Q3 2022 Northern Trust Corp Earnings Call

October 19, 2022

Okay.

Good day and thank you for standing by welcome to the Northern Trust Corporation third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

I ask a question during the session you into Crestar one one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jennifer Childe Director of Investor Relations. Please go ahead.

Thank you Victor good morning, everyone and welcome to Northern Trust corporations third quarter 2022 earnings Conference call. Joining me on our call. This morning are micro Grady, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, Lauren I'll, not our controller and Mark Bette Embraer arose from our Investor Relations team.

Our third 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 October 19th call is being webcast live on Northern Trust Dot com the only authorized rebroadcast.

This call is the replay that will be made available on our website through November 18th Northern Trust disclaims any continuing accuracy of the information provided in this call. After today. Please refer to our safe Harbor statement regarding forward looking statements on page 11 of the accompanying presentation, which will apply to our commentary on this call.

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.

You again for joining US today, let me turn the call over to Mike O'grady.

Thank you Jennifer let me join in welcoming everyone to our third quarter 2022 earnings call in the third quarter, we continued to execute well through a challenging operating environment compared to the prior year revenue grew 7% as the elimination of fee waivers and the favorable impact from higher interest rates more than offset this.

Significant headwinds from weaker equity and fixed income markets asset outflows and unfavorable currency movements.

<unk> growth of 9% reflected inflationary impacts across our cost base, particularly within our compensation and equipment and software lines.

<unk> was flat and we generated a return on average common equity of 14, 9%.

New business activity in wealth management was encouraging and we continue to engage actively with new and existing clients.

In asset management weak markets and institutional cash outflows reduced assets under management.

We saw continued growth in our alternatives tax advantaged equity and ETF complex and within asset servicing we continue to win new mandates and our backlog of new clients that haven't yet been onboard it has expanded meaningfully and is expected to transition over the coming quarters.

Closing, we remain well positioned to navigate the current macroeconomic and market uncertainty from a position of strength, our new business pipeline remains robust and our capital position continues to be strong and a slowing growth environment. We have also begun prudently tightening our expense controls and focusing on realizing productivity benefits Corona.

The investments we've made over the past several years I will now turn the call over to Jason.

Thank you, Mike and let me join Jennifer and Mike and welcome to our third quarter 2000, 22000, 22022 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 $394 $8 million earnings per share were $1 80, and our return on average common equity was 14, 9%.

Results for the quarter included a $17 million pension settlement charge within the employee benefits expense category.

Also recall that in the first quarter of this year, we implemented an accounting reclassification of certain fees, which will continue to impact the year over year comparisons as noted on this page.

Let's move to page three and review the financial highlights of the quarter.

Year over year revenue was up 7% and expenses increased 9% net income was flat in the sequential comparison revenue was down 1% and expenses were up 1%. While net income was also flat return on average common equity was 14, 9% for the quarter up.

From 13, 7% a year ago and down from 15, 7% in the prior quarter.

The results in greater detail, starting with revenue on page four.

Year over year unfavorable currency translation impacted revenue growth by approximately 200 basis points Trust investment and other servicing fees, representing the largest component of our revenue totaled $1 $1 billion and were down 3% from last year and down 6% sequentially.

All other remaining noninterest income declined 8% from the prior year and 2% from the prior quarter.

Net interest income, which I will discuss in more detail later was $525 million and was up 47% from a year ago and 12% sequentially.

Let's look at the components of our trust and investment fees on page five.

For our asset servicing business fees totaled $603 million and were down 4% year over year and down 6% sequentially.

Within asset servicing custody and fund administration fees were $407 million down.

Down 12% year over year and down 6% sequentially.

Custody and fund administration fees decreased sequentially, primarily due to unfavorable markets unfavorable currency translation and lower transaction volumes.

Custody and fund administration fees decreased from the prior year quarter, primarily due to unfavorable currency translation and unfavorable markets, partially offset by new business.

Assets under custody and administration for asset servicing clients or 12 trillion at quarter end down 19% year over year and down 7% sequentially.

Both the year over year and sequential declines were primarily driven by unfavorable markets and currency translation.

Investment management fees within asset servicing or $136 million.

Up 20% year over year and down 8% sequentially.

Investment management fees decreased sequentially, primarily due to unfavorable market and asset outflows.

Investment management fees increased from the prior year quarter, primarily due to lower money market fund fee waivers and the accounting reclassification previously discussed partially offset by asset outflows and unfavorable markets.

Assets under management for asset servicing clients were $873 7 billion.

Down 25% year over year and down 8% sequentially.

Both declines were driven by asset outflows weaker equity and fixed income markets and unfavorable currency translation.

Moving to our wealth management business Trust investment and other servicing fees were $475 $5 million down 1% compared to the prior year and down 5% from the prior quarter.

Within the regions the year over year declines were primarily driven by unfavorable market impacts partially offset by the elimination of money market fund fee waivers sequentially. The decline within the regions was primarily driven by unfavorable markets.

Within global family office, the year over year growth was driven by lower fee waivers and new business, partially offset by unfavorable markets.

<unk> decrease was mainly related to unfavorable markets.

Assets under management for our wealth management clients were $336 billion at quarter end down 10% year over year and down 5% on a sequential basis.

Both the year over year and sequential declines were driven primarily by unfavorable markets.

Moving to page six net interest income was $525 $3 million in the quarter and was up 47% from the prior year.

Turning assets averaged $132 billion in the quarter down 8% versus the prior year average deposits were $118 billion and were down 9% versus the prior year, while loan balances averaged $41 billion and were up 8% compared to the prior year.

On a sequential quarter basis net interest income grew 12%.

Average, earning assets declined 6% average deposits declined 8%, while average loan balances were up 2%.

The net interest margin was 158% in the quarter up 60 basis points from a year ago and up 23 basis points from the prior quarter.

Prior year quarter increase was primarily due to higher average interest rates and favorable balance sheet mix shift.

The sequential increase was primarily due to.

Higher average interest rates.

