Q2 2021 Northern Trust Corp Earnings Call
Yeah.
[music].
Good day and welcome to the Northern Trust second quarter 'twenty 'twenty 1 earnings Conference call. Today's conference is being recorded at this time and I'd like to turn the conference over to Mark Bette Director of Investor Relations. Please go ahead.
Thank you Stephanie and good morning, everyone and welcome to Northern Trust Corporation's second quarter 2021 earnings Conference call. Joining me on our call. This morning are Michael <unk>, our chairman and CEO, Jason Tyler, Our Chief Financial Officer, Lauren and I will not our controller and Briar rose from our Investor Relations team, our second quarter earnings.
Press release and financial trends report are both available on our website at Northern Trust Dot Com also on our website you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 20, <unk> call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this call is the replay that will be available.
On our website through August 18th Northern.
Northern Trust disclaims any continuing accuracy and the information provided in this call. After today now for our Safe Harbor statement, what we say during today's conference call May include forward looking statements, which are northern trust's current estimates and expectations of future events or future results actual results of course could differ materially from those expressed.
<unk> 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 2020 annual report on form 10-K, and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.
During today's question and answer session. Please limit your initial query to 1 question and 1 on 1 related follow up this will allow us to move through the queue and enable as many people as possible and the opportunity to ask questions as time permits. Thank.
And you again for joining US today, let me turn the call over to Michael Grady.
Thank you Mark let me join and welcoming everyone to our second quarter 2021 earnings call. During the second quarter. We continued to successfully execute on our growth strategies across each of our businesses and our wealth management business our goals driven approach and last year's launch of the Northern Trust Institute continue to resonate with our clients.
Further increasing client satisfaction levels are digital navigate the now campaign, which we introduced last year is successfully generating new contacts and leads and creating more opportunity and.
Certainty and tax law changes has also contributed to new business momentum and earlier in the quarter, We announced the launch of our tax policy Resource Center and extension of the Northern Trust Institute.
Within asset management, we continue to see momentum and our liquidity products as well as strong growth and our flex shares Etfs and ESG strategies, we continue to focus on expanding sustainable investment solutions and earlier this month announced the launch of the quality low volatility low carbon world strategy and actively managed strategy focus.
And on high quality low volatility stock, while maintaining our low carbon footprint relative to the MSC MSCI World Index. We also introduced the Northern Trust ESG Vectra score, which measures financially relevant ESG related criteria that could impact the operating performance of publicly traded companies.
Within our asset servicing business, we continue to see growth that was well diversified across regions products and client segments.
Recent notable public wins include funds Smith marks and Spencer pension Trust Martin Currie investment management, and KOL pension Trust. These services limited, we continue to invest and expand our asset servicing solutions as evidenced by US finalizing our acquisition of <unk> investment technology, which underscores our commitment.
On the front office solutions business.
The execution of our growth strategies combined with favorable markets resulted in 12% year over year growth and our trust fees, despite significant headwinds from money market fee waivers.
And our expense growth of 8% inclusive of the pension settlement charge generated 4 points of positive fee operating leverage the expense growth reflected new business as well as investments and both technology and our staff as we continue to build a diverse engaged workforce with skills for the future.
I also want to draw your attention to our latest corporate social responsibility report, which we published last week, marking a full decade of transparent detailed CSR reporting about the company.
The report details our progress towards creating long term value for our clients employees shareholders communities and other key stakeholders.
Moving into the second half of 2021 and beyond we remain focused on continuing to effectively navigate the persistent low interest rate environment, focusing on driving greater efficiencies as well as continuing to grow organically and a scalable and profitable manner.
With respect to the public health environment, we continue to operate and what we call resiliency mode, which means we're focused on providing our clients continuity of service while the majority of our employees worldwide are working remotely. However, during the third quarter, we expect to see more of our staff returning to their respective locations. Our return to office plans are being driven.
First by robust health and safety protocols specific to each location and second by business function needs and timeline.
Finally, I want to express my sincere appreciation for our employees, whose commitment and expertise and professionalism continues to be exceptional now let me turn the call to Jason to review, our financial results in greater detail for the quarter.
Thank you, Mike, Let me join Mark and Mike and welcoming you to our second quarter 2021 earnings call, let's dive into the financial results for the quarter starting on page 2.
This morning, we reported second quarter net income of $368.1 million.
Earnings per share were $1.72, and our return on cash on.
Common equity was 13, 7%.
This quarter's results included a $17.6 million pension settlement charge within the employee benefits expense category as.
As you can see on the bottom on page 2 equity markets performed well during the quarter and call that a significant portion of our trustees are based on quarter lag or month lag asset levels and both the S&P 500, and Evo local had strong sequential performance based on those calculations.
As shown on this page average 1 month and 3 month LIBOR rates were stable during the quarter with only modest declines.
U S dollar was weaker on a year over year basis, which had a favorable impact on our reported revenue, but is unfavorable to our expenses.
Let's move to page 3 and review, our financial highlights and the second quarter year.
Year over year revenue was up 5% with noninterest income up 10% and net interest income down 9%.
Expenses increased 8%, while net income was up 18%.
And the sequential comparison revenue and expense were both flat, while net income taking our credit provision and taxes into account was down 2%.
The provision for credit losses reflected a release of $27 million and reserves and the current quarter compared to a provision of $66 million and the prior year and a release of $30 million and the prior quarter.
Return on average common equity was 13, 7% for the quarter up from 12, 2% a year ago and consistent with the prior quarter.
Assets under custody and administration of $15.7 trillion.
30% from a year ago and 6% sequentially.
Assets under custody of 12, 2 trillion grew 32% from a year ago and 6% sequentially.
