Q3 2021 Northern Trust Corp Earnings Call
Please standby we're about to begin.
Good day, everyone and welcome to the Northern trusts third quarter 2021 earnings call. Today's conference is being recorded at this time I'll turn the call over.
Mr. Mark Bette. Please go ahead Sir.
Thank you Alan and good morning, everyone and welcome to Northern Trust corporations third quarter 2021 earnings Conference call. Joining me on our call. This morning are Michael <unk>, our chairman and CEO and Jason Tyler, Our Chief Financial Officer, our third quarter earnings press release.
Actual 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 today's conference call. This October 20th call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this call is the replay that will be available.
And finally on our website through November 17th Northern Trust disclaims any continuing accuracy of the information provided in this call. After today now for our Safe Harbor statement, what we say during today's conference call May include forward looking statements, which are northern trusts current estimates and expectations of future.
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.
Hi, urge you to read our 2020 annual report on Form 10-K, and other reports.
<unk> filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.
During today's question and answer session. Please limit your initial query to one question and one related follow up this will allow us to move through the 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 Michael <unk>.
Thank you Marc let me join in welcoming you to our third quarter 2021 earnings call. During the third quarter. We continued to have success executing on our growth strategies across each of our businesses and our wealth management business, we have driven strong.
Strong growth across each of our regions and our global family Office business, we continue to see improved levels of engagement and new business activities with both existing and new clients.
During the quarter, we've also invested and strengthened our depth of expertise. There's no question that labor markets are tight and competition for talent is fierce.
But even amidst this environment, we are very pleased with the additions to our team across the country.
Within asset management, we continue to see momentum in our quant active flex shares Etfs and ESG strategies, we launched six new climate themed Etfs, which incorporate our new ESG Vectra score two of the launch funds.
<unk>.
Marking our second launch of flex shares offerings in Europe. We've also continued to have growth in our liquidity products and our money funds surpassed $300 billion in assets under management during the quarter for the first time. Additionally.
Additionally, our asset management business was recognized by investment news as of 2021 excellence in.
Diversity equity and inclusion award winner for the third consecutive year.
Our asset servicing business continues to see growth that is well diversified across regions products and client segments. We remain focused on driving profitable growth, while investing in expanding our asset servicing solutions. The current environment has continued to.
We are in your origins earned by investment managers and as they rethink their operating models and whether to move to outsource solutions. Our whole office approach has put us in a position to help them achieve their goals.
We're also positioned well to benefit from the trends of asset owners managing more assets in house is the flexibility of our model and ability to combine.
Pressure <unk> for these clients has been an area of strength.
Our growth strategies within each of our businesses resulted in an 11% year over year growth for our trust fees and 10% growth in our revenue or expenses also increased year over year, albeit at a lower rate as we continue to invest in technology and our staff.
By including higher levels of compensation as we build a diverse engaged workforce with skills for the future.
Taken together this resulted in both positive fee operating leverage as well as positive total operating leverage.
To close I also want to express my sincere and immense appreciation for our employees around the world.
<unk> commitment expertise and professionalism and serving our clients communities and one another continues to be truly extraordinary 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 third quarter 2021 earnings call.
Let's dive into the financial results for the quarter starting on page two.
This morning, we reported third quarter net income of $395 7 million earnings per share were $1 80, and our return on average common equity was 13, 7%, which matches our performance from the prior two quarters.
You can see.
Political market data on the bottom of page two.
Call that a significant portion of our trust fees are based on quarter lag or month lag asset levels in both the S&P 500, and even local at favorable sequential performance based on those calculations.
As shown on this page average.
And just one month and three month LIBOR rates were modestly lower during the quarter.
Let's move to page three and review the financial highlights of the third quarter year over year revenue was up 10% and expenses increased 3% net income was up 34%.
In the sequential.
<unk> revenue was up 4% and expenses were up 1%, while net income was up 7%.
The provision for credit losses reflected a release of $13 million in reserves in the current quarter compared to a release of $27 million in the prior quarter.
Return on average common equity was 13 seven.
Paris I set for the quarter up from 10, 5% a year ago and consistent with the prior quarter.
Assets under custody and administration and assets under custody were both up 21% compared to the prior year and flat on a sequential basis.
Assets under management were one five.
Seven 4 million.
And were up 17% from a year ago, and also flat on a sequential basis.
Let's look at the results in greater detail starting with revenue on page four.
Trust investment and other services fees, representing the largest component of our revenue totaled $1 1 billion.
<unk> were up 11% from last year and up 3% sequentially.
Foreign exchange trading income was $66 million in the quarter up 8% year over year and down 6% sequentially.
The year over year growth was driven by higher volumes, while the sequential decline was due to lower volumes and.
For volatility.
The remaining components of noninterest income totaled $110 million in the quarter up 21% from one year ago and up 11% sequentially.
Within this securities commissions and trading income was up 40% from the prior year and up 10% sequentially.
And little higher levels of interest rate swap activity benefited both the year over year and sequential results, while higher core brokerage revenue also benefited the performance versus last year.
Other operating income totaled $62 million and was up 17% from one year ago and up 15% sequentially.
The increase compared to a year ago was driven by distributions from certain investments in community development projects as well as higher banking and credit related fees, partially offset by lower miscellaneous income.
The sequential increase was primarily driven by lower expenses related to visa swap agreements.
The higher income from investment.
It's in community development projects.
Net interest income, which I will discuss in more detail later was $357 million and was up 6% from one year ago and up 4% sequentially.
Let's look at the components of our trust and investment fees on page five.
For our corporate and institutional services business fees totaled $630 million and were up 8% year over year and up 3% sequentially.
Custody and fund administration fees were $460 million and up 17% year over year and up 1% sequentially.
Both the year over.