Turning to page seven expenses were $1 $2 billion in the quarter, 9% higher than the prior year and 1% higher than the prior quarter.

On a year over year basis expense growth benefited by approximately 300 basis points due to currency translation.

The current quarter's expenses included a $17 million pension settlement charge within the employee benefits category. This compares to similar charges in the prior year quarter of $6 9 million and $23 million in the prior period quarter.

Also included in the current quarter as the impact of the previously mentioned accounting reclassification, which increased other operating expense by $9 $4 million compared to the prior year.

Compensation expense was up 12% compared to the prior year and up 1% sequentially. The.

The year over year growth was primarily driven by higher salary expense in part due to inflationary pressures, partially offset by favorable currency translation.

The sequential increase was primarily due to higher salary expense, partially offset by lower incentives and favorable currency translation.

Outside services expense was $221 million and was up 5% from a year ago and up 4% sequentially. The.

The year over year increase was primarily driven by higher consulting and technical service costs, partially offset by lower third party advisory fees.

The sequential increase was primarily due to higher technical services and consulting costs.

Equipment software expense of $212 million was up 15% from one year ago and up 4% sequentially.

The year over year growth was primarily driven by higher software costs due to continued investments in technology as well as inflationary pressures and higher amortization.

The sequential increase was primarily due to higher software amortization expense.

Occupancy expense of $51 million was down 5% from a year ago and up 1% sequentially.

Other operating expense of $82 million was up 1% from one year ago and down 9% sequentially.

The sequential decline was primarily due to lower miscellaneous expenses in the current period.

Turning to page eight our capital ratios remained strong with our common equity tier one ratio of 10, 1% under the standardized approach down from the prior quarter's 10, 5% our.

Tier one leverage ratio was 7% up from six 7% in the prior quarter an increase in net unrealized losses on the available for sale Securities portfolio was a primary factor in this quarter's change in capital ratios.

Accumulated other comprehensive income at the end of the current quarter was a loss of $1 8 billion.

With the loss from the third quarter totaling approximately $300 million.

As previously announced in the third quarter, we increased the quarterly common stock dividend by 7% or five cents a share.

To <unk> 75 per share.

During the quarter, we returned $159 $5 million to common shareholders through cash dividends of $158 $4 million and share repurchases of $1 1 million.

The current environment continues to demonstrate the importance of a strong capital base and liquid balance sheet to both weather the uncertain economic conditions and to support our clients' needs.

We approach the end of the year on solid footing and remain well positioned to serve our clients and communities, while generating long term value to our shareholders and with that Victor. Please open the line for questions.

Yes.

As a reminder to ask a question you'll need to press star one on your telephone please standby with one part of the Q&A roster.

Our first question comes from the line.

Graphic from Morgan Stanley Your line is open.

Hi, good morning Betsy.

How are you doing.

Really well.

I did want to just dig in a little bit on the expense side and.

When I.

Listen and look at the results.

Areas, where it feels like maybe the inflation is impacting a little bit I know youre being very disciplined in.

How you are investing but I just wanted to make sure I understand how you're thinking about managing the expense base as we go through this inflationary environment and is there an opportunity to pull back on some of the consulting side professional services side or should we anticipate that the kind of rate of change we're seeing in this quarter.

Perfect. Thanks.

Sure.

Paul.

Let me start with a direct answer the question and yes. There are things, we can do and we've been focused on two to address expense growth and so let me.

Predominantly even within this period in mid September we.

We announced internally some additional expense controls, we always have those in place, but we meaningfully ramped up expense controls, particularly around hiring that's obviously the largest component of where we see expense increases thats, our largest line and so that will have that will lead us to have just a <unk>.

Bar on where we have increases in expenses and particularly from a hiring perspective, that's not to say that we are going to stop investing in.

That we're not going to continue investing in the things around technology and other areas, where we know we've had.

Important investments to take place, but at the same time, we do see an opportunity for us to raise that bar to try and tamped down the growth that we've seen in expenses.

Okay, and then just separately as I'm thinking through the growth profile here, you've got some nice exposure to international.

At the same time, we've got near the strong dollar weighing on the results to a certain extent, maybe you could help us think through the impact of the dollar.

And if we excluded that how results would have looked this quarter. Thanks.

Sure what it is.

Super high level.

Yes.

The company has a very natural hedge in there.

And from a currency perspective, so this quarter it was very roughly call it.

<unk> 300 basis points.

The impact on both the revenue side and the expense side.

So the dollar does play in but it plays on both the revenue on the expense side the other impact that.

It's not as symmetrical is how the dollar plays is how currency plays and more from an asset level perspective that played into asset level movements over the.

And in both assets under custody as well as assets under management and something people typically think about it even played in on the deposit decline and you think about the movement. We've had and we can talk about that in more detail, but even the deposits had a downward move in value.

About.

One 5 billion in aggregate across all currencies.

Okay, all right got it thanks.

Sure.

Thank you and one moment our next question.

And our next question comes from the line of Alexander <unk> from Goldman Sachs.

Good morning, Alex.

Oh, Hey, guys. Good morning, sorry, I Didnt catch my name there.

A couple of questions I guess one.

Obviously deposit outflows it sounds like it picked up in September relative to.

The last update that we heard from you guys at the Barclays Conference I think you said around 120 came in a little bit lower.

But the mix in particular, I think it was a little bit more pronounced due with noninterest bearing declining substantially so.

Just an update on sort of how the quarters progress, but also more importantly.

Where the deposit stand today, and the mix noninterest bearing and interest bearing as well as in your sort of updated thoughts on where that the deposit levels could ultimately trough out it looks like the noninterest bearing piece is getting pretty close to the kind of pre COVID-19 levels, but curious to get your thoughts there.

Sure. So first of all on the deposit levels and where they were relative to our expectation. They actually came in really close, particularly given what we mentioned earlier in.

The currency effect of the non USD and so where they landed in the quarter, where the average actually was pretty close and I mentioned that because.