Assets under management were $1.5 trillion.
22% from a year ago and 6% sequentially.
Now, let's look at results in greater detail, starting with revenue on page 4.
Trust investment and other servicing fees, representing the largest component of our revenue totaled $1.1 billion and were up 12% from last year and up 1% sequentially.
Foreign exchange trading income was $71 million and the quarter down 1% year over year and down 10% sequentially.
The sequential decline was driven by lower client volumes as well as lower volatility.
The remaining components and noninterest income totaled $99 million and the quarter down 3% from 1 year ago and down 2% sequentially.
Within this securities commissions and trading income was flat with the prior year and down 5% sequentially.
The sequential performance was driven by lower trading by lower trading within our core brokerage business, partially offset by higher transition management revenue.
Other operating income totaled $54 million and was down 4% from 1 year ago and down 1% sequentially.
Net interest income, which I will discuss in more detail later was $344 million and the second quarter down 9% from 1 year ago and down 1% sequentially.
Let's look at the components of our trust and investment fees on page 5.
For our corporate and institutional services business fees totaled $612 million and were up 8% year over year and down 1% sequentially.
Favorable currency translation benefited total C&I as fees on a year over year basis by approximately 3 points.
Custody and fund administration fees were $455 million and up 21% year over year and up 2% on a sequential basis.
Both the year over year and sequential increases were driven by favorable markets and new business.
The year over year comparison also benefiting from currency translation.
Assets under custody and administration for C&I as clients were 14, 8 trillion at quarter end up 30% year over year and up 6% sequentially. Both the year over year and sequential growth were driven by favorable markets and new business with currency translation also a benefit and a year over year comparison.
Investment management fees, and C&I assets of $101 million were down 22% year over year and down 13% sequentially.
Higher money market fund fee waivers were the key driver of both declines partially offset by favorable markets and new business.
Fee waivers and C&I asked totaled $50 million and the second quarter compared to $28 million and the prior quarter.
Yes.
Assets under management for C&I assets were 1.2 trillion up 22% year over year and up 7% sequentially.
The growth from the prior year was driven by favorable markets client flows and favorable currency translation.
The sequential growth was driven by favorable markets and net flows.
Securities lending fees were $19 million down, 29% year over year and up 7% sequentially. The.
The year over year decline was primarily driven by lower spreads partially offset by higher volumes, while the sequential performance was driven by higher spreads and volumes.
Average collateral levels were up 19% year over year and up 3% sequentially.
Moving to our wealth management business Trust investment and other servicing fees were $464 million and were up 17% compared to the prior year and up 5% from the prior quarter.
Fee waivers and wealth management totaled $29.2 million and the current quarter compared to $22.2 million and the prior quarter.
Across the regions, both the year over year and sequential growth were impacted by favorable markets and new business, partially offset by higher fee waivers within.
Within global family office, the favorable impact of markets and new business were offset by higher fee waivers.
Assets under management for our wealth management clients were $371 billion at quarter end up 22% year over year and up 4% sequentially.
The year over year growth was driven by favorable markets and client flows while the sequential performance primarily reflected favorable markets.
Moving to page 6 net interest income was $344 million and the quarter and was down 9% from the prior year.
Turning assets averaged $142 billion and the quarter up 13% versus the prior year.
Average deposits were 128 billion and were 15 and were up 15% versus the prior year, while loan balances averaged $36 billion and were up 2% compared to the prior year.
The net interest margin was <unk>, 97% and the quarter and was down 25 basis points from a year ago.
The net interest margin decreased primarily due to lower average interest rates as well as mix shift within the balance sheet.
On a sequential quarter basis net interest income declined 1%.
Average, earning assets and average deposits each increased 1% on a sequential basis, while average loan balances were up 6%.
The net interest margin declined 3 basis points sequentially, primarily due to lower average rate.
Turning to page 7 expenses were $1.1 billion and the second quarter and were 8% higher than the prior year and flat with the prior quarter.
The current quarter included a $17.6 million pension settlement charge within the employee benefits category.
This charge represented approximately 1.5 points of year over year and sequential growth.
The year over year comparison for expenses was also unfavorably impacted by currency translation by approximately 2 points of growth.
Compensation expense totaled $486 million and was up 6% compared to the prior year and was down 6% sequentially.
The year over year growth was primarily driven by higher cash based incentive accruals as well as higher salaries.
The growth and salaries was primarily attributable to unfavorable currency translation.
The sequential decline was primarily due to the prior quarter's equity incentives, including $32 million and expense associated with retirement eligible staff.
Excluding the previously mentioned pension and settlement settlement charge and employee benefits expense was up 11% from 1 year ago and down 3% sequentially. The year over year increase was primarily related to higher medical expense, while the sequential decline was due to lower payroll withholding, partially offset by higher medical expense.
And outside services expense was $218 million and was up 24% from a year ago and up 11% from the prior quarter.
Revenue and business volume expenses accounted for nearly 2 thirds of the year over year growth and nearly half of the sequential growth.
The remaining growth within the category included higher technical services consulting and legal expense, reflecting investment and the business as well as the timing of engagements.
Equipment and software expense of $178 million was up 9% from 1 year ago and up 1% sequentially.
The year over year growth reflected higher software support and amortization costs.
Occupancy expense of $52 million were down 13% from a year ago and up 3% sequentially.
The prior year included costs associated with our workplace real estate strategies.
Other operating expense of $68 million was down 21% from 1 year ago and down 6% sequentially.
The year over year decline was driven by lower miscellaneous expenses, including account servicing activities Mutual fund co administration costs and supplemental compensation plan expense.
The sequential decline was due to lower miscellaneous expense, partially offset by higher business promotion and staff related costs.
