Q4 2022 Northern Trust Corp Earnings Call
Speaker 1: Yeah.
Speaker 2: the Northern Trush Corporation fourth quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childs. Go ahead, ma'am.
Speaker 3: Thank you, Marjorie. Good morning, everyone, and welcome to Northern Trust Corporation's fourth quarter 2022 earnings conference call. Joining me on our call this morning are Mike O'Grady, our chairman and CEO , Jason Tyler, our chief financial officer, Lauren Allnut, our controller, and Mark Betty, Briar Rose, and Grace Higgins from our investor relations team.
Speaker 4: Our fourth quarter earnings press release and financial trends report are both available on our website at www.northerntrust.com. Also, on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This January 19th call is being webcast live on www.northerntrust.com.
Speaker 5: The only authorized rebroadcast of this call is the replay that will be made available on our website through February 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 13 of the accompanying presentation.
Speaker 6: 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. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.
Speaker 7: Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2022 earnings call.
Speaker 8: I'd like to start by thanking our teams across the company for their strong execution throughout the year in the face of significant global political and market turmoil. It is our partners unwavering focus on supporting our clients in uncertain and volatile times like these that truly differentiates Northern Trust.
Speaker 9: For the full year, revenue was up 5%, including trust fee growth of 2%, and our return on average common equity was 12.7%. Excluding the impact of $303 million in charges detailed in the presentation, revenue for the full year grew 8% and our return on equity was 14.9%.
Speaker 10: Fourth quarter results reflected trends that were consistent with those we saw through the first three quarters of the year. Namely, on a year-over-year basis, weaker markets pressured our trust fees, but this was more than offset by strong increases in net interest income.
Speaker 11: Within our wealth management business, assets under management and advisory fees grew sequentially in the fourth quarter. Total fees declined, however, due to the lagged effect of markets, strategic price reductions in our index funds and shifts in client allocations out of liquidity products.
Speaker 12: Overall, new business generation and wealth management was healthy in 2022. However, we did see some deceleration in the second half of the year as market activity waned. We continue to execute on our growth strategy and wealth management, including increasing the size and effectiveness of our sales force, expanding our digital marketing efforts, and expanding our growth strategy.
Speaker 13: leveraging the differentiated capabilities of the Northern Trust Institute.
Speaker 14: In asset management, assets under management were up sequentially, but fees declined due to the outflows we experienced in our liquidity and index products as a result of the impact of both weaker markets and clients seeking alternatives. We did see solid increases in alternative funds throughout the year, including year-over-year growth of more than 20% in the fourth quarter.
Speaker 15: Our ETF complex also continued to perform well with year-over-year organic growth of 12%.
Speaker 16: Our product launches during the year focused on ESG capabilities, including three new ESG applications in the fourth quarter.
Speaker 17: And within acid servicing, we delivered a solid finish to the year. We saw healthy momentum throughout the year with our whole office offering, as investment managers are increasingly considering outsourced solutions in the face of continued margin pressure and the challenging macroeconomic environment.
Speaker 18: Whole Office integrates our global asset servicing platform with innovative partners facilitating access to new technologies, services, and solutions.
Speaker 19: One recent client win offers an insight into what differentiates us in the marketplace.
Speaker 20: After an exhaustive RFP process during which we conducted a complete review of a large UK-based asset manager's front-to-back operating model, we were selected to provide a holistic full suite of core asset servicing, capital markets, and data and analytics products and services.
Speaker 21: This client was particularly impressed with our ability to digitalize their investment process to maximize the value of their data.
Speaker 22: We learned that this client chose us because of our combination of market leading tools and first-rate client service.
Speaker 23: We also saw continued strong demand for our integrated trading solutions offering throughout both the quarter and the year.
Speaker 24: In 2022, the number of clients on the platform increased 20% year-over-year to nearly 100.