As we get to the next quarter I think it's very difficult to predict in general and so but let me hit mix first so youre right noninterest bearing dropped significantly during the quarter.

And that's something we expect to happen a lot of our financial services clients that use our balance sheet.

Are often in noninterest bearing accounts, but is the rate as rates rise off of zero. They have the opportunity to move into interest bearing interest bearing accounts and they did that.

A lot of a very high percentage of the of the accounts that are eligible to do that have done. So at this point, which gets exactly to your point, Alex that were kind of it in some ways that those pre COVID-19 levels, that's not to say, we won't see additional movement, there, but we think certainly a lot of it.

It has already taken place.

And then the.

The third part of your question of where do we see things today.

Just looking at the first two weeks of the quarter deposits.

Behaved about what we would anticipate they tend to come down a little bit at this point into the quarter and so we're in that kind of.

110 to $1 15.

What we expect to happen between now and the end of the quarter is an interesting dynamic there's two forces working against each other one is with quantitative tightening and the yield curve being higher and clients across the board continuing to look at how they can allocate non operational with more investment cash.

It continues to put a downward pressure, but in the short run there is an offset to that there is an upward pressure in the seasonality that we've seen in fourth quarter, which tends to have more of an upward pressure and so it's difficult to see which one of those is going to have stronger influences, but best guesses.

You might call it flat from here and so that 110 115 level, but appreciating that there's big forces moving against each other.

Got it thanks for that I appreciate the color.

And I guess speaking of.

Institutional is looking to earn a little bit extra yield on their cash.

When I look at Northern Securities portfolio, you guys are yielding I think about one 8% in the market rates. They are probably closer to four maybe a little higher now geographically it could be could be different with the mix but.

But obviously an attractive opportunity to reprice, there I guess with OCI losses already running through your capital.

Any appetite to sell down I guess, some of the lower yielding securities without necessarily changing the profile of fixed versus floating and kind of keeping the overall duration of the portfolio in a similar place.

But I guess crystallizing some of the losses, but picking up incremental NAR in the current environment.

Yes, we talk about it a lot and I think an important dynamic for everyone to know and I know you. Appreciate this 100% is that the economics of taking the loss were reinvesting that lower amount at the higher yield efficiency of markets are just telling you that over time.

The impact of that should should be relatively equal now they're second component, though is that there may be other reasons to do that you might be looking to you might have a view that the yield curve is going to change significantly you might want to handle other ratios by doing that and so it's not to say that we wouldn't do it but it's just.

To say that the quick trade of take the take the.

Realize the loss invest at a higher rate, it's not as easy and as not as beneficial we care about the long term value of what the securities portfolio is yielding not just the NII or NIM in the short run.

Alright fair enough thanks, guys.

You bet. Thanks al.

One moment our next question.

Our next question comes from the line of Mike Mayo from Wells Fargo.

Your line is open.

Good morning, Mike.

I have two points.

Morning.

Yes.

Okay.

Yes.

Okay.

Both of them.

Paul.

Yes.

Hi.

Hello.

Yes, Michael.

Let me answer that.

Getting a lot of static in the background and I want to make sure that I want to make sure. We answer your question right.

Yes.

You want to add any way you can try an aircraft carrier.

Is that any better.

Dramatically.

Go for it Mike.

So much for my ipod.

Yes.

No.

Are the tailwind Don.

Jason you correctly predicted the NIM going back toward levels 2019.

Elimination of fee waivers those are good on the other hand, I guess, you still have some tailwind from the uninstall business, which really isn't clear why that's so much higher or are there delays or are you just winning business on the other hand, you have the headwinds from the lower stock markets is that going to continue or is that mostly in the numbers now. So if you can help me with the.

The tailwind and the headwind question and the reason I asked that is because you got <unk> and you still have negative operating leverage so it's.

Just a hostage to your business model or can you have revenues grow faster than expenses.

Yes, so couple of things in there, let me try and hit them, but certainly asking to clarify if I don't get all of them. One on rates is it done the answers now.

We still have upward movement and in fact.

We look just within the quarter at the month and September was.

Just a tiny bit above $1 60, and so we got into that level and.

So.

And even at this point betas will be much higher but wont be 100% and so we'll get an incremental lift and then the third dynamic of that is that as the securities portfolio is re pricing just to Alex's question earlier. It takes time, but we have opportunity to reinvest at these higher rates. So.

Not done yet.

On the.

On the pipeline of business that.

That has taken longer to come in.

Some of the opportunities we have in asset servicing in particular and the one not onboard a category are very big and they are chunky and those just take longer and the volatility in the markets. We think has just made clients just want to make sure that everything is lined up properly and so that one not onboarding.

Category is significantly higher than it is on average, but it's we're confident about it coming through and then the stock market dynamic you are right. This usually we talk about operating leverage and the numbers are just much smaller it's can we get it.

Expense growth plus a little bit of market lift to match.

But in this environment the macro environment is dominating whats happening to both expense growth and revenue growth and so I've been saying all year, we cannot their false positives and the operating leverage there a false negatives in the fee operating leverage and this.

As a year, where we have to just understand that those numbers are dominated by the macro factor that's not typical it doesn't change our long term financial model.

And on the one not onboard it category.

Can you size that to some degree and give us some sense of timing.

Yes, I can give a sense of timing, which is actually it's more back half of 'twenty three.

We're scheduling some of this stuff coming in play and that seems a long way away, but it's just us making sure and working very closely with clients to make sure everything is lined up properly and from a sizing perspective, we don't tend to give a number on that but what I can tell you is that it is meaningfully higher than that aggregate.

Meaningfully higher than what it has been historically.

<unk> pipeline and then outside of the one not funded the asset servicing business will tell you that.

The pipeline activity is also very high.

Okay. Thank you.

You bet. Thank you Mike.

Thank you one moment for our next question.

Our next question comes from the line of Ken <unk> from Jefferies. Your line is open.

Good morning, Ken.

Hey, good morning, Jason.