Now turning to page 8 our capital ratios remained strong with our common equity tier 1 ratio of 12% under the standardized approach flat with the prior quarter.
Our tier 1 leverage ratio was 7.1% up slightly from 6.9% and the prior quarter.
During the second quarter, we repurchased 252000 shares of common stock at a cost of $30 million.
We also declared cash dividends of <unk> 70 per share totaling $148 million to common stockholders.
The current environment continues to demonstrate the importance of a strong capital base and liquidity profile to support our clients' needs and we continue to provide our clients with exceptional service and solution expertise they've come to expect from us.
Our competitive positioning across each of our businesses wealth management asset management and asset servicing continues to resonate well in the marketplace.
Thank you again for participating and Northern Trust second quarter earnings Conference call today Mark.
Mike Mark Loren and I would be happy to answer your questions. Stephanie We please open the line.
Thank you and you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure your mute function is turned on.
And also reach our equipment.
Please limit yourself to 1 question and 1 follow up question to allow time for all Questioners and again you May press star 1 to ask a question.
First question comes from Alex <unk> with Goldman Sachs.
Good morning Al.
Hey, good morning, guys. Thanks for taking the question. So maybe I'll start with expenses and I was hoping just and you can attack on pack from the trends both on the comp and non comp side of the equation and I guess on the comp side. When we look at the sequential decline and compensation almost all of that is really just kind of explained by the seasonal effects.
<unk> accomplished pretty well controlled especially in context and gets better revenue environment. So how should we think about that for the rest of the year or there are things that.
Is there enough for you guys to kind of hold on line on expenses for the second half and then similarly on the non comp side of things.
Things were I guess, a little bit higher than originally expected and and you previewed that at a conference a few weeks ago, but.
Similar line of question kind of how should we think about the jumping off points from the non comp side of the equation.
Yeah. So let me, let me take them and ordered that.
I think you hit the comp walking into this period, well and the <unk>.
Control and you look at head count and particular, Alex and and that's flat for the second quarter, and a row, which evidences how we've been managing through the the announcements we made in January about what we were trying to do.
And.
And part of that is that we also look to reinvest some of some of that savings, which maybe plays into the second part of your question, which I'll come to and a second but in terms of thinking forward for the rest of the year.
Part of what we did was go through that that expense savings exercise earlier, and there we talked about $40 million to $50 million somewhere in that range of savings, we've gotten through that and executed that pretty well at this point not saying that we're going to continue to see a downward trajectory now I think frankly the.
Business growth and some of the investments, we're making and the business might cause that to start to have more of a traditional feel going forward. So and then if I come to the non comp side and I think the area Youre, probably looking at Alex is probably outside services and we've got it and Theres a $20 million increase sequentially there.
And we did we did talk about that I did reference that that line item was going to be higher than anticipated and.
So probably makes sense from you to unpack that a little bit for for the group and in a way the way we've been thinking about it is to separate that outside services category asset servicing line 2 categories.
First there is a lot of business related expenses that are that are in there and so sub custody third party advisory brokerage clearing market market data and those are line items, they're going to trend with the growth of the business and about half of the growth that we see sequential.
Ali is related to that business growth and.
And you can kind of even litmus test that if that's half of the $20 million and say, it's about $10 million compare that to the fact that that we saw about $40 million and trust fee growth X waivers and so that's not bad and that you should expect that when we've got that.
On a lift on trust fees, you would expect there to be some increase coming and these business related growth exercises.
And then the second Big category. There is a lot of our technology cost is within that outside services line and.
<unk>.
We've been we've had a very consistent goal of strengthening the foundation of technology, improving data architecture, and our client experience and since we're doing well on those head count exercises and markets are up we want to be deliberate and say, we're going to reinvest some of that savings back.
And to back into technology and that accounts for about half of that increase now to your question on how should we think about it going forward all of that said tick.
And that tech investments not going to continue to grow at $10 million a quarter.
The components of outside services.
Net relate to technology should actually be flat over the next few quarters and we've got some some of the engagements we had with consulting firms and others kind of frontload the activities there and so at this point, we're thinking that component should be flat. The other component sub custody third party.
Advisory brokerage and that's going to continue to trend with the business and.
And in hindsight, even thinking back to the charges, we talked about on January there is a good example of how we've deployed some of those savings and areas that we talked about to reinvest and technology broadly for the business.
Great. That's super helpful. Thanks, Thanks for that.
And then maybe I can squeeze another follow up just around capital return dynamics, the buyback was a little bit light this quarter.
Obviously, you guys continue to have very strong capital ratios and we've seen your peers talk about the willingness to sort of go even a little bit below their internal set of management targets because the balance sheets have ballooned as much as they did.
How does that inform at all your appetite for share repurchases. I know you guys kind of think about yourselves relative to peers and thats on a construct as opposed to the absolute sort of vacuum.
And given given the backdrop for share repurchase for both states and VK curious, how you're thinking about yourselves.
No.
And.
And acknowledged a lot of a lot of firms have talked about aggressive share repurchase to us share repurchases tied to a lot of factors as we think about how to deploy earning and.
And.
If we to keep capital levels roughly level, we've got a considered dividends, which you consider those kind of predictable then you're managing the 2 other factors 1.
And the capital required to support <unk> growth and then lastly share repurchase. So if you look at we actually looked at the last 5 years pre pandemic and dividends are interesting and they're consistently about a third of net income and <unk>.
So think about the other 2 thirds split between supporting our <unk> growth and share repurchase over that 5 years coming into the pandemic.
<unk> wasn't changing significantly so the increase that we saw related to <unk> growth is just about 15% and that leaves about 50% of our earnings that were redeployed to share repurchase since the start of the health crisis, though the relationship between repurchase and retention is actually flipped and so.