Over year and sequential increases were driven by favorable markets and new business.
Unfavorable currency translation and lower transaction volumes also impacted the sequential comparison.
Assets under custody and administration for C&I as clients were $14 eight trillion at quarter end up 20.
Only 1% year over year and flat sequentially the year over year growth was primarily driven by favorable markets and new business. The sequential performance was driven by new business and favorable markets offset by unfavorable currency translation.
Investment management fees in C&I as of 114.
$14 million were down 17% year over year and up 13% sequentially the.
The year over year performance was driven by higher money market fund fee waivers, partially offset by favorable markets and new business.
The sequential performance was driven by new business and favorable markets.
Fee waivers in <unk> totaled $49 $9 million in the third quarter essentially unchanged from the prior quarter, but up compared to zero point $9 million in the prior year.
Assets under management for CNI as clients were $1 two trillion up.
Up 17% year over.
And down 1% sequentially the growth from the prior year was driven by favorable markets and client flows. The sequential decline was driven by modest unfavorable impact from markets and currency, partially offset by positive net flows.
Securities lending fees were $20 million up.
Year on year over year and up 3% sequentially.
Average collateral levels were up 22% year over year and up 3% sequentially.
Moving to our wealth management business.
<unk> investment and other servicing fees were $481 million and were.
2%, 15% compared to the prior year and up 4% from the prior quarter.
Fee waivers in wealth management totaled $26 $7 million in the current quarter compared to $29 2 million in the prior quarter.
And $4 4 million in the prior year.
Across the.
We're <unk> in global family office, the year over year growth was driven by favorable markets and new business, partially offset by higher fee waivers.
For the sequential performance the growth within the regions was mainly due to favorable markets as well as slightly lower fee waivers.
Within global family office, the sequential growth was.
Regionally due to new business favorable markets and lower fee waivers.
Assets under management for wealth management clients were $373 billion at quarter end up 17% year over year, and essentially flat on a sequential basis the.
The year over year growth was driven by favorable markets and client.
Primarily while the sequential performance primarily reflected client flows mainly offset by unfavorable market.
Okay.
Moving to page six net interest income was $357 million in the quarter and was up 6% from the prior year.
Earning assets averaged 140.
Flow <unk> and.
In the quarter up 11% versus the prior year.
Average deposits were $130 billion and were up 15% versus the prior year, while loan balances averaged 38 billion and were up 16% compared to the prior year.
The net interest margin was zero point.
48% in the quarter and was down five basis points from a year ago.
The net interest margin decreased primarily due to lower average interest rates, partially offset by the benefits of balance sheet volume and mix.
On a sequential quarter basis net interest income grew 4%.
Average, earning.
900, and average deposits increased 1% on a sequential basis, while average loan balances were up 6%.
The net interest margin increased one basis point sequentially, primarily due to changes in balance sheet volume and mix.
Turning to page seven expenses were $1 one.
Asset dollars in the third quarter and were 3% higher than the prior year and up 1% from the prior quarter.
This quarter's results included a $6 $9 million pension settlement charge within the employee benefits expense category, while the prior quarter included a pension charge of $17 $6 million.
Also.
Billion recall that last year's results included a $43 $4 million charge relating to account services active account servicing activities.
Excluding these items expenses were up 7% versus the prior year and up 2% sequentially.
Compensation expense totaled $496 million.
So and was up 7% compared to the prior year and was up 2% sequentially.
The year over year growth was primarily driven by higher cash based incentive accruals as well as higher salaries.
The sequential increase was primarily due to higher cash based incentive accruals.
Excluding the previously mentioned pension.
Settlement charges employee benefits expense was down 3% from a year ago and down 6% sequentially.
Outside services expense was $211 million and was up 13% from a year ago and down 3% from the prior quarter revenue.
Revenue in business volume expenses accounted for approximately three quarters of the year over year growth.
The remaining year over year growth within the category included higher technical services consulting and data processing related costs, reflecting investment in the business as well as the timing of engagements.
The sequential decline was driven.
So our technical services legal services and third party advisor fees, partially offset by higher sub custody related costs.
Equipment and software expense of $185 million was up 8% from one year ago and up 4% sequentially, both the year over year and sequential increases.
Given by reflected higher software support and amortization costs.
Occupancy expense of $54 million was up 4% from a year ago and up 3% sequentially higher real estate taxes and building operation costs were the primary drivers of both increases.
<unk>, excluding the prior year's charge other operating expense of $81 million was down 3% from one year ago and up 20% sequentially. The.
The year over year decline was driven by lower miscellaneous expenses and staff related costs, partially offset by higher business promotion spend.
The sequential increase.
Acted by costs associated with the Northern Trust sponsored PGA golf tournament, partially offset by other miscellaneous expenses within the category.
Turning to page eight our capital ratios remained strong with our common equity tier one ratio of 11, 9% under the standardized approach down.
Down slightly from the prior quarter, our tier one leverage ratio was seven 1% in line with the prior quarter.
During the quarter, we purchased 860000 shares of common stock at a cost of $100 million.
We also declared cash dividends of <unk> 70 per share totaling $148 million to common stock.
<unk> holders.
The current environment continues to demonstrate the importance of a strong capital base and liquid balance sheet profile to support our clients' needs and we continue to provide our clients with exceptional service and solution expertise they've come to expect.
Our competitive positioning across each of our businesses.
Management asset management and asset servicing continues to resonate well in the marketplace and is generating organic growth across each business. Thank.
Thank you again for participating in Northern Trust third quarter earnings conference call today.
Mark and I'd be happy to answer your questions. Alan will you. Please open the line.
Sure.
Certainly sir if you'd like to ask a question. Please signal at this time by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach.
We once again ask that you limit yourselves to one question with a relevant follow up question.
