So that wasn't quite fully reflected in the first quarter yet. So that's another part of the the sequential impact.
Okay. Thanks for that and then if do you still expect that I want to say that you had flagged during a presentation intra quarter that you expected deposit betas to be quite high in the event of a of a fed rate cut near near 100% as I recall.
It is your expectation still that they would be that high end and why do you think that beta is there going to be so much higher on the way down than we have seen it in a in prior historical periods of a fed rate cuts. Thanks.
Yeah I.
It's it's still our view that the betas will be let me separate first retail and institutional deposits.
It's our view certainly on institutional deposits, which make up the majority of our balance sheet.
But the betas will be pretty high and almost like say almost symmetrical as they were on the way up is is the most recent betas were pretty high we think that that same beta favorability would happened on the way down so.
Perhaps not at 100% that depends on the competitive landscape, but high.
And on the way down so that's what we'd see institutionally on the retail space I think it's really a function of the competitive landscape. There. So they were they moved up fairly slowly. So we benefited from the early days of the rate hikes, and then that beta moved up overtime.
I think you could probably also see some of the same symmetrical path down in betas on the retail space, but there is a much more transparent markets understand the pricing there and we need to remain competitive in that landscape.
So I guess I'd summarize it in by saying I think we still believe that the the overall the betas will be pretty high on the way down and pretty fast.
If you get closer and closer to a zero bound for U.S. dollars that could create some compression.
As we get closer to that but there's still a few highlights before we get there.
And moving on we'll go to Glenn Schorr with Evercore.
Hi, Glenn tell there.
A quick one related to see rates markets, obviously very strong year to date.
I'm, just curious how rate, particularly in the U.S. curious how breakpoints fee caps play a role and make it hard for us to look at.
Any.
Cost of the fee rate trends.
And maybe can throw in there comment about what kind of fee rate on the new assets coming in the door come in it.
Hi, Glenn it's Mark.
Yes, there is a lot that goes into that so we don't specifically look at fee rates internally because of really.
The mix of business can be quite different. So you can have a very large custody mandate with assets, where the fees might be small compared to a small assets under administration mandate, where the fees are larger but I. So as far as the trends go there it's hard to pin down something there I would say, though that as we've highlighted before when you look at that line about 40% of the fees are not asset value related. So in general you would get the fees moving less than what you would get the assets moving assuming that asset mix is coming on at the same rate, which.
Which it's not I wouldn't say that.
Some of the places where we're winning are in places that we do have.
You know when you're talking about hedge fund services and areas like that that does usually generically it would have a higher beta or a higher fee rate than what say domestic custody would have as a for instance, yeah. Glenn I would just add your second part of your question was the new assets coming on board the fee rate.
I think Mark's point is important there is.
The types of wins, we're having where its growth and I think we mentioned.
Magnitude or an anchorage headphones.
Though still there's still good value added fee the fee base there and then there is other large.
Just pure asset servicing custody wins, where the competitive landscape you know the basis point yield might be a bit lower so you've got to really look at the mix coming in and we've got a pretty nice mix both globally and in product set mix. So we get a nice blend of of rates coming in on the new business. It's not all just in the lower margin.
Oh right.
And I appreciate all that maybe one quick follow up to Brian's question.
The I hear you loud and clear on the high.
It is on the way down on the institutional side.
Im curious is there a difference in client segment by client segment in the retail side I'm surprised to see such.
Rate sensitivity, it's not what I think of when I think of Northern Trust wealth management.
Yeah, I think what you have to look at there as you've got to look at the beta.
Over a much longer period than just one quarter, because we could have been behind the market and slower to the market over periods of time and you can see beta moves in certain periods that look larger than the beta than you would expect because we're catching up from some competitive landscape and I will still say it is still competitive for even high net worth deposits.
You've got sophisticated investors, who are looking when yields get to some differential what the market that are seeking at least for the cash portion of their business.
Balances, they're looking for market rates and so we need to remain competitive.
It may not be quite as.
As competitive as those that are relying on retail deposits, but it remains competitive.