And dividends are still roughly a third maybe a little higher but the rise and loans and securities that you see on the balance sheet that leads to an increase and RW way. So about half the earnings have been redeployed and the farmer retention to maintain capital levels and that debt left about 15%.
<unk> repurchased that's kind of and narrowed the overall lens of how we've gotten to where we are now that is not to say that we wouldn't change our capital levels or the change and <unk> is a long term phenomenon and we could easily see lower <unk> levels and a lot of different scenarios that we could predict but.
And at least explains what happened and the 5 years pre pandemic and the trends you saw there and then how things have changed in the midst of the health crisis and how at this point or share repurchase or light relative to what you saw coming pre pandemic.
Great. Thank you very much for taking the questions.
Absolutely Thanks al.
Thank you and our next question comes from Glenn Schorr with Evercore ISI.
Hey, Glenn.
Hello, Thanks, Hello, there and good morning.
So question on on just rate rate impact in general.
Flat rates from here or better do we finally see the signs of on.
And NII and fee waivers bottoming out.
Or is there another.
Level to think about it as non operating deposits might start declining just curious to get your thoughts on that and the cadence from here.
High level I think the band at this point has narrowed a lot and.
So theres still run off and the securities portfolio were 65 or 2 thirds of the way through the runoff there and.
And we're still losing about 40 basis points, but if we think about the impact of what that's doing.
Not as significant as it once was and.
And then another component and people obviously, you've seen Iot are up and I think 1 thing to note. There people see we've got about 35 billion and cash, but we only have about 13, 14 and $15 billion at the fed and so that translates to a $1 million.
And have a $2 million a quarter, it's not that much and lift.
LIBOR continues to be a big impact and you actually saw LIBOR come down a little bit and went from 12 basis points to 10 over the quarter and so all those things together, we're at least at this point, we're not talking about 5 and 10 and $15 million moves, we're talking about $1 million to $3 million moves a quarter and they're often.
Setting each other largely so I think we're in a band where the volumes across the portfolio are going to be the driver of what happens and and net interest income.
Okay I appreciate that 1.
You could just.
And.
And just comment on the fixed versus floating.
Mix.
Your debt.
And then the securities portfolio and I'm, just curious on LCR.
And just thinking about locking on either side.
As rates have moved yet again lower.
Wouldn't it wouldn't cause us and the <unk>.
<unk> moves and it wouldn't cause us to make a change and we're constantly looking out on the market and just thinking broadly about how we feel about it and so we.
And we did have duration.
Step out a little bit it went from 2.5 to $2.6 and $2.6 maybe 2.7 somewhere in that range, but.
<unk>.
That's more reflective of the longer journey, we've been on.
Extending the securities portfolio, but we're conscious to not try and.
And and Chase return by doing anything inconsistent with what we've talked about strategically and.
And the strategy, we talked about at Alto has been to get about where we are right now and and.
In and duration and and mix and so no significant changes that I wouldn't want to forecast coming up.
Okay I appreciate it thank you.
Thank you Glenn.
Thank you. Our next question comes from Gerard Cassidy with RBC.
Sure.
Good morning, Michael.
And Jason Hi, guys.
Can I follow up on the money market mutual fund waivers fees now that.
And there has been a slight increase in rates and the reverse repo area, where many of the money market mutual funds are now engaged with the federal reserve do you sense that your money market mutual fund waivers fees could actually decline sequentially. Some of your peers have pointed that out.
Yes, I think they will and.
Unless we get a significant change and the short end of the yield curve, but what happened mid June was was helpful for waivers and if you think about do.
Can you just think about the math of it well first of all I will tell you I can tell you where we were we peaked at a run rate of $80 million to $85 million a quarter and Thats. What we were early June and.
And now as we sit today, the run rates more like $70 million per quarter and.
Net debt change that run rate changed pretty quickly.
After the fed actions June 16th or whatever it was now that said there is not much I don't think there's that much more that's going to come in terms of run rate and I think.
At this point because these money market mutual funds are so short and probably 40% of them on average have 30 days or less and duration and the portfolios that they have already turned over and reinvest it and so the run rate I gave you and largely reflective of the post.
And overnight repo facility changes, but yes. There is there is a benefit that came from fed actions and mid June.
Very good. Thank you and then as a follow up.
<unk> talked a little bit about your reserves at the fed I think on your balance sheet. Your total.
Deposits and banks all central banks.
Around 54 billion.
And if that's the right number.
Can you tell me, what's what's a more normal number and once we get into maybe a more normal environment and at some point and the future.
What would be a lower number that you'd be comfortable with.
Well I'm not I'm not sure it's I'm not sure is lower it's interestingly.
We talk a lot about this what is.
If we layer and the overall deposits on average deposits or forget about just what's the deferred but just in general what's driving the asset levels as the liability side and if we're at $120.530 billion.
Is that a post pandemic normal and.
It's just too hard to tell and I think there is clients are right now they've held on to liquidity longer than what we would've anticipated.
And that 35.
$15 billion and USD that other 20 billion ish, that's in $2000.30 billion and other currencies and other central banks, it's all driven by the by the deposit base and it's held in there pretty flat for a while now and that kind of $120.130 billion level.
Thank you Jason Thank you.
Sure. Thanks sure.
Thank you. Our next question comes from Brennan Hawken with UBS.
And Brian.
Good morning, Thanks for taking my question.
Jason curious about the loan growth.
And so that was pretty robust this quarter.
And actually the end of period higher than the average so certainly suggest it was it was steady through the quarter.
Can you maybe give some color on what's driving the loan growth and also the decline in the.