Follow up on that organic growth side can you just talk about the wealth business and if you could also try to separate the markets from just where organic growth is there any any any updates in terms of the same type of.

Pulled back at all in terms of customers moving in coming over bringing assets over given the environment.

Yes, actually I'm really glad you asked that because the wealth businesses.

Journey is very different the wealth business the organic growth there was higher first half of the year and.

The business is still doing well, but they don't feel that the one not funded is not as strong relative to history as the <unk>.

Servicing business.

Both of those client channels will tell you importantly, their win rates and the market are are are very attractive and they are very consistent with what they have been historically and so it's just about for well.

Their view is equity markets are lower less capital markets activity and its put just less money in motion.

So year to date organic growth and well has been in line with historical levels first half strong frankly higher than normal second half looks lighter, but money in motion is down fewer ipos fewer liquidity events, but importantly, there their senses their win rate in the March.

It is consistent with what it has been historically.

Okay, and then if I could just ask one follow up to Alex's question. So if there's more room to go on the NIM. The challenge is overcoming the magnitude of that price decline and the balance sheet. So.

How far out is your line of sight I know youre not going to give specific guidance, but in terms of your NII growth being able to continue post third quarter result.

No.

Your the way you're framing the algorithm is right. It's just we.

Yes.

Rates are it's going to start to flatten out and.

Our beta is this coming quarter, we're anticipating that there.

We are anticipating data is at 80%.

This coming quarter.

So the benefits are just flattening out but as rates go higher we're still getting a benefit and the repricing of the securities portfolio.

A positive lag effect to that effectively now all that said.

The volume levels matter, a lot as well and just as rates were increasing we talked about the importance of loans Thats, where the real yield is but we can't ignore the fact that when volumes are coming down it puts pressure on the securities portfolio and on money market.

Assets, which has an impact less on NIM, but more on NII.

Right I got it okay. Thank you.

Thank you.

Thank you one moment for our next question.

Our next question comes from the line of Brennan Hawken from UBS. Your line is open.

Good morning Brennan.

Hey, Jason.

I'm glad you said good morning, because.

<unk> cut out when you said my name.

Okay.

To ask a question about what Youre seeing here so far number one just to clarify the 110 to 115, that's kind of like the range <unk> been seeing in deposits quarter to date right in and and assuming that's the case.

As you said hard to predict but.

If we do end up with that.

Seeing some continued pressure on the deposit side is should we expect that wholesale funding line to plug the gap to the extent that <unk> securities.

Cannot come down quick enough should.

Should we think that that line is going to continue to grow if the deposits remain under pressure.

Yes, youre right in that.

We think that's.

The last fulfillment mechanism on the balance sheet, and we don't use that Theres no strategic initiative there to use it but it does in the short run in the short run act as fulfillment mechanism.

Depending on what's happening in the good news is there is a positive carry there is a positive carry on that and rates are rates are decent. So it helps NII, but we don't use it as a way to to push and lever the balance sheet more than we need to we use it is effectively just a fulfillment mechanism.

Okay great.

That's sort of the output to the extent that you do.

Don't have that you need to plug.

That makes sense and then and then when we think about.

Non operating deposits.

Where do we stand in total for nonoperating versus.

Where we were at the peak of the last rate hiking cycle have we.

Retraced.

That decline and and you spoke to the shifting of nonoperating from noninterest bearing and interest bearing I'm guessing that's what's driving up the betas.

What kind of magnitude impact does that because I'm guessing the non op is a more demanding customer base on the beta side.

Is that fair, yes. It is.

It is for sure and.

There is actually another layer within there, which we've talked about it a little bit. So it is good for us.

Fine for you to continue asking more detail on it but even within the non operational there's financial and nonfinancial and the not the financial non operational.

The areas, where there is the highest rate sensitivity and frankly, it's also.

The area, where we have to have the highest.

Amount of run off anticipation and therefore, it's the area, where we do the shortest and least yielding investing on the other side of it and so that and you're right that that component is.

Continues to be the higher run off in terms of volume level. So far so if I look at the numbers. It is across all the categories. We look at its the single.

Our single highest decline on a percentage basis, even this quarter.

And that said theres declines in other areas as well and so even within the operational base was down I'll call it 5% to 10%.

But thats more that client base looking at different investment options, and saying I might have with the yield curve at and flat at zero might not have been looking to ladder in treasury securities or look at an active fixed income portfolio, but now they are very much looking to do that as they talk to their advisers.

So very different dynamics at play.

Okay.

Alright, thanks for the color.

You bet. Thank you.

Thank you one moment for next question.

And our next question comes from the line of Brian <unk> from Deutsche Bank. Your line is open.

Good morning, Brian Good morning, Good morning, how are you doing.

Great.

Just first one clarification on that deposit beta of 80% that you just mentioned Jason.

Incremental beta.

As opposed to say an absolute level that you'd be at in the fourth quarter.

That correct.

I want to make sure I understand it so.

Yes, that's the as we think about incremental rate changes yes.

That's the data that we're experiencing on those incremental changes on the incremental yep Yep. That's the one I wanted to clarify yes perfect.

And then maybe just on expenses I.

I guess.

One question just around the seasonality expectations, because you do have some of the cost controls in place that you mentioned that you initiated in September .

So how should we think about the typical seasonal lift in.

And outside services and equipment and software for example that we usually see.

And then also short term just the pension charges.

Is that should we think of that as more recurring or really sort of youre kind of done with that.

Sure well I'll hit the.

I'll I'll hit the first one just on expenses and then Loren is here and can also talk on the pension settlement accounting issues. So on the.

On expenses, we've mentioned that in the depreciation is higher and so in equipment and software in particular, we are anticipating another lift in fourth quarter similar to what we had in the third quarter.

Despite the expense actions we're taking.

The part of that is just baked into the into our base right now and particularly from a depreciation and amortization perspective that said, we will be looking hard at expenses, even within that line item, but we've also talked about the importance of us investing in technology, but we will see that similar lift going into fourth quarter and then.