Okay. Thanks very much.
Thanks.
And next we'll go to Mike carrier with Bank of America.
Hi, Mike Hi, Mike Hi, Good morning, Thanks for taking the questions.
The first one just on the expense growth so thats been coming in better this quarter and year to date versus kind of the targeted.
In line with the organic growth.
Right.
Just curious should we be expecting.
Maybe any new spend in the second half.
This year.
Or could that be coming in lower just given you know the revenue backdrop in some of the uncertainty.
Whether it's you mentioned some of the FX, but also the rate backdrop.
Yeah.
So here I would say the the environment. We're operating in is it's not lost on US right. So a net interest income environment that that.
Looks like it will become more difficult in terms of the where rates are moving.
So we really want to continue to grow our you know to drive our organic revenue in our franchise.
But we have to be mindful of the macro headwinds that we're facing we can't just singularly focused on that so that means.
I think the disciplines or that you've seen in the first six months of this year and I think even longer trend in that.
They have they are vital to our profitability they have to remain.
So so we are we're focused.
On certain as you know.
Disciplined capital deployment for projects return seeking projects disciplined expense management around occupancy procurement business promotion location strategies automation driving it organizational design all things we've talked about those are even more in focus they've been in focus you've seen the benefits of our focus of them, but they're even more and focus as we are wrecking recognizing the environment that we're entering and I can tell you that.
I think some of the cultural behaviors that we've embedded as a part of value for spend are now part of the disciplines that will help us we think continue to execute on that and the second half of this year and.
And in the future. So there is.
Not a planned ramp in those expenses because we are.
We're certainly cognizant of.
Of the environment, we're operating in and there is a a strong focus on on maintaining those what I will say, though I want to be clear is we think our organic growth rate is still a very important governor if I could say that what is allowable for that expense growth rate. So we still want to grow our franchise organically and there is some expense needed to fuel that organic growth.
But as long as that's proportional at appropriate with enough spread in it.
We.
We think we can move it forward and move the profitability of the firm for.
Okay. Thanks, and then.
Just as a follow up on on Eni.
So you mentioned your expectations on on deposit Betas, and then just if we go down the path of getting a few fed cuts just anything from like a positioning or duration of the balance sheet has anything changed or do you expect anything and it just so I'm clear on like the deposits.
You mentioned on the institutional side some of the activity that you saw on the on the non U.S.
You mentioned some of the things that you guys do on like the de leveraging and then it sounds like on the retail side you are seeing somebody move on.
When we just think about the start.
Jump offline is that roughly unchanged because you had the depression or like of the the institutional but you're having the retail come on board.
Yes, let's let me, let me break that into two parts.
One you're talking about the balance sheet jump off point sort of from a size and then the first is sort of I think more of an outlook on on net interest income and I think we'll.
Well give a little color there I would imagine that people want to hear that.
If you if you looked at our net interest income.
From the Q1 to Q2, we stripped out there was some favorable impact from the lower FX swap activity, but we implemented bowling, which we took our earning assets down if you netted those out our sequential decline was probably just under 3%.
I know, we reported one but those factors moved it around.
If we look at the current implied curve and we assume two rate cuts in July and September we would we would think in the third quarter that we would see about a 2% to 3% decline in net interest income.
From this quarter's reported net interest income and that includes the impact of boldly and other things in there. So so we would see somewhere around 2% to 3% in the fourth quarter of this year.
We would say flat to slightly down from there and again, that's relying on a whole series of factors how did the betas play out how does our balance sheet play out.
Over that time in terms of volume and mix. There's a lot of factors that based on our best modeling and our best forecast at this point.
Relatively modest decline in net interest income in Q3 and flat to slightly down in Q4 based on our current.
Thinking in there.
In terms of the balance sheet size, Mark if you want to.
Yeah, I would I guess, if you look at the average balance sheet and you're thinking about that as your starting point and which is probably the best thing to do because we do at period end deposit flows that spike up the one thing I would point to is.
This change in the suite product in wealth management.
Where that was really only a partial quarter it happened.