Hello, and yield was that simply a function of LIBOR or was there some mix that was contributing to that as well.
Thanks.
So the loan growth I'd put it and in 2 buckets 1 is.
There is there has been and ongoing for the last several months for this year and maybe even leading up to it.
And initiative, a desire a deliberate level of activity with clients to explain to them. We like the types of loans that we do but we're willing to do more of them with those clients and I've talked about being perceived as more of a reluctant lender and so where we've been.
Talking to clients and we will do more and so that has been a continued lift to our loan portfolio I think particularly relative to what we've seen and the rest of the industry that said, there's also a chunk of it that's more it's probably more episodic and we've talked about the spiking us and.
The deposits that can come from particularly GSO clients are very large asset owners and there is an element. That's there that's prop debt that we would view as episodic and spiky and thats leading to both.
Hi.
A big part of the increase that you mentioned and also is a driver of the yield but back to the fact that we did see LIBOR come down a couple of basis points that obviously is also going to have an impact on the loan portfolio as a whole.
Got it okay. Thanks for that and then thinking about organic growth and the quarter.
You guys had signaled recently that things are starting to pick back up after being.
On hold with with the pandemic and all.
All of the disruption.
So how did on organic growth come in this quarter and when you think about organic growth, particularly on the wealth management side do you. All typically use metrics that are consistent for wealth management like net new assets in order to gauge that growth and.
Is there any chance that we'll be getting some disclosure maybe some formal disclosure around those metrics at any point. So we can have a better more clear sense of of how this business is growing.
Well the.
Feel like giving.
Moving revenue numbers by region, and and also splitting out the family office business and.
So let me I can.
We can come back to the disclosure element, if you'd like but just maybe start sequentially with your questions. The organic growth across the company was good and strong and C&I asks for the quarter and we look at that very much year over year, and it's very difficult to try and unpack that on a sequential basis, but the C&I business has had.
Strong new business growth and that's.
And that's coming to fruition, it's being on boarded and we're seeing good organic lift and the business and.
And then well as you can see it's benefiting a lot it's more exposed to market growth and so that's been more of a help but there's also been good year over year growth and the wealth management business as well I'll also call out and looking at the numbers a little bit deeper that a portion of the growth sequentially and well.
<unk> came from what we think it was some nonrecurring items, we have those items and CNS and we call those out but that we also have those in the wealth management business and so that can be.
Trust and state settlements it can be how we account for alternatives coming on to the coming onto the income statement not a huge amount, but you call it 3 or $4 million of the lift that we had non recurring in nature.
But overall it was a good.
We'd said very strong organic growth.
Quarter for the enterprise.
Great. Thanks for that color Jason.
You bet.
Thank you. Our next question comes from Michael <unk> with Wells Fargo Securities.
Hi.
And Mike your opening comments you mentioned.
The digital strategy and some changes that you made and how thats, helping out right now and Thats, a very high level comment and it's appreciated but can you connect that to some more concrete metrics on how it's.
Actually impacting the results that we're seeing and maybe will impact results ahead.
So I think with digital and Mike There is a number of ways to look at it but to start with the referenced in my opening comments, there, particularly in wealth management on a.
A lot of this is as I've talked previously about switching from a new business generation model that has historically been primarily I'll call. It.
Either in person or on the phone if you will to being more digital and so when I talked about the navigate and now campaign that was essentially or driven by and online digital campaign.
And the key to it was debt.
How do we generate more opportunities from that so leads from that and so both with what was online. It was supported then with some more traditional media through advertisements that generated thousands of leads for us at a high level, which then have been worked through to get to the.
And the leads that fit our profile and then could be followed up I'll call it and a more traditional way and doing that.
Other 1 I'll mentioned, Mike that I referred to is the tax policy Resource Center, which is part of the Northern Trust Institute and while we talk a lot about that is our knowledge base that we leverage for our clients, but it's also a significant new business generation.
Assets and the reason why that's also digital specifically to your point is when we launch that center, which essentially is online and then that has generated significant new leads so just with that.
Net policy resource Center.
Since it's been launched we've had over 250000 views of that and then from that that gives us the.
The data if you will to then follow up with those that are going to the center and again that doesn't mean that 250000, and then will be quote unquote good leads but it.
It's the funnel, which you then work those through down to ultimately being new clients. So that's when I mentioned digital and that was the reference on that front and then to your point more broadly with what we're doing just with Digitalized and our entire business that's much broader with regard to our technical and technological.
<unk> capabilities that drive both new capabilities for our clients, but also efficiencies for our business model.
And on that last point, when you talk about efficiencies to the business model is there.
Any way you can size the potential your aspirational targets lowering unit costs, improving the fees and expense relationship any.
Kind of context, you can put around that.
Yeah. So.
And as you know and you highlighted that there.
There's a number of financial metrics, but 1 that we've looked to which is the expenses to trust fees and we've continued to drive that down over time and I do think at a high level financial perspective, Thats, where youre going to see it come through and just to try to make that more tangible.
So 1 of our big investments and asset servicing is in our matrix platform.
That first is focus on transfer agency.
And so with that yes, it will provide a much better experience.
For our clients clients right, because we're doing that on behalf of asset manager clients, but also that is going to yield significant efficiencies for us essentially thats the first.
And I'll call. It funding mechanism for the business plan to make that investment and then the other of course is generating new business because of the capabilities.
Alright, thank you.
Sure.
Thank you. Our next question comes from Steven <unk> with Wolfe Research.
Hi, good morning.
Alright.
With regards to the outlook, Jason I was hoping you could speak to what's driving that.
The increased loan appetite and the current environment I know you talked about really strong growth and demand across our client base, but I was hoping you could provide us some context around how much of a seasonality a factor that maybe drove that step up given some of the tax seasonality and just the implications for the NII trajectory and the back half whether theres a sufficient.