Speaker 25: Our one but not transition backlog that we spoke to you about last quarter started to transition in during the fourth
Speaker 26: Expense growth continued to be elevated in the quarter, reflecting investments in people and technology to strengthen our resiliency, advance our digital modernization efforts, and drive growth in the business.
Speaker 27: all critical initiatives, but the level of growth is too high.
Speaker 28: Some of the charges we announced today reflect early steps we are taking to bring down the trajectory to better align with the current operating environment and create capacity for profitable growth.
Speaker 29: To underscore our commitment, we recently launched a dedicated Office of Productivity to reinforce our approach to driving efficiency throughout the company.
Speaker 30: Jason will provide more color on in his prepared remarks.
Speaker 31: In closing, as we begin 2023, we remain well positioned to navigate the ongoing macroeconomic and market uncertainty from a position of strength. Our focus is on driving organic growth, improving our productivity, and continuing to bolster our foundation.
Speaker 32: I'll now turn the call over to Jason.
Thank you, Mike, and let me join Jennifer and Mike in welcoming you to our fourth quarter 2022 earnings call. Dive into the financial results of the quarter starting on page 2. This morning, we reported fourth quarter net income of $155.7 million. Earnings per share were 71 cents.
and our return on average common equity was 5.9%.
Our results were unfortunately impacted by the inclusion of $266 million in pretax charges, which reflect $199 million in net income.
impacts of 94 cents in earnings per share impacts.
These charges included the following on a pretax basis.
$213 million of investment security losses related to the intent to sell certain available for sale debt securities, which were subsequently sold in early January . $32 million of severance related charges.
$14 million of occupancy charges related to early lease exits, and $6.8 million of pension settlement charges.
Also recall that in the first quarter of this year, we implemented an accounting reclassification of certain fees
which continues to impact the year-over-year comparisons as noted on this page.
Thank you.
835.
Let's move to page three and review the financial highlights of the quarter.
Including the charges previously mentioned, year over year, revenue was down 8%, expenses increased 13%, and net income was down 62%.
In a sequential comparison, revenue was down 13%, expenses were up 8%, while net income was down 61%.
Excluding the charges previously mentioned, year over year, revenue was up 5% and expenses increased 9%.
Excluding the charges previously mentioned, on a sequential basis revenue was down 1% and expenses were up 5%.
Let's look at the results in greater detail, starting with revenue on page 4.
Year over year, unfavorable currency translation reduced our revenue growth by approximately 200 basis points.
Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1 billion. We're down 6% from last year and down 3% sequentially.
Our trustees continue to be unfavorably impacted by the weaker equity and fixed income markets and unfavorable currency movements.
As a reminder, a significant portion of our trust fees
are recorded on a month or quarter lag basis. So this quarter's performance is largely reflective of the third quarter's market performance, as well as the months of October and November .
The year-over-year and sequential declines in all other remaining non-interest income are primarily driven by the $213 million pre-tax investment security loss due to the intent to sell certain available for sale debt securities.
These securities were subsequently sold in early January 2023, which I'll describe in more detail in a few minutes.
That interest income on an FTE basis, which I'll also discuss in more detail later, was $550 million and was up 48% from a year ago and up 5% sequentially.
Let's look at the components of our trust and investment fees on page 5.
For our asset servicing business, fees totaled 588 million dollars, and we're down 6% year over year and down 3% sequentially.
With an asset servicing, custody and fund administration fees were $406 million, down 11% year over year, but importantly, they were flat sequentially.
Custody and fund administration fees decreased from the prior year quarter, primarily due to unfavorable markets and unfavorable currency translation partially upset by new business.
Assets under custody and administration for asset servicing clients were $13 trillion at quarter end, down 16% year over year, and up 6% sequentially.
The year-over-year decline was primarily driven by unfavorable markets and currency translation.
The sequential increase is primarily driven by favorable markets and currency translation.
Investment management fees within asset servicing were $124 million, up 9% year over year and down 9% sequentially.