And again that is star one if you'd like to be placed.
Welcome to Q.
We will take our first question from Glenn Schorr with Evercore.
Good morning, Glenn.
Hi, Thanks, good morning, Thanks very much.
First question on custody and fund administration fees.
Usually we're beating you up and saying why didn't they grow as much as asset.
At this time.
17% growth of almost 21% pro forma assets. So I guess the underlying question is.
The nature of the new business that you're adding on.
That average fee.
Overall average and if there is anything.
Yes.
You could add on in regards to the great because it's interesting.
Sure well I'll.
I'll start and if Mike wants to jump in.
And looking at what's been added on what was interesting to me is that it.
It's a really good blend across geographies and across client channels and so there's been good business it's been on boarded.
In EMEA.
But also in North America, and then you look at the client channels, whether it's our traditional institutional Investor group AIG or our fund services group. There's been business has been on boarded across the board Interestingly, we don't look that much at kind of the average fee per.
AP assets coming on board, we look much more at what are we doing for those clients and so I think what jumps more to me is how we've been able to continue to build in some of the other ancillary services that we're doing for clients things overall like core brokerage and FX down.
Mostly because of the summer dynamic, but its up nicely over year over year, Mike anything to add.
I would just add Glenn two points, one is that with some of the new business that came online during the quarter.
It was as Jason mentioned in North America. It was in fund services and specifically.
<unk> administration, plus other services related to that so think about those as kind of a full service clients to your point where per dollar of assets.
It's going to be higher so good good client wins on that front and then the second thing is that we also get.
<unk> growth through the I'll say success and growth of our clients and we've seen that particularly in the alternative assets area, where they've had good flows and good appreciation and that has flowed through to some of the.
Increase in fees that you're seeing for us.
That makes a lot of sense, maybe just a quick follow up you mentioned the alternative world.
Obviously.
Big push and ongoing momentum in.
High net worth individuals increasing their allocations to all we've seen that in a bunch of the big broker dealers. We've seen the oil is getting success and distributing their product.
The Big wealth management platform can you just talk to us about where you're at in terms of that evolution.
Strategically we see that as.
It has been successful to your point, Glenn but still is a big opportunity for us across the company.
So meaning each of our businesses.
And with each of those I would say we are trying to provide more in the way of services around that so within asset management are 50, South business is completely focused on providing alternative solutions for our.
Company.
Wealth management clients, but also institutional clients.
Certainly within asset servicing I mentioned, they're a little bit alternative asset managers as you know we have.
<unk>.
A relatively meaningful business and hedge funds with hedge funds, we're looking to expand that more to.
Private capital.
Both where again we have.
A strong client base, but looking to grow that faster.
And then also within wealth management, if you just look at the asset allocation of our wealth management clients.
At this point it would indicate that overall.
Our allocation to alternatives.
Capital should be higher over time, and so how can we provide that we have some solutions on our platform. In addition to 50, south where they can invest directly in alternative funds.
But we believe that there is more we can do across the spectrum of clients that we have.
Thank you.
Our next question will come from the line of Steven <unk> with Wolfe Research.
Good morning, Steve Hi, good morning.
So just wanted to start off with a question on organic growth and maybe specific to the wealth management segment. Some of your peers have been citing that flow rates have been running hot.
Okay, correcting some moderation or normalization in the coming quarters, and I was hoping you could speak to where organic growth within the wealth segments running today and what do you believe is a sustainable flow rate for that business longer term.
Well I'd start with separating the regions from.
And in general over the last several years.
<unk> business, which obviously people who are less familiar than you or Steve that serves the very upper end of our market clients with dedicated family offices, and we think that that matches our brand.
G, particularly well than we've seen strong growth there on a consistent basis and so within the wealth segment, that's where we've seen higher levels and then I think.
Progressively the in general the higher the client base in terms of assets, that's where we that's where we've done well and.
<unk> that's been a continued theme for us and as we look year over year.
We've always talked about the fact that.
Wealth will be lower organic growth relative to C&I asset through a cycle, but still positive and that's what we've seen even if we look year over year.
And so I would just add there is also a tremendous amount of activity right now.
<unk>.
To predict how that will continue but when you think about.
The family owned businesses and other liquidity events.
For business owners.
Wealth creation, where it goes from a business to being.
With wealth.
It creates the opportunity for us to work with those clients in a different way and so there has been a high level of activity on that front.
And we will see what happens through the end of the year here potential tax changes things like that that generally creates opportunity for us.
That's great and just for my follow up on the NII outlook I was certainly encouraging to see the uptick in securities yields in the quarter and just curious if the forward curve holds have we reached a point, where we've lapped reinvestment headwinds and just bigger picture in terms of the NII outlook more broadly.
Given strong loan growth and improving rate backdrop should we expect to now grow off the current NII base level.
So we're still we're not fully all the way through from an NII perspective, the whole balance sheet is call it 85% to 90%.
Cool.
But obviously, we're not quite all the way there yet from a securities perspective, we're getting close we're still losing I'd call. It based on the reinvestment rates right now about $1 million a quarter and reinvestment.
But that's going to eventually taper off and it's not as big of.
Through it because it was a year ago, obviously, just having a $1 million quarter drag and so youre right in that from here, mostly the drivers are going to be based on what's happening in the business. So you saw.
Strong loan growth.
Other factors of where we're investing to be the key drivers of the movement in NII.
And the drag from reinvestment is definitely.
Much much lower than what it was before.
That's great color. Thanks, so much for taking my questions.
Sure. Thank you.
And your next question comes from the line of Brennan Hawken with UBS.
Hey, Brennan.
<unk> impact.
If you're talking if youre on mute.
Ma'am, it's happened to me again, sorry about that.
Yeah.