<unk> from <unk>.

And then <unk>.

Salting is without a doubt one of the key areas, where we're looking very hard to make sure that anything that comes on at this point is.

Is critical and that we're we're handling that with a very high bar of what we're doing but it's very correlated in many instances as well to what we're doing from an equipment and software perspective with that bar and you want to talk on pension for a second sure. So as we think about pension we definitely would expect to see that recur in the fourth quarter.

The fact that we have tried to.

Triggered this accounting mechanism.

It does mean that our run rate of pension expense in the current year.

Lower.

We'll expect to see that in the fourth quarter. It is difficult to predict whether thats something that we would.

Going forward into 'twenty.

Okay, Okay, great and if I could just squeeze one more in there on expenses in terms of the Onboarding of clients. Do you also expect that typically we see expenses in advance of that particularly if they are more larger complex assignments in asset servicing is that a similar dynamic that we may see either.

Now or in the first half of next year in advance of the Onboarding of clients.

This is Mike I would say we've already experienced some of that so as Jason has mentioned.

Some of these transitions just theyre taking longer for a number of reasons I would say part of it too is that if you look at the pipeline right now on the asset servicing side, it's a high proportion of asset managers and those mandates just tend to take longer to transition and then for asset owners and so we've been already have been at <unk>.

Work in doing that and incurring some of the expenses that go with it and then as you point out as those start to transition in it kind of normalizes into into the rate.

Perfect. Thanks, so much for the color.

Thank you.

Okay.

Just one question.

Our next question comes from the line.

Sure from Evercore ISI your line is open.

Good morning, Glenn Hello, there.

So I guess in some way a bit of a microcosm of the.

An issue we have.

The market. So my question on the expense side as his head Count's up 11 comp up like 12.

And that's half the.

The expense dollars so is it.

Fair for me to assume that.

We could be more careful going forward, but.

The higher level of dollars.

Unemployed comp and benefits is probably going to be with us for a while just like the market fears.

Overall in other words, you can't take Counterweigh that you just gave.

Yeah, Glenn I think that's true in general just to expand on that I would say that.

US at least.

We've gone through a time period here with inflation, but also tremendous competition for the best talent.

And as you know, that's that's where we look or one of the ways. We look to differentiate ourselves. So it was very important to us to make sure that we were retaining the best talent and also attracting new talent as well and so.

So yes, we've had that increase in comp.

That has been a part of the run rate going forward.

The question is what happens to the rate of growth going forward.

We're looking at that very carefully I would say, but we need to be competitive on that front and then the other part adjacent mentioned we've added a number of additional partners employees for us.

And Thats, something which was very appropriate as we invest in taking care of our clients invest in technology invest in resiliency. So all makes sense. We just going forward has to be really really focused on making sure that we're only adding four very critical roles so that that.

Growth rate of.

Head count is appropriate.

Yes.

Alone there.

One question on <unk>.

When markets are going up a lot like they used to.

You would have plenty of clients that would have either <unk> or fee caps, such that just don't scale up as markets go up.

My question is does it work that way and reverse in the market's fallen like 22% this year.

Do we have any protection on the way down.

Maybe fees might not drop as much as the markets would imply going forward.

So a couple of thoughts are one.

Even within the.

Contracts that are asset based a lot of the components of them are flat and so as you see increases.

And decreases the.

The fee rates don't move a 100% in the same magnitude.

And <unk>.

Secondly.

Outside of that there are certain volume there's certain transactions that are charged for on a per unit basis, and so that in and of itself adds a layer that doesn't that's uncorrelated in many ways to the level of assets and so and even this quarter.

One of the things we experience as we think about organic growth in particular in the asset servicing business that was another dynamic.

<unk> volumes were down and.

That that May have had some correlation with markets being down, but we actually think it was more correlated to just the volatility where a lot of the managers that asset manager clients we have.

We're doing less because of the particularly the currency volatility and so.

Different dynamics at work, but without a doubt there.

Trust fees won't move 100% in line with market with markets.

Yes.

Maybe one last one wealth management Big Big difference.

And the AUM change year on year downturn versus down 25 for asset servicing I'm, assuming that's mostly mix and wealth management clients holding 20 something percent in cash. So I wonder if you could confirm that and B talk about what.

Wealth clients are now doing with all that cash.

Sure so from a.

In.

From a wealth perspective, the clients may may take a different approach and saying that they are thinking about investing and they might it's more of an asset class change for them in asset allocation change by class and the institutional market those clients will often think differently.

And they might be moving between providers they might be moving.

And they've got more options to think about what their existing.

Existing option sets are I will say in general our if you think about deposits and.

And the money market funds combined.

Well just the movements tend to not be as as extreme and so deposits might be a better place to look at that they've actually just been been flatter and so the wealth clients tend to be ironically than we all think about that component of the market, maybe being more moving around more.

But I think it is the nature of our specific clients that they tend to be to.

Move less and and just be more patient through cycles.

Okay. Thank you for that.

Sure.

One moment our next question.

Our next question comes from the line.

<unk>.

RBC capital markets. Your line is open.

Good morning Gerard.

Good morning, Jason.

Digging a little deeper into the decline year over year of assets under custody and administration you touched on in your prepared remarks can you share with us how it breaks out between just market conditions in fixed income versus equity.

You already discussed a lot about the deposit issues.

And then also.

With the dollar may have contributed to that decline and lastly were there any customers that luck.

Sure.

AUC a was down call it six 5%.

Markets were over half of that.

Currency tier.

To your point observation was about a third and we've got a significant international exposure higher than what most people realize in AUC.

And in fact, only seven eight.

Only 70% is USD.

And then.

Client outflows were the remainder.

And so not.

Heavily significant portion of either AUC or of the decline itself and importantly, the decline in AUC that was related to outflows. It was related to our largely our asset manager clients underlying business having outflows.

And in our asset owners.

Balancing but there is no material change in our client base or in our wallet share and.

The business just emphasizes that win rate continues to be.