At different points throughout the quarter.
So so for that line the savings money market and other.
Looking at the end of period for that might be a little bit closer to where it might run during the quarter, but that that remains to be determined but.
That's how I would position as far as a balance sheet jump off point.
Okay. That's helpful. Thanks, a lot.
Okay.
And next we'll go to Betsy Graseck with Morgan Stanley .
Hi, Betsy Hi, good morning.
A couple of follow ups to that one is if here rate cuts were all in July I forgot to rate cuts in July is there a material change to the numbers. He just described or not really.
Not really in fact.
It might be very very modestly better to get 50 basis points to 20 fives.
A 50 into 25.
Would we would probably have to get back to you.
That is but we know what it is but it might be a little bit more impactful, but a 50.
Is very modestly better so I wish I could say roughly for your projections probably.
About equal over two quarters.
Okay and then.
Can you just give us some color as to what the Decisioning was behind the bully what was the reason for that and should we expect more.
[noise], either fully like types of transactions going forward or other.
Securities assets asset repositioning that you might be doing in a changing rate environment.
Yeah, we have a as you know we've embarked on what I will call a.
Balance sheet optimization type program, and we've looked at certain asset classes or certain yield.
Opportunities on our balance sheet, we had no beauly.
Investments, which made us relatively unique in the marketplace and in the current yield environment, and particularly with the declining rate environment the benefits of that actually were.
Pretty powerful as we cited.
It's $14 million of benefit in.
Net income for our franchise it does take down an eye on an annualized basis. It does take down our eni, but it will flow through the other income line and you saw some of the benefit of that in just sort of one half of one quarter.
We're always looking at our optimization efforts I can't say, whether we would add more or less Foley for instance in this transaction, but this was our.
First pass at it.
I guess I was just wondering like how you decided to size. It the way you did with it you know as you.
10 indicated you were the only one didnt have it so.
Was there a relative positioning these are the peers or.
Im just trying I went well liability.
Sure sure there are several factors that the.
A limit the size there's regulations as to how much as a percent of your capital that you can have but remember we have counter party credit exposure than that we have to go out to with very high credit quality carriers that we now have this credit exposure to and so our credit group also is providing input as to the sizing of the portfolio and when we put all that together it added up to a million dollars.
For now.
Okay, then I would say I should take from that that you are optimized on the bully positioning.
As we sit here today that we have a billion dollars in there we were always looking at those opportunities I can't say, whether we'd go higher or lower in the future, but I think we're here for some period of time, Yeah got it okay. Thank you.
And next we'll go to Alex Blostein with Goldman Sachs.
Hi, Alex Hey, guys, Hey, good morning, Hey, guys.
Thanks for the IR guidance I know you guys typically don't get into explicit guidance, but given where we are on the cycle I think it was definitely appreciate it thanks for that.
A question for you guys around expenses again so.
Given the fact that historically, you've been sort of aiming to align expense growth with organic fee growth.
So call it now for about 5% or something like that.
In light of a tougher backdrop from an IR and obviously tends to be much higher margin type of business for you guys.
Is there an emphasis to potentially bring that down below the organic fee growth level. So in other words.
Good could we still anticipate some of the positive kind of operating leverage or dynamic even with your current and IR outlook.
Yes.
I think we are.
Looking at that hard Alex is like you said, we can't ignore the.
The backdrop, we're in and pressure on one of our important revenue lines net interest income may put additional pressure that we have to look at on our expense line to widen out that leverage that you're talking about.
Some things will naturally happen there I think it's important for instance, I will tell you certain cash based incentive plans. If net interest income goes down they're going down so that will give us some natural reduction in our expense lines. If thats. The backdrop, but then the discretionary items. I described we may have to continue to push harder harder on some of those levers to to widen out if you will the organic leverage in our business.
To overcome if you will some of the pressures we see on net interest income for instance.
Yep. Thanks.
Second question around foreign exchange trading so last quarter I believe.
There was a $13 million swap benefit in that line.