I'd like to follow up on Stephen's question.
<unk>.
And as.
His point I think is really fair, we've seen pretty significant acceleration from a lot of the wealth management firms.
And it's happening broadly it's happening in the mass affluent space that's happening in the high net worth space.
It doesn't seem like you guys have seen a similar magnitude of acceleration.
But we're not sure because we don't get the granular disclosure so number one.
Could you maybe juxtapose do you juxtapose your growth versus some of those.
Peers and then.
Maybe if the growth hasnt accelerated the way we've seen at some of the others. Why do you think that is do you think it's because you were focused on ultra high.
High net worth do you think it has something to do with your approach and how you market to clients where face to face meetings are a lot more important.
What do you think might be going on there. Thanks.
Sorry, Matt So I'll start.
And I think to your point, our business is different than what I would call the broad.
Broad market for wealth managers.
And as we've talked about many times, we're more focused up market, where some of that activity can be lumpier. If you will.
They're large transactions that either are clients are a part of or large wins, where we're bringing on.
New clients with very meaningful wealth and so I think in that sense, you are going to have different dynamics that happen. There now we do internally track closely.
The flows and the revenues that are coming in from the.
The different types of clients.
And as much as there has been.
Some variability in the proportion that's coming from the ultra high net worth versus the high net worth it's still relatively steady so I would say to your point we are participating in this very kind of broad base, whether we're participating as much as any one of the other particular competitors I can't speak to.
But on the higher end it has its own set of dynamics.
Okay. Thanks for that.
And Jason you've recently flagged some upward expense pressure.
At an industry conference, which has been a big focus for investors.
Yeah.
Understand that it's probably too early to get much of a sense of magnitude on that front, but if it is possible to try to frame the magnitude that'd be helpful number one and number two even with that upward pressure.
Is the commitment and the focus still on generating fee.
Revenue operating leverage organic.
Operating leverage ex the fee waivers.
Okay.
Thanks, I don't want to ramble would it be helpful. For me to just give a little bit of an ill review expenses in general or do you want me to just stay specifically on.
On kind of what happened with technology equipment and services outside services.
No it's much more about the outlook and thinking about.
Next year versus whats happened here recently.
So.
Sounds good. So we've mentioned historically that we think about expenses in four categories, there's inflation efficiencies investments in growth.
Just keep that framework in mind and I'll.
Some of the key themes that we're thinking about as we're thinking about 2022 expenses.
First inflation is going to hit in a couple of areas Mike talked earlier about.
The pressures we're feeling there in.
And comp, we're going to see higher growth levels every firm.
Ill gives me about the challenges of retaining and attracting top talent or no different so.
This will hit its affecting the salary base now.
But it's going to continue to embed over time, and we will see a larger than historical adjustment.
In second quarter, when our normal base pay adjustments actually hit.
It also though it affects incentives and that's already hitting the income statement, we have got a there's a higher incentive accrual in third quarter of 2021.
We're addressing these issues and then.
<unk> as you talked you highlighted kind of the equipment and software and outside services line, which.
Soccer or we should really talk about those in concert with one another because there is some movement between those lines and we want to we're going to continue investing and strengthening the technology Foundation given that we've got the digital transformation that's happening in wealth management and everything we want to do to maximize defenses against cyber.
I think that means equipment software and outside services are going to continue to be on a higher growth rate relative to the other expense.
Relative to the other expense categories now just to remember about half of those lines are tied to business growth, but we're going to see the foundational element of those continue to be invested in.
The third theme I'd call out is.
Call It a return to normal and.
That's going to touch on occupancy and then travel which hits in other operating expenses were going to be on the road more often and that'll hit those that line item.
And we're not going to likely get to pre COVID-19.
<unk> levels, but by the end of next year, but that will be significantly higher and then the last thing is on efficiency actions, we embedded efficiency and productivity targets into our plan every year, we made a big push on efficiency. This year with the staff actions we took.
<unk> hundred roles, mostly in North America, and that drove the savings we talked about of about $50 million, we're going to continue to push for opportunities across all of the expense categories to find efficiencies, but those are the big four themes that have been on my mind is in our minds not mine all of our minds as we talk as we start to talk.
2022, hopefully hopefully that's helpful in giving you a little bit of an outlook of how we're thinking about expenses.
It is helpful. Just the last piece to.
I'll remind you about is the fee operating leverage like despite this pressure that still committed.
Thank you so much for reminding me of that because.
Talk about that is it's super important and I think a lot of a lot of people try and think about her northern's expense is going to be flat up it depends we consider ourselves still a growth company, we want to drive revenue growth and so that fourth element of the framework I gave in the beginning of those comments around growth.
We're.
It's doing expenses because of that because we've got good revenue growth. That's fine that's good and so the key thing we look at when we put all that together what is the operating leverage look like for the company.
Okay. Thanks.
And next.
Go to Mike Mayo with Wells Fargo Securities.
Hi, Good morning, Michael followers, Hey, good morning, just following on the last question I'm not sure you answered that last question, maybe that was intentional because youre going to wait.
Yes.
Do you think youll have.
The operating leverage based on fees relative to the expenses even with the.
The higher comp <unk> and fiber.
The General question is where are you on the.
The broader investing.
Sure.
I mean head count this year should probably grow only by about 1% and for the prior five years. It grew by about 5% that's a dramatic.
<unk> reduction.
People that youre, adding so it looks like a lot more productivity. So the question is yes.
How much is that driven from technology, and it's sustainable and it should help drive positive operating leverage in the future and how much is simply more productive employees.
Might cost more in the future.
And the number so it might come in to start with that because you've highlighted I think a really important dynamic which is we.
We have seen this meaningful increase in productivity.
That said I.
Looking at the drivers of that yes. Some of it is from technology that.