Investment management fees decreased sequentially, primarily due to asset outflows and unfavorable asset
Investment management fees increased from the prior year quarter primarily due to lower money market fund fee waivers partially offset by asset outflows and unfavorable markets.
Assets under management for asset servicing clients were $898 billion, down 25% year-over-year, and up 3% sequentially.
The year-over-year decline was driven by asset outflows, weaker equity in fixed income markets, and unfavorable currency translation.
The sequential growth was driven by favorable markets and currency translation, partially offset by asset outflows.
Moving to our wealth management business, trust, investment, and other servicing fees were $454 million. And Kim
down 7% 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 and asset outflows partially offset by the elimination of money market fund fee waivers.
Sequentially, the decline within the regions was primarily driven by unfavorable markets, asset outflows, and a strategic repricing initiative.
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 asset outflows, unfavorable markets, and the re-pricing initiative. Assets under management for our wealth management clients were $351 billion at quarter end, down 16% year over year, and up 5% on a sequential basis.
The year-over-year decline was driven primarily by unfavorable markets and asset outflows.
The sequential increase was primarily due to favorable markets.
Moving to page six, net interest income was $550 million in the quarter and was up 48% in the prior year.
Earning assets averaged $134 billion in the quarter, down 10% versus the prior year.
Average deposits were 116 billion dollars and were down 14 percent versus the prior year, while loan balances averaged 42 billion dollars.
up 6% compared to the prior year.
On a sequential quarter basis, net interest income grew 5%.
Average earning assets were up 1%. Average deposits declined 2% while average loan balances were up 2%.
The net interest margin was 1.63% in the quarter, up 64 basis points from a year ago, and up 5 basis points from the prior quarter.
The prior year quarter increase is primarily due to higher average interest rates. The sequential increase is primarily due to higher average interest rates partially offset by an unfavorable balance sheet mix.
Turning to page seven, on a year-over-year basis, expense growth benefited by approximately 300 basis points due to currency translation.
As reported, expenses were $1.3 billion in the fourth quarter, 13% higher than the prior year and 8% higher than the prior quarter.
The current boarder's expenses included $53 million in charges. These charges in part reflect steps we're taking in conjunction with the launch of our Office of Productivity.
To shift away, we approach and manage our expenses.
Through this initiative, we expect to leverage data and analytics to help us better understand the efficacy of our spending so as to optimize our cost base and drive greater efficiencies throughout the organization. We'll update you on our progress in the coming quarters as appropriate.
Excluding charges in both periods, expenses in the fourth quarter were up 10% year over year, and a 5% sequentially.
Also, recall that the current quarter includes the impact of the previously mentioned accounting reclassification, which increased other operating expense by $8.6 million compared to the prior year. The current quarter includes the impact of the prior year's operating expense by $8.6
Compensation expense was up 15% compared to the prior year and up 6% sequentially. The year over year growth was primarily driven by higher salary expense in part due to inflationary pressures and the previously mentioned severance related charges partially offset by favorable currency translation.
The sequential increase is primarily due to the aforementioned severance-related charges and higher salary expense partially upset by lower incentives.
Employee benefits expense is down 4% compared to the prior quarter and down 6% sequentially.
The year-over-year decrease is primarily driven by lower ongoing pension expense, partially offset by higher medical costs.
The sequential decrease is primarily due to lower pension costs, including the lower pension settlement charge relative to the prior period, partially offset by higher medical costs.
Outside services expense was $233 million and was up 4% from a year ago and up 5% sequentially.
The year-over-year increase was primarily driven by higher technical service costs.
legal services, and consulting services.
partially offset by lower third-party advisory fees and subcustodian expense.
The sequential increase was primarily due to higher technical services costs and legal services, partially offset by lower subcustodian expense and consulting costs.