So kind of I think apples to apples, you've seen an improvement sequentially and then a fairly difficult environments. So curious again kind of and I know that's been a focus for you guys to kind of drive some of the organic initiatives and foreign exchange trading and gain some market share. So maybe a little bit on kind of what's going on underneath the surface within that part of the business.
And.
Any better way for us to think about kind of the go forward.
Yeah. So so you're right at the core of the core FX actually did pretty well if you strip the swap.
Impact out of that I think theres a couple of factors in there. One is we saw our share of FX transactions that we got from our client base increased.
From quarter over quarter. So we're.
We're communicating marketing.
Better products and capabilities that we captured a higher percentage share of trade even in a in a lower volatility environment. We captured more share of trade and we also saw a little bit higher volume in some of the emerging market currencies in the quarter from our client base I don't know if that's true for everyone, but from our client base that in itself also has a little wider spreads. So the combination of those two I think actually drove.
A relatively good core FX performance.
Quarter over quarter.
Great. Thanks, so much.
And next from Wolfe Research, we'll go to Stephen Chen.
Hi, Thanks, good morning.
Hi, So just wanted to ask a follow up on the Securities book I appreciate all the detail that I I guidance.
As we model the securities yield then layer in the forward curve can you just remind us what percentage of the book repriced as each quarter and where does the overall duration of the books. It today given some of the extensions you have been doing.
So the overall duration of the book, let me ask the second part is at 1.3 years, and we have been adding some duration you're right, but that duration that we've added has been somewhat muted.
As the longer rates have come down and obviously creates.
Have you have faster prepayments and and so that has the impact of shortening the duration. So were were lengthening and with our purchases, but the actual come down of the rates and the long end of the curve mutes it but were still longer at 1.3 than we've been traditionally where weve run probably closer to one or 1.1 on the terms of the duration.
As far as the repricing goes.
Yeah, we've talked about before how our securities portfolio can't divided between a shorter and a longer the shorter book is probably it's a little bit less than half of of the total securities book, and that's where you would get mostly.
When you think about one month LIBOR and three month LIBOR that repricing would happen fairly quick obviously within a quarter.
And then the other part of the book the longer book that as you get securities Rolling over you put something on two years ago. It rolls over and then you.
You reinvest that so that that would happen on more of a staggered basis across a period of time.
Hi, Thanks for that color and just one follow up for me on some of the deposit growth commentary I think there's a big debate about how much of the rate headwinds can be offset with volume growth.
And you noted that deposit beta size should be elevated on the way down.
But just given a relative or an overall a more sophisticated client base. How are you guys thinking about the pace of organic deposit growth that you can generate within both retail and institutional and just looking out to the forward curves I gave some very helpful. Detail on 19, just as we look out to 2020 do you believe there is a path to generating sufficient eni or volume growth to offset some of those rate headwinds.
If we look out to 2020.
I would say, we're going to start to become more reliant on an organic growth rate that we've talked to you before in our asset servicing business primarily to drive the custody growth than the deposit growth that you are talking about.
We could be.
More aggressive in our pricing to try to attract deposits, but given the construct of our balance sheet that type of funding need has to make good economic sense for us to want to do it and we don't have a big loan portfolio on for instance.
So I think the growth rate.
In our deposits is going to come from.
At least some most of that will come from just the organic growth we've seen in our our fees. So if we've talked about four to five.
Some portion of that would come with deposits not all of it because we do fund administration and other work, which may not come with custody deposits on the balance sheet, but much of it comes with custody deposits. So I think that becomes more of the.
The benchmark for the balance sheet growth and to your point, depending on how rates move.
It probably be difficult to make it up with volume.
To your point, what I would say is.
If we get more than two insurance type cuts that the fed may.
That we would project.
But your own projection on it if we get more than two and we start to get into something that looks more like quantitative easing historically I think the custody banks have been the recipients of the liquidity that is pumped into the system and so we could see deposit growth and balance sheet growth.
Move at a much faster rate if this becomes more than a.
One or two.
Rate cut cycle.
That's very helpful contacts thanks for taking my questions.
Yes.
Moving on we'll go to Jim Mitchell with Buckingham Research.