With us to automate activities and other initiatives that we've been executing on for some time period.
That said another driver is the tight market for for talent.
And so and just a remote working environment, it's changed the operating environment.
To your point or question on sustainability.
My judgment would be that it is a little tight.
It's too tight at this point so we've continued to grow.
As Jason highlighted some of that growth, yes. It comes through the market, but we've also added new client net new business.
Breath.
We've added people as a part of that we've tried to do it very efficiently, but also it's.
It's Ben.
Heavy burden I would just say on the employees to be able to deliver that in a remote working environment.
So back to the broader question.
On what we're driving towards.
<unk> growth, which does mean growing fees growing revenue faster than we're growing our expense base with that now in any quarter in any year, it can ebb and flow a little bit, but that's the objective over time and when we look at the profitability in this quarter.
Whether you want to look at the ROE the pre tax margin.
Or the fees to expenses, they're all at pretty attractive levels could they be better, particularly on the pre tax margin if the rate environment changes, absolutely and we'd like to see that but we think we're operating pretty efficiently today, certainly look to do more.
More but we're in an unusual operating environment.
And then one related question as far as the investments in your back office, which you retooled.
As it relates to the cloud.
I think you are more conservative with your plans to move.
More workload.
To the public cloud and I'm, just curious as to why the the more conservatism on your part versus some other.
<unk> firms.
So I would say we are cloud strategy is absolutely focused.
<unk> focused and tailored to our business.
<unk>, our client base and so.
The pace or how it would be characterize Mike relative to somebody else.
Could be viewed differently I don't have a problem with that.
We're looking at how does it fit with what we're doing given the nature of our.
Our client base and what we do for them, Yes, we are high.
Please sensitized to.
All of the potential impacts and risks of a transition like that.
Now with that said.
We have been very focused first on the private cloud.
And beyond the fact that that's been a strategy that we've been executing on for years.
This past year, we completely upgraded the capabilities of the private cloud for us and have.
Many many of our applications and activities in the private cloud as far as public cloud where.
We're taking a hybrid cloud approach to that to your point I would say been.
And it's about how we do it and we are still in the earlier stages of the actual transition of applications and activities into the public cloud.
The strategy is there to continue to do that but in a thoughtful secure stable way for our business and for our clients.
Thank you.
Next we'll go to Gerard Cassidy with RBC.
Yeah.
Good morning.
Hi.
Jason can you give us some color.
You had real good loan growth this quarter sequentially, just what we.
Thought putting the loan growth and then also with the balance sheet. Your average deposits you pointed out grew sequentially, but the period end numbers fell so maybe if you could give us some color on that as well.
Sure.
So let me start with loan growth two buckets one is.
Driving the personal side and again in that bucket. Those are extremely those can be extremely high network clients that want to use our balance sheet to solve for liquidity needs.
And the reason I highlight that because it can be very volatile and unpredictable but.
Roughly half of the sequential increase came from that general bucket. The second bucket is commercial which was about the other half and that's that's more stable and that's been in various areas, but we've talked about going to our existing clients and doing.
More of the existing loan types with them, but explaining to them that we've got appetite to do more with them and part of our business model not just financial model is to grow with our clients and I think thats one of the things that's driven our loan growth as our clients have been they've been active in.
You've told.
<unk> told them, we're happy to participate with them more in those ways and so thats hit on the commercial lines.
And so again I think part of it is the base. There is has definitely risen but part of it is more.
As some components that might be more volatile over time.
And then.
On.
Is it volumes as you know well because I know you follow this closely that that can also just be volatile and we've got our clients will they'll call us and ask to put not millions, but sometimes hundreds of millions or billions of dollars on the balance sheet and so we don't we tend not to look at.
The deposit.
The quarter end balances.
I do look coming into the quarter and after the quarter, how they trend in this quarter what didn't look very different in terms of how balances trended coming in or out. So I didn't override the dynamic that you mentioned the average versus.
Quarter end.
Very good thank you and then.
You and your peers have had strong year over year growth in your fee revenues you've talked about it already.
This call can.
Can you.
Pull out for us what percentage would you attribute.
The growth in.
Custody fees and wealth management fees that is.
From market appreciation versus new business or additional flows from clients can you parse through that.
Sure. So I can split it let's just start will grow year over year, and we think about the C&I business.
There is.
Two.
A good chunk has come from from markets.
Call It high mid to high single digit.
And then there is also the organic or net new business and other dynamics would represent the rest and that adds up.
Overall to kind of again mid to mid to high single digits, but a little bit last call. It 567, 8%.
On total C&I AST trust fees.
Alright.
And then.
Well I can do the same type of split for you.
And a little bit more weighted toward market, there which is that.
It's had an impact that's stronger if we look year over year more like <unk>.
<unk>, 20% tight and the organic piece, if I added up.
Also also strong.
But more in the low single digit range.
On a percentage basis.
Waivers are certainly.
Two.
Got it alright, thank you.
Absolutely. Thank you.
And your next question will come.
<unk>, but Betsy <unk> with Morgan Stanley.
Good morning, Betsy Hi, Hi, good morning.
I had a question just a bit more strategic to kick off on how you're thinking about the returns that you're going to be generating from the investments youre, making today.
The various sleeves and.
Come from the line of Globe I'm, just wondering if we think about where we are today versus pre COVID-19.
Has the return profile changed much for your incremental investment spend.
Yes Betsy.
<unk> necessarily say that the return profile has changed in many.
And across specs.
What I think has been interesting through the crisis here is that although there was a pause in some of the execution of.
<unk> projects and programs around investments in the initial stages of the pandemic it picked up pretty quickly thereafter.
And instead of.
Groups, all being in one room.
Working together on the digital project, they figured out how to do it by Webex zoom or teams. So.