Offsetting the securities yield headwind that you had cited earlier and your remarks.
The.
Not a lot there's not a lot of seasonality on the loan side.
Ross at all some on the deposits, but not on the loans and so.
Good.
What I was talking about earlier is there may be a layer there that's less about seasonality, but more about just the spiking us and how some of our very very large clients will sometimes come to us and say, we want to borrow very large dollar amount to either avoid selling.
Large asset avoid the public sale.
Large assets and we're happy those are extremely high quality loans, and there and theyre meaningful to clients to help.
On their liquidity needs, but you can also imagine pricing on and isn't something thats driving incredible increase in NII, either and so I don't think that I think it probably sticks out more and the and volume levels, then it will and NII levels over time.
Got it and just from my follow up losses on NII was hoping to get a sense as to how you're thinking about managing some of that.
And as liquidity that parked at the fed you saw a very healthy step up and that.
Surprisingly sequentially and the securities growth has been relatively tepid and excess reserves have continued to expand wanted to get a sense as to whether you have sufficient excess liquidity or buffer.
Some of those incremental funds back into securities.
Yeah, we've got a lot of we've got plenty of room right now if we wanted to move from whether it's <unk> and non HLA and whether we wanted to increase the balance sheet size of clients, where the driver there and saying and saying we wanted to do significant increases again.
We haven't we're not incredibly receptive to the phone calls from organizations. We don't work with saying can we park $10.5 billion on the balance sheet, we've always talked about the balance sheet being there for our clients and being a strategic resource for us engaging with our clients, but it.
This point, we feel like we've got a lot of flexibility I think you look at tier 1 leverage of 7.1 and.
And.
And that gives an indication and and of itself is tens of billions of dollars of room that we could have to bring on additional assets and then includes in terms of how we would deploy it and there's also plenty of room, we have to to move between <unk> and non <unk> based on what we see as attractive and the market and the <unk>.
Risk profile that we're looking at across the different asset classes that we invest and.
Great color, thanks for taking my questions.
Sure.
Thank you. Our next question comes from Betsy <unk> with Morgan Stanley.
Hi, Good morning, Hi, Bert.
Great.
I had a couple of questions on some of the initiatives that you've announced recently in particular.
European ETF launch and the alternative asset.
Servicing digitization initiatives, maybe you could give us a sense as to.
And how we should be thinking about the rollout timing the impact.
Is it likely to come through earnings and the next couple of years or is this.
Client acquisition over time type of initiatives.
Headline both as long term strategically important but short term not needle moving from income statement perspective and.
Take for example, the European Etfs.
We've got $160 billion, and AUM and and.
And overall assets, mostly in Europe related to <unk> ESG and we've got a nice business in Europe when it comes to.
And when it comes to dealing with ESG and fund launches and so that's a good example of us thinking about what's important for our clients and working with the asset management business.
And to determine what they can do to provide incremental resources for clients long term not you'd think about the size of trillium and $5 and assets and and.
<unk>.
And the asset management business and that's not something that we think is going to be a needle mover to that 1.5 trillion dollars, but also strategically really important.
Mike If you have and anything you want and Betsy 2 to address the other 1 and it fits into my comments on digitalization and the fact that the first driver.
Often is the efficiencies that we get from it so what we announced there on the alternative asset side is the ability to use machine learning and order to essentially capture all the data for alternative assets and digitize them. If you will so that then they can be much more efficiently processed.
Through the entire process and so.
Something that I.
And we will benefit us on the efficiency and productivity side.
Okay, and then just separately.
The equity markets are up nicely and we're hearing about a lot of pension plans that are looking to get.
And then put into the hands of CIO providers.
No you are involved in that business could you give us a sense as to how you believe your position for what seems like is a wave of opportunity here.
Yes.
And we're in that business and and a good way and we think about particularly North America pension plans are OCI businesses and.
I'm, a little stale on the numbers, but it was 1 point within the last few years, we were the leader in that space and so.
So it falls into our sweet spot well, we've got very good expertise very sufficient client base, particularly on the on the.
On the DB side of the house.
<unk> market.
Now.
Flip side too and as you get a lot of clients, who as they de risk and do other things with their portfolio as they can.
Can sometimes work against you, but and so I don't think about it is.
Big wave that again is going to move the needle on $4 billion and fees, but it's.
That's a very strategically important business for us where we've done extremely well over time with high quality clients and and a very talented team and so when there is money and motion there for firms to be thinking about outsourcing their DB plans.
Think we're very well positioned.
I would just add debt because we do believe we're particularly well positioned for that.
And that trend because in addition to adjacent and said if you think about our business model you have.
<unk> practice.
And that Jason talked about but also.
We have relationships through wealth management and through the family office part of that as well.
And we have.
Exposure and connections into a number of foundations.
That might not be as large as some of the biggest that you read about but are going through the same decision making of whether they want to just outsource the investment activity. There and we think that will continue and we think again, we cover it I would say is broadly as anybody.
Okay, Alright, Thanks, and then just 1 squeeze and then question on the dividend I know, we talked earlier about the.
Buyback, but should we be expecting any changes to the dividend going forward.
Well if you look over the last few years, particularly pre 2020, which is kind of a goofy year, but our dividends pretty consistently 30% to 50% of net income and.
And it's been very consistent and if you look at where this quarter falls It falls right in the middle of that 30% to 50% range and so.
So nothing there and it would.
Raise a flag up or down and we think it's very.
And it's very.
Attractive from and we also interestingly I think something people don't do a lot we look at dividends relative to <unk>.
And as an interesting way to combine thinking about payout ratio with returns and.