Hi, Jay Good morning, Hey.
Just two questions first maybe one last one on the deposits non interest bearing actually was flat on a sequential basis a lot of your peers were down event, highlighting declines going forward or I guess is that sort of that organic growth you're talking about what's what's keeping your noninterest bearing flat and how do you think about that over the next.
I guess looking over the next couple of quarters.
Yeah, Let me, let me walk you through that again, so we had about 18 billion in.
Average noninterest bearing deposits I think in the quarter.
And if you look at those about 85% of those are in dollar.
So of the dollar.
Deposits noninterest bearing 25% our wealth management deposits.
Those have been historically very sticky and they have remained sticky for a long time, another 25% our sort of our treasury cash management business, they're there for balances to pay fees et cetera. Those two have been fairly sticky. So I think you've got kind of half of the of the dollar base noninterest bearing that had have been and remain pretty sticky that leaves sort of the other 50% there which are part of core institutional asset servicing.
Many of those we think are just part of operational needs and been there we kind of talked about three to 4 billion sort of being.
What I would say was.
Perhaps yield seeking that was sitting there in noninterest bearing and we've seen we have regular dialogue with those clients. We believe those are also there for the liquidity purposes, we certainly have seen run off in noninterest bearing over the year, but more frequently we think most of that has sought.
The yield seeking peace had sought yield already so.
We've seen a little bit more stability in noninterest bearing the last two quarters.
Okay. That's helpful and maybe just bigger picture I know you guys have been talking about.
Efforts to boost organic growth in wealth, maybe you can just sort of update us on what you've been doing there what any evidence yet of that.
Accelerating that would be helpful. Thanks.
Yes, so we as you can see with our wealth management reported figures they had a strong quarter very strong quarter very healthy margins and good fee growth rate year over year, some of that driven by markets, but some of that driven by.
Organic and again, they continue to look at geographies, where we have.
Want to increase our market share.
We don't always have to have a physical presence as we've talked in the past there are certain.
Cities in markets, where.
We've got grown our market share without having to have a physical presence and those are generally very attractive pieces of business with.
With low.
Physical overhead needed to get there and we can serve it out of Chicago, or or Florida, or New York or wherever.
And then I would say our product suite.
Particularly our holistic advice our goals powered solutioning has resonated and particularly resonated with people in an environment, where we've we've seen a little bit more volatility certainly interest rate uncertainty markets are favorable, but you've got a lot of people looking at the landscape. The geopolitical landscape and there are some uncertainties on the horizons and so we think our technology and tools led to pretty increased strong.
Organic growth in that business as well.
So I mean is there any hard number you can point to in terms of new account openings or flows picking up help us.
Yeah, we don't really that we've disclosed yes, we don't disclose that I mean, when you look at the fee growth rates in the business and.
Make your own assessment of the market impacts of that and you can probably get to an underlying core growth rate.
Moving on we'll go to Marty Mosby with Vining Sparks.
Thanks Mark.
Hi, Good morning, I wanted to ask you about the leverage.
The de leverage this particular quarter. It looked like they were deposits that were outside the United States and.
You know, where you kind of using that as a source or be able to take some wholesale funding was very low and then re deploy it in the United States at a higher rate is that some of the FX translation is that why you wanted to get out of it well just what was the motivation for it and what was the trigger to get out of the de leveraging strategy you had.
Out there.
Well I'll split this question with Mark.
But the strategy for getting out of it is Marty the the wholesale funding the return on it.
Quite frankly has has gone to about zero. So from a return even an incremental return the cost of wholesale funding and the investment that we were putting it in with generating.
You know a very low to no return in this environment. So we we took the decision to pull some of the leveraging off and I think Marty the the currency or the the where it sits on the balance sheet. These are euro dollar deposits. So.
We the wholesale deposits, where we went to a money fund or something like that it's a it's a wholesale deposit marketo.
Yeah, I mean, a euro dollar deposit yet so we werent it we're not crossing currencies with it so we're keeping it in us and it is you do see it certainly short term borrowings is another line, where we do we'll do that.