In that sense.
We've continued to make really good progress on investments such as just to give you. An example, the digi.
<unk> station of our wealth management business.
There's a number of components to that journey as we call it and so.
That progress has been very good and.
I'd say in general to your point on the timing or the profile for the.
The returns on that should be similar.
To what we would've expected when we started it.
The one thing I would say is just the.
The characterization or the character if you will of investments in the different businesses I talked earlier in the call about launching new funds and asset management. For example, so there is no meaningful investment that goes into product.
<unk> development.
And again throughout the last couple of years here, they've continued to put out new products.
And then it takes some time period for those to obviously build AUM, but then a very profitable over time.
That profile is very different than asset servicing.
Product, where a lot of the investment the returns youre going to get is nearer term in the sense of bringing on a large client there is some integration and transition costs with that but then once that's up and running essentially youre getting the return.
For that investment and then finally, just wealth management I talked.
<unk> out some additions that we've made not just in the last quarter, but it could go back and you're hiring people and teams that are in different parts of the country again takes a little bit of time for them to get on and get acclimated, but theyre productive relatively quickly as well.
Well, so we look at all of those when we put together both our longer term strategic planning, but also the.
The annual plan.
Okay, and then just a little more nitty gritty.
Im wondering if theres any update on how youre thinking about the.
Reinvesting the expenses that have.
Have been associated with the golf tournament.
Is that kind of flow through and other types of marketing or is that.
Get thrown into the bigger bucket of opportunity set and we could see that migrate into.
Other areas of investment and not not specifically around that sleeve of client that you've been investing in with the golf tournament.
Thanks.
Yes, the way I would characterize it Betsy is.
The golf tournament was a great opportunity for us to build our brand and particularly focused on.
A certain target market.
And that was highly successful.
Going forward, we will continue.
<unk> to invest in the brand. So yes, some of that investment will go into brand building and marketing.
However, there are also a portion of that to your point will be considered more broadly in the investments, we're making whether that's in people or technology.
Or other areas to continue to grow the company.
Company.
Okay. Thanks.
Thanks, We'll go to Ken <unk> with Jefferies.
Hi, good morning.
Good morning.
Jason I'm wondering if you can give us an update on your thoughts around fee waivers from here.
Down a little bit obviously.
Rates to move to touch, but not that much just any updated thoughts on where you expect those to sit in.
Vis vis waiting for a bigger movements in rates going forward. Thanks.
Sure.
Couple of thoughts one.
Even though.
Saw a little creep this quarter are purely relative to what we thought it was actually.
If you think about it was driven more by volume and we Mike talked in his opening comments about the fact that money market mutual funds are over $300 billion, that's a record for us and so.
And I think.
People, sometimes forget that we're participating in the growth.
But it also causes higher waivers.
So, but what's more important is that the overall base of business that we have there is good and so if you add that if you add up the waivers plus what we're earning and so you think about the overall capacity that we that we have at the current volume level.
475 million.
To $500 million.
And that's a strong capacity that we have there now it will volumes stay in as rates go up.
Probably maybe not.
But.
It's nice that we've had good volume growth there and the other thing to remember is.
And it doesn't take a big lift in rates for the waivers to come down and a lot of our a lot of our AUM. There is more institutional pricing, even our even on the wealth side, even though waivers that are associated in the wealth management side are the nature of our client base means date.
Do they price themselves more like institutionally I forgot the purchasing power to have more of an institutional approach and so the fees aren't that high and it doesn't take that much more yield to clear those hurdles and start to get back to that capacity level.
And then yes.
The other dynamic.
Run rate wise.
We're still as we sit today, we're still a little over $300 billion that held in over the quarter end and the run rate on waivers is right at $75 million a quarter.
Okay, Great and then second question just coming back to the operator.
Bringing leverage points this year.
Like easy comp for market levels right driving the huge trust fee growth and then kind of a harder comp for costs off of last year's really low base. So this year, you've got this really wide gap, but in absolute revenue on an absolute cost growth rate that are both above trend so to speak and so.
I think the reason why the questions keep coming up about cost growth is next year, when presumably we don't get as much of that backend lift from markets alone what happens with the absolute growth expenses relative to what might be a slower naturally slower overall.
Revenue growth right. So how much of this year.
<unk>, 56% growth rate was also influenced by just the kind of easy comps from last year so to speak.
It helps I think it's about like absolute levels of expense growth next year. Thanks.
Yes.
Yes, just a perspective on that for you Ken is I think you're right I mean, we did get a meaningful benefit.
And from the market.
In the fee growth and that helps that.
Positive operating fee leverage the operating leverage the other way that I think about it is what is the absolute level of expenses to fees and so now for this quarter. We're at about 102.
That is a.
Much lower level than we've been.
As evidence of this positive fee operating leverage over time.
And so.
At that tight level to your point to then say in the next year can you continue to drive that down at that same rate. That's why I say, it kind of ebbs and flows.
Right, but we want to be in that range.
Around that 100% 105 somewhere in there.
To make sure that we.
Our appropriately investing in the business et cetera, but also growing we don't want to.
Squeeze that so much that it impinges on our ability to serve our clients into.
Yes, good perspective on reminding about that expense to trust fees. Thanks.
Yes.
Next we'll go to Jim Mitchell with Seaport research.
Hey, good morning, Jim.
Hey, just maybe on the balance sheet, if I look over.
The last two quarters.
Securities average security levels have been declining while cash levels have been growing.
Is this you positioning for higher rates.
Or is this something.
Something else driving that.
Something else driving that.
<unk>.
Yes.
There is a.
There is a hard line that people see externally between the between cash and securities, but there's so many different security types that are actually within the cash and within the securities.
<unk>.
On the cost of cash and securities or some.