The equipment software expense of $229 million is up 17 percent from a year ago and up 8 percent sequentially. The year-over-year and sequential growth are both primarily driven by higher software costs due to continued investments in technology as well as inflationary pressures and higher amortization. guys.
We also recognize the $3.8 million termination charge associated with our mainframe strategy.
Occupancy expense of $66 million was up 27% from a year ago and up 28% sequentially.
The year-over-year and sequential growth were both primarily driven by the previously mentioned $14 million of charges related to early lease exits.
Other operating expense of $108 million was up 37% from a year ago and up 31% sequentially.
The year-over-year increase is primarily driven by higher staff related expense, business promotion, and miscellaneous expense.
The sequential increase is primarily due to higher business promotion, supplemental compensation plan expense, and miscellaneous expenses in the current period.
Turning to the full year, our results in 2022 are summarized on page 8.
On the right margin of this page, we outline the charges that we called out for both years.
included in these items net income was including these items net income was 1.3 billion dollars down 14% compared to 2021 and earnings per share were six dollars and 14 cents down 14% from the prior year
In 2022, these charges had a $227 million impact on net income and a $1.08 impact on earnings per share.
In 2021, these charges had an $18 million impact on net income and a 7 cent impact on earnings per share.
Full year revenue and expense trends are outlined on page 9 and include the charges previously mentioned.
Trust, investment and other servicing fees grew 2% in 2022.
The growth during the year was primarily driven by lower money market fee waivers and new business, partially offset by unfavorable markets and unfavorable currency translation.
Net interest income grew 36%. Average earning assets during the year decreased by 10%, while the net interest margin increased 64 basis points, driven by higher average interest rates.
The net result was revenue growth of 5% in 2022 compared to 2021 and expense growth of 10%.
Excluding these charges in both periods, revenue for the full year was up 8% from the prior year and expenses were up 9%.
Turning to page 10, our capital ratios remain strong with our common equity tier one ratio of 10.8% under the standardized approach, up from the prior quarter's 10.1%.
Our Tier 1 leverage ratio is 7.1%, up from 7% in the prior quarter.
a decrease in net unrealized losses in the available for sale securities portfolio and less foreign exchange volatility were the primary factors in this quarter's increase in capital ratios.
Accumulated other comprehensive income at the end of the quarter was a loss of $1.6 billion.
During the quarter, we returned $158.9 million to common shareholders through cash dividends of $158.8 million and share repurchases of $0.1 million.
In early January of this year, we sold $2.1 billion of higher capital consuming, lower yielding, non-HQLA debt securities,
and reinvested the proceeds into lower capital consuming, higher yielding HQLA assets.
This repositioning offered a unique opportunity to de-risk our portfolio, free up capital, and improve our liquidity ratios while simultaneously generating more attractive returns.
With that, Marjorie, please open the line for questions. Thank you very much. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypads. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
And again, that is star one. We'll pause for a moment to allow the opportunity to signal for questions. But while we do, we'll take our first question from Glenn Schor from Evercore. Please go ahead.
And that is star one. We'll pause for a moment to allow the opportunity to signal for questions. But while we do, we'll take our first question from Glenn Schor from Evercore. Please go ahead. Good morning, Goliath. Good morning.
So I guess I'll try to focus on deposits. So the interest bearing down 12, the non-interest bearing down 48 percent year on year, but there's a clear error.
declining
impact on a sequential basis. So I'm curious, a much higher rate paid and a decelerating outflow of deposits, how can you help us think through what to expect in 23 on both attrition mix and betas for deposits.
basis. So I'm curious, a much higher rate paid and a decelerating outflow of deposits, how can you help us think through what to expect in 23 on both attrition mix and betas for deposits? Thank you.