So as we look at our peers and you can pick your own but both in terms of debt.
The level of that payout ratio on a percent basis relative to earnings the consistency of it and.
And also how it is relative to <unk>, which again gets to both returns and pay out.
And relative to the peers, we look at risk or really well on those different lenses.
Okay. Thank you.
Okay.
Thank you and your next question comes from Ken and Eastern with Jefferies.
Hi, Good morning, just to follow up on that point on capital further.
I just wanted to make sure I.
Clear that.
It seems like you're focusing as much on just maintaining capital ratios with that balancing act you mentioned on <unk> versus the combined shareholder return and so I know you guys don't give us formal targets, but I think historically.
I Wonder if you might have relative to where the others are is this a little bit of a difference maybe its post pandemic or maybe it's.
Do you want to keep some aside for inorganic opportunities just wondering like how do we think about how northern trust thinks about your absolute capital in that regard I understand the mix abuses has changed but coming back to just like where do you want to live on absolute levels. Thanks.
Sure and Ken It's Mike.
I think you hit on the key factors and how those do change over time. So to your point you said, while the pandemic and how you might feel about that that that criteria is the operating environment. So we're always looking at that operating environment determining where we think we need to be the second I would say is certainly from a regulatory perspective.
And on and again feel very good about where we are there, but that's another lens to make sure that we think we're and the right place vis vis all of the ratios and the whole CCAR process and everything and then third as you mentioned, it's instead of I'll call on absolute it's the relative capital ratios, which we know that that.
Is.
A part of the considerations that clients have when they think about a financial partner a partner that.
They need to trust not just today to be around and be strong but be around for a very very long time.
And that's part of the pitch if you will Ken is that.
That northern trust has been around and we'll be around through all types of environments and that we have amongst all of the capabilities, but we also have the financial strength and capitalization. So that's why that criteria is important and to your point that that can change over time.
And as our peers move their capital levels up and down.
Right, Okay, and so it seems to me that <unk> got plenty of capacity on all of those factors plus room for balance sheet growth plus room for buybacks, but.
And so it seems like the mix of the buyback has become a smaller.
Proportionate, obviously as we saw this quarter.
Yes, it did but as Jason went through we've just gone through and the last 6 quarters.
Meaningful increase and <unk> largely intentional if you will adjacent and talked about where we saw the opportunity to really support clients and.
And to get prospects that would not just be credit clients, but broader relationships and so we saw that as a better opportunity at that time to redeploy in the business and.
And <unk> went up as he said mark.
And the 6 quarters than it did and the 5 previous years and a meaningful way does that stay the same going forward obviously.
Obviously, we don't know but.
Generally speaking these things tend to change over time.
That's very fair. Thank you, Mike and just 1 question on deposit growth, which has remained stickier as you guys have mentioned.
Are you comfortable housing at all on balance sheet.
Even though youre getting relatively low returns and the low rate environment or do you contemplate trying to move some of it often to off balance sheet vehicles.
We can start in that instance, with whats best for our clients and we.
We've got $280 billion and money market fund family and so and the performance. There is good it's a very attractive set of of money market mutual.
Actual funds at the same time, some clients really like the saying we want to be on the balance sheet and some of it is geographic obviously and the in the U S. There is much more prevalent to use funds, where some of our European clients like to use the balance sheet more and they were and a good position, where we've got room on both.
It's really good attractive offerings on both sides and don't need to nudge clients, 1 way or in other for us when that said, we we sometimes look and different operating environments. We can we can think about pricing. We can think about the value proposition that we can offer clients in 1 platform versus another and.
And we can have conversations with them about that and do things, but not in a position at this point to have to nudge and that 7.1% in this environment, where we're all bank balance sheets are inflated. It gives us it gives us a lot of room to be able to just lead with what makes the most sense for large sophisticated <unk>.
<unk>.
Got it okay. Thanks, guys.
Sure.
Thank you. Our next question comes from Vivek <unk> with Jpmorgan.
Hi, Thanks for taking my questions.
Yes.
Come back into the capital question.
Since that since the buybacks and dividends have caught everybody's attention.
Following up on your comment that you had to do it with less risk.
And watch versus peers.
And then you'll focus on the risk weighted assets. So that would imply that you will focus on the CET 1 ratio versus peers.
Is that a GAAP what is the GAAP that you are trying to maintain about peers and is it 100 basis points.
Okay.
Can you give us some sales.
As we think about.
And the <unk>.
Cost structure and stuff your balance sheet and whatever assumptions we make.
What is it that we should be keeping in mind.
And it is no.
And GAAP in particular and Thats not even I also wouldn't say that's the only ratio that we look at CET, 1 and we're looking at and we've talked about tier 1 leverage a few times just this morning on this call and and there are other things that we look at.
Well in terms of the balance sheet strength in credit.
Credit quality and other factors and how that duration and what exposures like 2 to interest rate risk and so theres a lot of ways to to litmus test that and then at the same time, we've also mentioned and Mike just walked through the framework.
And its ago, we're thinking not just about the relative but at an absolute level, where we want to be thinking about what the regulatory environments like and then I always.
And remind people that we're not just making this decision unilaterally internally we have really good engaged conversations with our board around this topic as well on where we might want to be where we might want to take the balance sheet strategically and so I know, it's tempting to kind of look and say, okay, well whats the floor and where are you.
Volume, but there's so many factors that we're looking at and also whats the reinvestment opportunity set look like and if we've got opportunities to let our waa grow and ways that we think are building the future earnings and Thats.
And that's what I think some people convince us that the <unk> growth isn't just a drag that theoretically should give you should give a sense that there's potential future earnings that's expected and we're still.