Hi, and consistent.

But this was a dynamic of our underlying clients, having outflows and over time that works in our favor our clients do well and we grow with them. This period was one where particularly the asset managers had outflows which impacted AUC.

Very good and then second asking.

Revenue question, a little differently can you share with us what percentage of your fee revenues, our variable rate price, meaning you charge, maybe a couple of basis points to your customer as a percentage of assets under custody. So as assets under custody. They go up and down in revenues of course, followed.

Where does that stand today.

Yeah.

Yes.

Okay.

Yeah.

Maybe something has to give you a quick sound bite that we could come back on its different across asset servicing and and let me offer a couple of things that might be helpful too.

In asset servicing.

40% of the fees are not.

Asset value sensitive, they're driven by transaction volumes.

Level fees are flat fees.

Of the asset sensitive fees that 60% about 75% operate on a month lag and about 25% on a quarter lag.

In.

This transition to wealth management I'll split it between the family office in the regions because they are different.

In the family office.

Probably its about a third of the fees are sensitive to equity markets in some ways and about 10% are sensitive to the fixed income markets. So close.

Close to half overall and then in the regions.

About half a little bit more sensitive to equity markets, but a quarter are sensitive to it.

Fixed income and so that should that should give you a good tool set to work from.

It does thank you.

Sure.

Yeah.

Thank you.

One moment for our next question.

Our next question comes from the line of Vivek <unk>.

<unk> from Jpmorgan Your line is open.

Thanks.

Taking my questions a couple of questions here.

Capital Youll see <unk> down to 10.1, Mike you've always wanted to keep a gap versus your peers that gap has.

Really disappear for the moment, what are you thinking, especially if rates stay high for a while.

What is your plan in terms of trying to bring back that gap.

So vivek youre right.

As to our objective on capital there and I would say that Hasnt changed.

Has changed as you know with rates the impact of OCI.

On that and so over time that will accrete back into capital and Thats. Our our plan. If you will is too.

Allow the capital ratio to continue to be in the range that we've had for some time period right now it's just.

The lower part of that range as a result of LCI.

Okay. So no plans to strengthen our balance sheet or anything.

In the near term to try and do anything about it.

Yes, so I would say there is no specific plans around that vivek, but we do look at risk weighted assets very closely because it is that as a proxy then for the amount of capital that's being deployed in that activity and are we getting the right return Jason talked about.

The size of the balance sheet earlier, and the fact that we do get positive returns across all of those activities, but some of them more than others and so we've never looked to just expand the balance sheet. If it was going to be in low returning activities. So that will be the same in this environment.

Every dollar of our TBA is precious.

Got it.

Different question, a little detailed one Jason you mentioned other.

Operating expenses were down due to lower miscellaneous expenses is it sustainable at this lower run rate given the cost focus that you've got or is that just temporary and comes back.

There is a lot of different factors going within that line item and so it's a difficult one to predict we tend we tried to call out the big moves but difficult to say that there is any any trend within that there's nothing we would call out at this point.

Okay.

One last one if I may you mentioned investment management seeing outflows.

How much and which products are you seeing that.

Across.

AUM in general the declines about 7%.

The majority of that is within asset servicing and then from an asset class to your perspective, it's a combination of mostly cash but also equity and then also the SEC lending cash collateral pools, but.

At the same time markets drove.

About 40% of the decline and currency was the remaining approximately 10%.

Okay Alright.

Alright, thank you.

Youre welcome.

Thank you.

Our next question.

We have a follow up from the line of Brennan Hawken from UBS. Your line is open.

Hey, Thanks for taking my follow up.

You touched briefly on this before Jason but could you give us an updated currency mix of the deposits.

Whether or not.

FX moves we've seen has caused some shifts there.

Okay.

Yes.

Second.

Sure.

Yeah.

Market, Jennifer if you get it before I did.

Yeah. This is Marc USD deposits, you were asking about the currency mix of deposits Brennan.

Yes, exactly current exited positive yes.

So in the.

Current quarter, it's a little bit over 70 is U S. So at 71%.

And then as you go down for total deposits.

A little bit more than 10% as pound.

A little bit more than 5% of zero and then you get to Aussie dollar, which is also right around 5% and then the rest is kind of spread out among the remaining 5% or so 5% to 10%.

But still not as not a significant change from what we've seen before even though the volumes have come down.

Okay.

Got it and then.

Earlier on expenses, you guys spoke to taking some actions on expenses to try to.

Diminish some of the inflationary pressure.

Is it possible to give some.

Color or help us think about what kind of magnitude we should be expecting as far as those action goes those potential actions go and what the timing would be.

I'll hit on timing.

And from that perspective.

We started and announced internally these higher levels of controls in early mid September and so.

We're already seeing some beneficial impact from that and certainly.

Change in heightening of the bar on what were bringing in and again got to emphasize there are still things that we think about from an investment perspective from to the extent, we have growth, we're going to follow that growth with appropriate level of investment and.

And but this is also about productivity and making sure that we address inflation very aggressively those are the two components that we're looking at and we've taken more of a five quarter approach to this year's planning process for 2023 to ensure we work hard on fourth quarter. So.

And that we maximize our ability to do well and be where we want to be in coming into the into next year and from a magnitude perspective too early to we're not going to give numbers on that at this point. It's just it is noteworthy enough that we wanted to make sure to communicate that this is something that.

It's been a pivot and a significant increase in the controls around higher level around spend increases.

Okay.

Just framing it is it best to think about because you said that this is about addressing the inflation and whatnot, you're not stopping the investment of course.

But given the challenging environment. So should we think about this could.

Help too.

Offset some of the recent inflationary pressure that you saw this year. So it's about like bringing the growth rate down.

Is that is that the right way to think about it or is it more.

Containing further pressure in sort of like stopping us from continuing to go higher.

Well it's both.

If we if we go back and it's a good thing for you to encourage us to frame it and so let's just come back to the way, we usually we always talk about our expenses, which is around productivity and placement and inflation growth and investing in and if we use that framework typically we want we'd like to see.