Frank I think federal home loan bank borrowings.
And then the wholesale deposits flow through the non U.S. office line. So it's a combination of those two that we use for leveraging purposes, but we it is.
On the liability side, U.S. dollars and U.S. dollars on the asset side as well.
Gotcha.
And then we've talked extensively as you know.
An advocate for expanding the duration to protect and I as.
You end up having these declines.
What is your perspective in a sense of doing not doing that as you know as you've gone through the cycle and why wouldn't we have been more proactive in defensive to protect against a fairly valuable part of our income stream, which is this net interest income.
Yes, so marty over a year ago, we start talking about here about the duration extension of the portfolio and have been executing on that and I know.
At at 1.3 that.
Still seems perhaps short in duration to the average but for our portfolio, that's a fairly meaningful increase and again, we take that duration.
We don't do it through any credit.
Additions, it's it's generally done through.
Duration of treasuries and added so we have been doing some of that.
Over the periods in there obviously or other.
Hedges in swaps and other things that we can do into the portfolio to help look at that so weve been I would say we've been contemplating.
A rate move core.
At least a year from our Alco and have been executing on some of that behind the scenes. So I think it's one of the reasons are.
Actually our net interest income and others has held up reasonably well obviously.
We continue to look at that and some of those decisions now.
What's with way the shape of the yield curve is right now there is some eni give up.
In protecting against the long term move down in rates as you might imagine based on where the very short end of the curve is now versus the long end and.
But we have taken some of those decisions. So thanks.
Moving on we'll go to Ken Usdin with Jefferies.
Hi, Ken.
Hey, Thanks, good morning, guys out a bit but just to add one more thing on the NII first so if I if I take the three and a half impact from the Holy and then the 29 for the year effectively are you, saying that that the decline in Threeq. It was really just from the bully and that core Eni dollars.
Are are basically going to be flattish is that the right way to think about it.
Well this is mark you would.
We also had a benefit from the FX swap so but in a way right. I mean, if you counted but back bully you it'd be flat, but that was because of the fact that we had a benefit from the FX swaps, which was basically offset by what we saw play out with the interest rate environment Yeah.
Right. Okay and then my second question just on the cost side, so value for spend is expected to run rate by the end of this year.
And it's been a three percentage point helper to the cost growth rate. So as we look out into past 2000.
And.
919, or sorry, it it's got a run rate by <unk> next year, but you have gotten a good chunk of it are ready so.
The magnitude of helps does it stay the same as you go forward like are we going to expect three percentage points of help on an ongoing basis or do you have to re up that we think about re upping. The plan at some point to maintain this right balance any thoughts there. Thanks.
Yes, thanks, Ken so.
You're thinking is right the 2% to 3% you know kind of per annum benefit that you talked about is what we're seeing in terms of what we re upped value for spend let me frame. It this way the answer to that is.
To meet the sort of the financial model that we've talked about which is set an organic fee growth rate, we've talked four to five.
Then we look at our expense base beneath that and we say weve got certain inflationary price.
Expenses coming at us.
We've got certain investments that we want to make and we've got certain expenses that we need to fuel that 4% to 5% growth rate.
If we want to get leverage in that equation I guarantee you you need a productivity offset.
To make that math works. So if you've got four to five growth rate you add in inflationary expenses you add in investment needs you add in the.
The expenses needed to grow that four to five you probably produce something higher than a 4% to 5% expense growth rate.
What we're saying is.
That needs to be the productivity, we need to get on an annual basis in our franchise to drive leverage into that business and your magnitude.
Is.
In the area code that we're thinking about the 2% to 3% kind of range every year a good way we think about it is it's got to be at least as much to offset inflation.
So if our expense.
Improvements have to be at least enough to offset inflation and then you have your cost to drive the new business and you've got some available for investment and that's the way we think about the more we drive and productivity the more we share and profitability and investment opportunities for the future.
And next we'll go to Gerard Cassidy with RBC.
Hi, Gerard.
Yes, Hi, Mark.