Where we are strategically gone back and forth into and out of and that's frankly, where the change in classification that you see has been driven and so there could be securities that are that have a risk return profile that are very similar to one another one of which would be classified as cash in one would be classified as.
Securities and that's strategically where we will make some of the kind of portfolio decisions of where we want to be playing based on what we're seeing in the marketplace and how we think about the risk return characteristics and just in a sentence, that's what's been driving that.
The distinction that you see based on the external reporting classification.
Eric.
Okay, but can you maybe speak to whether you.
Believe asset sensitivity increased quarter over quarter.
And how much of that Central Bank cash you think is available to invest when do you feel the time is right.
So plenty of plenty of availability.
Vacation.
From <unk> perspective and from.
From our perspective, we're not constrained by that we feel that we've got plenty of liquidity plenty plenty of buffers to be able to react if we see more opportunities in the marketplace.
And we've just we've been running the portfolio based on <unk>.
<unk> front risk return characteristics, and where we want to be from a liquidity perspective, but certainly no constraint constraints and plenty of dry powder, whether it's from a regulatory perspective or even our own view of what we want to do for more of an economic liquidity perspective for us to be able to put more to work if we see the opportunity to do so.
System.
Okay, and the asset sensitivity question.
Yes, we've actually stepped out a little bit one way to get at that just to give you more of a quantitative we've spent stepped out to about $2 seven in duration and.
So there are other ways, we can <unk> securities first for the security.
Portfolio. Thank you that's not the overall balance sheet, but the securities portfolio, but it gives you a sense of how we've managed that as from $2 six last quarter and there are other things we can do even within that to provide.
To provide more flexibility, if we see opportunities coming on the yield curve, but haven't.
Securities, We havent done much strategically there to change asset sensitivity.
Okay. That's all helpful. Thank you.
You bet.
Alright next well go to Brian Patel with Deutsche Bank.
Great. Thanks, Brian Good morning folks good morning.
Most of my questions have been asked and answered but.
Did you have two more.
One sorry, if I missed this but the growth in <unk> investment management.
Linked quarter up 13% with money market waivers being flat what was the.
Main driver of that.
Okay.
Hi, Brian its mark.
So youre looking at the sequential growth in C&I asset investment management fees.
Just to make sure yes, so yes, it was a combination of.
Both markets and organic growth.
And to Jason's point.
We did have with the higher money fund levels, even though waivers.
What that does come with fees with net new fees and that that would have been partly behind that but if you were going to break it down.
Say that.
The new business organic growth I would say drove a little bit more than the market growth that on that sequential growth.
Okay perfect.
That's a good dovetail into my second question, a little bit broader but ESG asset management I think less.
Last time I saw I think you guys have $155 billion correct me, if I'm wrong on that on Northern Trust ESG.
Maybe just the question I guess would be from the organic growth side of your investment management.
They actually business.
And as you think of that coming both on the institutional side, and then especially on the wealth management side.
How are you viewing that.
First of all as an importance to your wealth management clients to have this capability investment management capabilities and I think I think Mike you mentioned launch of six new.
Products in the quarter, but then also more.
The organic growth potential for northern Trust.
Investment management from developing those ESG capabilities is that going to be a major driver going forward.
So.
Brian.
I would say that that is another major trend obviously, that's in the marketplace, but also big driver for our strategy going forward.
Yes across the company, but as you highlighted particularly within asset management.
And at that 155 billion in AUM now the growth.
Right over the last five years, there has been about double.
What the market growth rate has been for ESG best we can measure it there and to your point this hits across our client spectrum. So a lot of that it started more.
Outside the U S in EMEA, where we initially saw that the.
Greatest growth.
With institutional clients.
But now we're seeing it more through funds.
And in the U S and with.
Both institutional clients, but also with our wealth clients and we think we're still in the <unk>.
Early days, we think that that that ESG or sustainability.
Investing will be at a higher growth rate than the rest of that.
Market overall.
The $1 55 numbers still ballpark good good number and AUM.
And the plan is to develop even more product there or do you think you are fairly set where you were.
That.
Tell me more product.
A lot of it is leveraging this ESG vector score that was developed which gives us a lot of capability to do more.
Great.
Great. Thanks for the color. Thank you.
Sure.
Alright next question comes from the line of Rob <unk> with autonomous.
<unk> research.
Good morning, guys. A question on capital allocation, you've been very transparent on the components of your overall capital allocation strategy ratio relative to peers and dividend supporting growth et cetera any.
Any change in your outlook on any of those components that could impact the capital.
<unk> trajectory going forward.
The one.
Thanks for reminding the framework for everyone, but.
The key element there that has been a driver has been we've been able to see the <unk> growth because we've seen loan growth coming in.
And.
That is a big factor in how things get driven and there are other things to we could see from securities lending and other components of <unk> and at this point, we don't see the same type of RW a lift.
Now, it's not to say that it can't happen.
And if it does happen and if we see it then we'll then look at the other factors in determining where we want to be from a CET one perspective in other areas, but as we sit today, we don't we don't see the type of organic growth coming in our WMA. That's the one component of that overall mosaic.
Yeah.
Got it thank you.
Sure.
All right next we'll go to Alex close ties with Goldman Sachs.
Hi, Good morning, Thanks, Hey, guys. Thanks for squeezing me in.
So I had a question around the money market fund business you.
I'd highlight quite a lot of success growing that business in AUM and really gaining share against a large sort of.
Bulk of inflows with the whole industry is seeing.
How sticky do you think those assets are going to be in light of tapering offering near term, but also sort of longer term as we start to contemplate interest rate.
Increases I think we've also had gotten accustomed to thinking about our deposits will probably start to leave the industry, but how intertwined do you think the money market fund business is with that as we sort of contemplate how much of fee waivers could ultimately come back.