Productivity offset inflation, that's a lot easier to do when inflation of 2% inflation at eight 910%, it's very difficult, but that should tell you. We are going to be looking extremely hard at productivity. It where we can look at our existing base of business and find opportunities to be more efficient.

And then in the concept of.

Investing those that's where you just have to have a high bar and we have to say our growth rate historically has been high but we've accomplished a lot of the things we wanted to do.

In wealth management, we went through digital metamorphosis and our infrastructure. We went through we've gone we've gotten a lot of work done on migrating to the cloud and in our risk and cyber and regulatory bucket, we've done a lot of investing to ensure that.

The brand that we have is protected well and those are those are the three components around technology spending importantly that debt that we're talking about things internally so that infrastructure foundational pieces. One the second is that middle layer of risk regulatory cyber and the third is <unk>.

Around what's client driven and there are opportunities in each of those but the risk regulatory cyber is one where you would say we're going to ensure that we're doing everything we need to do there to make sure. We are where we should be as a franchise. The other two buckets. We've got to think about pacing, we've got to think about who.

We are using to help us on those things there are levers we can pull and then that last overall bucket of what do we do from a growth perspective to the extent that there's good business out there for us to bring on we're going to do it and that we care as much about the organic growth of the company as about wanted to make sure that the expense growth.

Right.

Where it should be.

Alright, thanks for taking my follow ups.

No. Thanks for encouraging the framework I hopefully that's helpful.

One moment for next question.

Our next question comes from the line of Mike Brown from K B W.

Yeah.

Great. Thanks for thank you Darren <unk> sure.

I just wanted to ask about the debt.

The volatility that we saw in the guilt market, we saw some headlines about.

Some challenges related to processing.

For your business.

Some context around the situation they're in.

Be any financial impact related to the volatility there.

Thank you for your business.

Yes, so Mike.

You've given the background, they're largely just sit there has been a significant amount of bill.

Both volumes and volatility in the guilt market.

And we.

We have a meaningful client base of UK pensions.

That are affected by that and number of those pension clients.

Utilize.

Liability driven investment strategies and managers that provide those strategies and likewise, we have.

Some very meaningful clients on that front. So we've been in the middle of that volume and volatility and have been doing everything thats required to be able to handle that.

Needless to say it has presented challenges for all of the players in that marketplace.

As it continued to work its way through and I would say.

Still uncertain and our expectation is that although some of the volumes may have come down here more recently, we are prepared that they could pick back up again and that the volatility has not gone away.

So from that perspective, we've been very focused on taking care of the clients, making sure that everything is getting done and I would say as far as any particular financial exposure or anything like that there is no change to the business model for us or necessarily exposures or things like that.

Okay very good thank you and just.

On share buybacks I don't think we really hurt.

<unk> much about that on this call.

Certainly were very low this quarter.

If I, if I heard Jason's comment correctly before it sounds like you know a lot of focus will probably be on rebuilding the CET one ratio.

So is it fair to assume that the buybacks will probably be relatively muted here and may be just dependent on how.

The OCI accrete back into capital or just any thoughts there on the framework for thinking about buybacks would be helpful.

Yes, I think you've got it largely right.

With <unk>.

One $5 billion to $2 billion in on accumulative basis, that's that's a high amount we care about our CET one levels.

<unk> got obviously, the strong very strong capital positions, but we think about it so much on a relative basis as well in an aggregate basis and so we feel good about the capital levels, but also our.

Yeah.

I'd say a bias towards making sure. We're we stay relatively where we want.

Great. Thank you Jason.

You bet.

On moment for next question.

A follow up from the line of Gerard Cassidy from RBC capital markets. Your line is open.

Thank you Jason Jason just a quick follow up on the beta that you mentioned incrementally 80% for the upcoming quarter as you pointed out.

Can you two parts to the question how does that compare to the last tightening cycle is 80% at this point normal or similar I should say not normal and second if rates continue to go higher let's say another 75 to 100 basis points will be incremental beta or approach a 100%.

So in terms of where it is relative to prior cycles. It has not been linear in this cycle each each each rate hike seems to have its own dynamic to it and the another dynamic is that historically we've seen.

Most of the dynamic come from the fed.

But this cycle and the mix of our deposits.

There is more impact from non USD currencies, and so you've got to play that in as well, it's really important and then to the second and.

And those those betas also behaves very differently and then also our wealth even within USD the wealth deposits behave differently.

They don't flatten out as much.

Even at even at higher levels from here, which gets to the second part of your question does it does it level off completely at some point it does it not.

Got up another 100 basis points for sure, but each currency behaves differently.

And depending on where we are behaves differently to betas are very high in non USD negative rates you can imagine clients were highly demanding.

Getting a 100% of the benefit as they were in negative territory as they got to zero in a little bit above the conversations change and.

And then also the dynamics of what are the alternatives look like and so the shape of the yield curve matters and so all those things come into play, but the direct answer is we don't anticipate a flattening.

Even at even with another 100 basis point lift, but we will continue to see higher betas as we get there.

Very good and then Mike just to follow up on the pension answer that you gave over in London.

London U K accounts.

Is it safe to assume that you guys are primarily acting as agent for those customers rather than any balance sheet risk or youre not underwriting MDI products.

Correct. So we are not an LTI.

Product provider, if you will on the asset management side, and Youre right, where the asset servicer for either the UK pension or for the LTI manager that's our that's our client and so yes, we're acting as agent for them now with sales of gilts with moving collateral around that there is a tremendous amount of moves.

<unk> of cash and bonds as a part of that.

So we will act as a go between.

Cause of that and so that can create.

Temporary exposures, if you will which is what would be the case, that's normal as part of.

The offering that we have for them.

And I would just add that with all of the increases in volumes and volatility that I talked about which have been multiples of what.

Is normally the case, we've put additional resources to every doing everything we can to make sure that we can we can handle those so.