Trying to grow earnings and so looking at dividends and share repurchase I think can sometimes take it pull that narrative toward thinking about those things is the better way to redeploy earnings, but the <unk> growth is reflective in some ways over the long run of the base of business that we have now again, it's not to.
Say that we think <unk> is going to continue to increase it could come down.
When mentioning the loan the loan growth. We've talked about is is something that had a significant increase and <unk>. This period, if that goes away and a year, then <unk> would come down and so there's so many factors that we sit around the table and talk about where do we want to go with redeployment of earning.
<unk>, we've got to try and predict not just where things are but where things are going and each of these elements, but it certainly broader than thinking about a specific GAAP on CET 1.
Okay, Okay great.
And 1 more on.
As you.
Okay.
Look at tier.
Overall.
And expenses.
Total assets.
Other operating expenses.
What do you expect that trajectory to be.
Are you seeing any other impact from an inflationary standpoint any.
Any color on that given the big talk and the environment about inflation.
Sure.
And look to do to offset that.
Yeah.
I think we missed the operative word there or are we looking to see any changes and what did you say vivek from.
The rise in inflation are you seeing any inflation impacting your expenses.
And if so how you either what are you to being able to do to offset that.
Thanks for clarifying and then just another component of the question here.
The comments, we made earlier weren't on other expenses. It was on outside services just to make sure everybody understands what we were talking about and detail there but.
And the inflation is showing up in different areas. I mean every firm is dealing with with talent issues and and.
And the pressures there.
And we certainly see that and experience it and talking it management levels about how to how to address it and the inflation, we see across the business and different areas as well and.
And some of it is unit cost, but some of it is just the increased cost of doing business and we talked about the significant increase and technology oriented expenses that we're having and some ways thats and inflation costs on the business. It's not just it's not just a unit price and inflation.
<unk>, but its inflation and the overall cost of doing business, so, it's showing up and different ways across the organization.
And just add Vivek.
If you think about it and our manufacturing context to Jason's point, we're seeing inflation on the cost side and a number of ways and our manufacturing context. Your question would be are you able to pass that on to the <unk>.
And consumer and that's not the way our operating model is set up that said if you think about generally how we're pricing what we do.
A lot of it relates to the asset level, so to the extent that that inflation is going through too.
AUM AUC levels youre, capturing some of it there and then also to the extent that you believe that there is inflation.
On the horizon as well you would expect interest rates to go up as well and we know where we are on on rates and what the impact would be to the extent that those increase.
Okay. Thank you both.
Sure.
Thank you and our next question comes from Brian Bedell with Deutsche Bank.
Great and Brian Good morning.
And.
Most of my questions have been asked and answered, but maybe just to come back on the seasonal expenses and the second half.
Give us.
The color on the outside service expense and.
Typically you see a.
Seasonal bump and equipment and software expense and.
And pretty reliable and we started last 3 years.
Could you just maybe comment on weather.
We expect to see that.
The other dynamic and then.
Other expenses.
I don't know if I missed it but.
And trust open is that.
We're going to be a factor for <unk>.
Thanks for bringing up the equipment and software price should have referenced that earlier, yes.
Likely to be.
And increase there as we think about.
And what's happening over the remainder of the year and it's not 1 or 2 areas that I could point you to but its just youre right. There are some dynamics that tends to tick up some of the expenses that we some of the capital expenses that we put in place you started to see depreciation come up there and it's in a lot of different.
Line items.
And so but there should be a tick up there are normal ish or maybe even slightly above that increase and equipment and software and then in terms of golf on or Mike do you on it.
Take them.
It will be and their third quarter, yes, and.
Brian This is mark I mean, you could look at the business promotional line, even though that's not all the golf, but there is seasonality to it and if you looked at it.
2017 through 2019, and there was about a $16 million to $17 million and step up from second and third quarter. So that's probably a decent way to think about it.
Okay, Great that's helpful.
Peter.
Right.
<unk>.
Last last year as we came in as people wondered whether because of the pandemic those numbers would be lower and I think everybody should be thinking about it as more of a normal year.
And mark throughout and it would be the 1 thing and it's important for people to take away alright, great.
Great. Okay, yes, it gets to what makes sense and then maybe just.
On ESG to expect that.
2 part question you mentioned I think Mike you mentioned the Vectra score.
Net debt you launched.
And thats for asset owners, if I'm not mistaken.
And I guess the question there is that's on.
Net.
Charging for separately or more built into the overall and surface suffering and and are on the wealth side are you seeing demand from your wealth clients.
Increasingly to invest and.
And that's with social responsibility and are you meeting that through your own investment management.
Other open.
Open architecture managers on our platform.
So yes, we are seeing the demand.
Brian kind of across the fronts that you talked about so let me just give a little more detail to it.
First of all with our asset servicing clients to your point as they invest more in ESG and they need the analytics and data and reporting to support that and so we are providing that type of service to them and.
And 1 of the examples that I mentioned earlier the Mark.
And Spencer mandate that we had in the quarter was 4 that that service just as an example.
And then with wealth management, absolutely our client base is interested in ESG and increasing.
They're investable assets in that area and.
And as much as we have and open architecture model with wealth management.
<unk> of it is serviced through and Tam and so we've seen the benefit of that and and Tam and Tim on its own or in addition.
On the institutional side is seeing that demand and fulfilling it as well and so just to put some numbers on that our ESG assets and and Tam now.
And now are at about 155 billion, which is up over 50% from a year ago, So healthy growth and that area and it's an area of focus for us as a company.
Okay, that's great color. Thank you.
Sure. Thanks.
Thank you.
This concludes today's Q&A session. Thank you for joining our presentation. This concludes today's call you may now disconnect.
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