I'll start Alex and then Jason and knows that business wealth can give his perspective.
But I think what's interesting is coming into.
The pandemic a couple of years ago, you had a combination of two things one is the obvious what youre pointing out which is just significant.
Easing on the part of the central banks increased liquidity and that absolutely drove the flows into.
To the money market funds is one place, but the other the other dynamic is that was also at a point in time, where.
Strategically and Tam was expanding its distribution for money funds and so not only having a portal that being on other portals and so it was an intentional strategy that hit at.
Time to essentially capture more a greater share of that increase flows coming from that.
The additional liquidity in the marketplace. So then if you take that and then try to answer your question of what happens to the extent that you have tapering and some contraction. There I think yes of course, you're going to see it go down.
But I think it's going to be stickier than you might think in the sense of it wasn't just the one factor.
Got it that's helpful because of the share gain dynamic doesn't help there.
My follow up sort of related to that sorry.
Sorry to go back to the operating leverage dynamic again, but.
Yes.
Mike I appreciate you framing it the way you did it like look we're doing 100 to 105 expenses to total fees, that's kind of where we hope to be.
As we contemplate fee waivers coming back.
Should I think of the expenses to fees going below 100.
Which I guess would imply almost.
Almost all of the fee waiver benefit will come through to the bottom line at 100% margin.
Or 100 to 105 is kind of where you see yourself living.
Even with a normalization in sort of interest rates.
So kiddingly if you could also tell me what.
Equity market levels are going to be at that point in time.
That would help as well because but youre highlighting the right thing Alex.
We are benefiting now from strong markets with regard to that ratio.
And we're being penalized if you will by the money market fund fee waivers and so that's playing out in there, but I would say more importantly.
Question is yes, that's going to ebb and flow, but I don't believe that that is a ratio that just continues to grind down.
Below zero, and well below zero et cetera, because I think that that would actually again that would impact our ability to have the right talent.
<unk>.
Make sure that they are compensated appropriately and fairly for all the value that they're delivering to invest in the technology to take care of our clients, but also to grow the business.
So simplistically it would be a draw on the business. If you tried to squeeze it too tight so to speak so so that's why.
To your own view is that that range is more importantly, more important now that said.
That is not the only ratio that drives overall profitability and returns as you know and right now with rates, where they are and net interest margin where it is.
Other revenues so to speak which are.
A bigger driver in driving the pre tax margin.
At a lower level than they have been and so point being you can be in that range and yet have the other revenues growing in such a way that your profitability is growing going up and your returns are going up.
Got it.
That all makes perfect sense, thanks very much.
Sure.
Alright, well take another question, we'll go to Vivek <unk> with Jpmorgan.
Hi, Thanks for taking my questions a couple of them firstly balance sheet.
Given the plans for fed tapering.
Average deposits have been granted.
Going up.
What do you see as the outlook for that.
Given the the tapering thing that I just mentioned.
Do you see yourself being able to continue to grow that.
Well I think it's.
It's hard to tell.
Certainly our clients right now see the flat yield curve and I've been saying it I think it's less about the very short end of the curve and in some ways. It has more to do with the shape of the curve and.
If there is some lift in the medium then I think thats more than anything else.
Might cause clients to move.
The overnight effectively to try and get some yield right now with rates flat. So far out there is just no enticement to do anything else. Another dynamic is.
Some clients think about cash.
As an asset allocation and we were just talking about the equity markets have done.
Awesome and so with markets now, where they are and everyone's seeing their overall portfolio somewhat stronger.
We should also assume clients are going to want to have more allocation to cash and so I think both of those dynamics need to need to be played through as we as we think through but we certainly think that.
Well the things Mike talked about with the money market mutual funds and the strength of our balance sheet or things that do attract clients to to think that it's a good place for us to be able to provide liquidity resource for them.
A separate question for both of you what are you seeing in the all space in terms of pricing.
Yes.
This pricing compression overall.
All of you talk about in the custody business, but specifically all switch has always had a higher fee rate.
You see that coming down more than the overall fee rate.
Pricing.
Do you see more compression there given that.
<unk> tire.
Our.
Any thoughts and color on that.
Vivek are you speaking to the investment product side of it.
No.
<unk> business.
Business Mike.
Most of that be affected both hedge funds and the private side.
Im, especially pleased with new players like Youre getting and as you mentioned trying to grow that more.
What how do you see that dynamic playing out.
Yes, I would.
I would say that particularly on the hedge fund administration side of it.
Some of that has already played through in previous years.
And so like it would be similar than to other asset classes.
The private capital side, so p/e and infrastructure and real estate and things like that to your point, it's earlier in the <unk>.
Development of that market more of it I think will be outsourced overtime.
<unk>.
The size of the funds, obviously are increasing and so just from a pure rate perspective, yes, I do think that that will play out in more compression on that if you will than some of the other asset classes.
Okay. Thank you.
Sure.
Alright, we have one more question, we'll take that from Jeff Harte with Piper Sandler.
Alright, good morning, Hey, good morning, guys, so pretty much everything has been asked but.
One I have left is there anything to highlight on the sequential increase in non accrual loans in the quarter.
No.
That.
The.
Did tick up.
More episodic we don't feel like we're going to have losses, there and we've obviously in your reserves are very very strong given the quality of our portfolio, but nothing to nothing to highlight there that jumped out at us is.
As a concern.
Okay. Thank you.
You bet. Thank you Jeff.
Alright, it looks like we have no further questions at this time, so I'd like to turn it back to our speakers for any additional or closing remarks.
Thanks, everyone for joining us and we'll talk to you in January for our fourth quarter results.
Yeah.
Alright that does conclude today's conference we thank everyone again for their participation.
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