That's really been our position on it and again can't predict where it's going to go but we're trying to be prepared for this to continue for some time.

Very helpful. Thank you.

Sure.

Yes.

Thank you.

And that concludes our Q&A for today I'd like to turn the call back over to Jennifer Childe for any closing remarks.

Thanks, Victor and thanks, everyone for joining us today, and we look forward to speaking with you again very soon.

Yes.

Thank you for participating you may now disconnect everyone have a great day.

The conference will begin shortly.

To raise your hand during Q&A you can dial one one.

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One on your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Jennifer Childe Director of Investor Relations. Please go ahead.

Thank you Victor good morning, everyone and welcome to Northern Trust corporations third quarter 2022 earnings Conference call. Joining me on our call. This morning are Mike <unk>, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, Lauren Allnutt, our controller, and Mark Bette and Brian <unk> from our Investor Relations team.

Most of this call is the replay that will be made available on our website through November 18th Northern Trust disclaims any continuing accuracy of the information provided in this call. After today. Please refer to our safe Harbor statement regarding forward looking statements on page 11 of the accompanying presentation, which will apply to our commentary on this call.

Thank you again for joining US today, let me turn the call over to Mike O'grady.

Thank you Jennifer let me join in welcoming everyone to our third quarter 2022 earnings call in the third quarter, we continued to execute well through a challenging operating environment compared to the prior year revenue grew 7% and the elimination of fee waivers and the favorable impact from higher interest rates more than offset that.

Significant headwinds from weaker equity and fixed income markets asset outflows and unfavorable currency movements.

<unk> growth of 9% reflected inflationary impacts across our cost base, particularly within our compensation and equipment and software lines.

<unk> was flat and we generated a return on average common equity of 14, 9%.

New business activity in wealth management was encouraging and we continue to engage actively with new and existing clients and asset management weak markets and institutional cash outflows reduced assets under management. We saw continued growth in our alternatives tax advantaged equity and ETF complex and.

Within asset servicing we continue to win new mandates and our backlog of new clients that haven't yet been on boarded has expanded meaningfully and is expected to transition over the coming quarters.

<unk>, we remain well positioned to navigate the current macroeconomic and market uncertainty drove position of strength, our new business pipeline remains robust and our capital position continues to be strong and a slowing growth environment. We have also begun prudently tightening our expense controls and focusing on realizing productivity benefits from the <unk>.

Investments we've made over the past several years I will now turn the call over to Jason.

Thank you, Mike and let me join Jennifer and Mike and welcoming you to our third quarter 2000, 22000, 22022 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 $394 $8 million earnings per share were $1 80, and our return on average common equity was 14, 9%.

<unk> for the quarter included a $17 million pension settlement charge within the employee benefits expense category.

Also recall that in the first quarter of this year, we implemented an accounting reclassification of certain fees, which will continue to impact the year over year comparisons as noted on this page.

Let's move to page three and review the financial highlights of the quarter.

Year over year revenue was up 7% and expenses increased 9% net income was flat in the sequential comparison revenue was down 1% and expenses were up 1%. While net income was also flat.

On average common equity was 14, 9% for the quarter up from 13, 7% a year ago down from 15, 7% in the prior quarter.

Yes.

Clearly the results in greater detail, starting with revenue on page four.

All other remaining noninterest income declined 8% from the prior year and 2% from the prior quarter.

Net interest income, which I will discuss in more detail later was $525 million and was up 47% from a year ago and 12% sequentially.

Let's look at the components of our trust and investment fees on page five.

For our asset servicing business fees totaled $603 million and were down 4% year over year and down 6% sequentially.

Within asset servicing custody and fund administration fees were $407 million down 12% year over year and down 6% sequentially.

City and fund administration fees decreased sequentially, primarily due to unfavorable markets unfavorable currency translation and lower transaction volumes.

Custody and fund administration fees decreased from the prior year quarter, primarily due to unfavorable currency translation and unfavorable markets, partially offset by new business.

Assets under custody and administration for asset servicing clients or 12 trillion at quarter end down 19% year over year and down 7% sequentially.

Both the year over year and sequential declines were primarily driven by unfavorable markets and currency translation.

Investment management fees within asset servicing or $136 million.

Up 20% year over year and down 8% sequentially.

Investment management fees decreased sequentially, primarily due to unfavorable market and asset outflows.

Assets under management for asset servicing clients were $873 7 billion.

Down 25% year over year and down 8% sequentially.

Both declines were driven by asset outflows weaker equity and fixed income markets and unfavorable currency translation.

Moving to our wealth management business Trust investment and other servicing fees were $475 $5 million down 1% compared to the prior year and down 5% from the prior quarter.

Within global family office, the year over year growth was driven by lower fee waivers and new business, partially offset by unfavorable markets.

The sequential decrease was mainly related to unfavorable markets.

Assets under management for our wealth management clients were $336 billion at quarter end down 10% year over year and down 5% on a sequential basis both.

Both the year over year and sequential declines were driven primarily by unfavorable markets.

Moving to page six net interest income was $525 $3 million in the quarter and was up 47% from the prior year.

On a sequential quarter basis net interest income grew 12%.

Average, earning assets declined 6% average deposits declined 8%, while average loan balances were up 2%.

The net interest margin was 158% in the quarter up 60 basis points from a year ago and up 23 basis points from the prior quarter.

Prior year quarter increase was primarily due to higher average interest rates and favorable balance sheet mix shift.

The sequential increase was primarily due to.

Higher average interest rates.

Turning to page seven expenses were $1 2 billion in the quarter, 9% higher than the prior year and 1% higher than the prior quarter.

On a year over year basis expense growth benefited by approximately 300 basis points due to currency translation.

Also included in the current quarter as the impact of the previously mentioned accounting reclassification, which increased other operating expense by $9 $4 million compared to the prior year.

Compensation expense was up 12% compared to the prior year and up 1% sequentially. The.

The year over year growth was primarily driven by higher salaries expense in part due to inflationary pressures, partially offset by favorable currency translation.