Bill can you I know the modeling is challenging and nobody can really predict the future on interest rates.
With the 100% accuracy, but I recognize we're all focused on the short end of the curve what happens in your guys' outlook. If the long end of the curve actually rise is due to maybe.
Trade.
Settlement with China stronger economy, and we're looking at a two and three quarters tenure.
In the first going into the first part of next year, how does that affect what you guys have been talking about on net interest income.
You know I think Gerard the answer to that is is it probably depends on how the steepness of the curve moves between the short end and the long end. So if the long end moves up in the short end moves up in parallel.
It's a different impact that if the short end stays where it is and the long end moves up when we get steepness in the curves from a loan book perspective, we don't have nearly as much mortgage based credit that's going to be impacted by the type of move you're talking about in the long end of the curve. So I would say less impactful to us in that space, but the investment opportunities along the curve and the spread they offer from the short end of the curve does matter to us. So I guess I would have to say it depends on how the rest of the curve shifts with that move in the low end.
Okay, because I was assuming the insured and drops 15, but the long end, Steve. So you get the so called Bull Steepener in the curve.
That is what I was thinking but thank you and the second question. When you guys step back and you look at the challenges that you know companies always face and opportunities that you guys have well what are some of the aside from interest rates since we've talked about that.
What are some of the challenges that you guys foresee that you have to overcome maybe in the next 12 or 18 months.
When you look at it the businesses.
No I would say if we look there's always a significant.
Demand for technological investment.
For our business and we compete particularly on the asset servicing side in a highly technologically driven feel and so making sure we make the right investments.
In that technology to remain competitive.
Along with the word competitive I would say we are in a competitive.
Marketplace and.
While I would say we have seen.
It's pretty similar type fee pressures that we've talked about in the past.
Compression of 1.5% to 2% in the marketplace.
We're in a competitive.
Environment with good competitors and and so we want to monitor the competitive nature. There. So we got to remain.
Vigilant to the competitive landscape on the horizon.
And on the wealth space I think it's one of of opportunity. So what you ask what the challenges are I think for that is what are the right pockets to grow and where do we want to.
Where do we have less market share than we would like and where can we get to two that client base, because where we are established.
We do very well in those markets and I think there's opportunity for us.
In certain markets, where were they may be underrepresented.
Great. Thank you.
Moving on we'll go to Brian Kleinhanzl with KBW.
Hi, Brian .
Hey, good morning, guys.
Quick question on the expenses to trust and investment season, when it came down again this quarter, it's been kind of trending lower.
Over the past couple of years, but given your pull back on expenses are you still expecting that the trend lower from here is it just a more challenging environment, which is expected to kind of flatten out for a while.
So that that question I would say.
We do hope that over long periods to evaluate that but we want to continue to drive more productivity and so weve not achieved.
Sort of Nirvana in terms of that range, what I think we have to be cautious of is we have seasonality in our business for instance, next quarter. We have the northern Trust open which puts pressure on expenses in a quarter and obviously markets can be volatile and drive the fee line and our expenses can't necessarily react.
In 90 days to a market that can move so, but if you look over longer periods of time. The answer is there is continued focus on driving that down.
And I would give you. An example, if you do these calculations between our two businesses they are quite different and the mature wealth management business does drive that expense to fee ratio lower.
The 105 for instance, and so.
I would say the answer is over long measurement periods. There is still absolutely focus inside the firm on continuing to improve that you may see quarterly moves that.
To go up or down just based on seasonality indoor market volatility.
Okay and a separate question on the agency MBS portfolio, you're going to see a drop off in yields like other banks have seen premium amortization what was the impact from PMAG business border or is there something of a lag effect for you.
Yes, So I think we've talked to you about premium amortization being somewhere around the $10 million to $12 million.
In a quarter and it was inside of that range in this quarter yeah.
So.
The nature of our portfolio and the way, we've modeled that and everything it produced premium amortization that was much in the range we've sort of.
Guided to.
Okay. Thanks.
And that does conclude today's conference we'd like to thank everyone for their participation you may now disconnect.
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