Sure. Well, there's a lot going on with the balance sheet, with the repositioning as well. So let me give you a couple of the key ingredients, and then let me know if there's additional detail you'd like. So just on volume, we saw volume
Up at down last to 116. We still think that that 110 to 115. Is a good is a good starting point for 1st quarter and as, you know, the quarter has the quarters have some seasonality. We usually get a spike at the end of 4th quarter.
first quarter gets some build from tax preparation, and in the second quarter, we'll start to see outflows as clients pay taxes. But as you think about first quarter, at least, 110 to 115 is still a good range. Then let me take beta in three different, or rate, really, in three different parts.
First, beta, and you noted that beta was high. We'd indicated we thought it would be at this point in the cycle, and we still think that it is!
That's a pretty good indication of what will look like over the course of the next 3 months. So beta for interest bearing deposits with 75, 80%. It was in line. We do anticipate that to be similar. Balance sheet repositioning that takes. 2Billion dollars a little bit more at a profit at what was.
about two or two and a quarter percent, and then it reinvested.
and a quarter percent, then it reinvested on the short end of the curve.
a couple of hundred basis points higher. Right now we're mostly overnight, but we'll continue to think about what we want to do with that from a non-HQLA perspective, but at least the starting point you should be thinking about is moving that $2 billion.
to overnight. And then just lastly as we're talking about rate, just a quick reminder, the runoff on the portfolio is just over a billion dollars. And you're moving that from two, two and a quarter to higher rates. We're repositioning as we mature securities.
to the short end, so there's a similar pickup there. And then last thing on Outlook, just as you think about first quarter, is just remember that day count costs us about $8 million going from fourth quarter to first quarter. So those are the big ingredients. Hopefully that's helpful.
Wow, well prepared. Thank you. Appreciate it. And maybe just follow up is...
similar question on average earning assets up 1% quarter on quarter should we feel in the range of stable now
Or I guess it is.
Yeah, it's hard to tell. I mean, I think about it very much from where the, obviously, it's a liability-driven balance sheet, and so the commentary on deposits is really what's driving the size of average earning assets in general. What we saw in the quarter, it certainly does look like things have, like composed by that landscape of like, you don't know if it's black as white or white as cooldown. I mean, this is like a strategy, we rely on tree control when, say when it comes to how you are printing something like you can remember that sheet, then guess what?
you should think of that as the driver of average earning assets.
I appreciate all the thanks.
Sure. Thank you. And we'll take our next question from Betsy Grasek from Morgan Stanley . Please go ahead.
Hi, good morning.
I heard all the commentary around the expenses and the efforts to
kind of slow the growth rate as we go forward here. But maybe you could help us understand maybe the pace at which you think you can do that. Because when I strip out the one-timers from the expense ratio, it's a little bit more complicated.
It still looks like the expense ratio moved up a bit around 400 basis points Q on Q. So how should I think about the trajectory from here? Does it stabilize where it is? Is there still some, you know,
push up from here or should we expect that the arc begins to come down in one cue? How should we think through that?
What
It doesn't stay where it is and it certainly doesn't increase over time. We, that expense ratio needs to come down. It's pretty good. You're talking about assume expense to trust fees. And so, you know, a few things to think about. One, and we can get into more detail on it, but in the short run at least.
from an expense perspective as we think about what first quarter is going to look like. I can give you some thoughts there just as you start to model out what does it look like.
you know, compensation is obviously our biggest line and so we've got to start there. And so we've got the 30 million dollars, which you indicated even pulling that out. And so what does that look like going forward? We actually think that in general that line item should start to flatten out in the near term as some of those several
we're anticipating to take place first and by the end of the first quarter. So we're going to start to see benefit of that. We're going to backfill some of those roles, but they're not going to be in expensive locations. This is less about us addressing FTE or headcount, and it's getting at what the economics are, which is the salary run rate line.
The other dynamics for compensation, I'd call it a wash as we think about going into first quarter. And then equipment software is where we've seen a big uplift over the last couple years. And we talked a few weeks ago externally about the fact that we thought that line would be at about $225 million. And that came in higher.
as we come into first quarter, but we think beyond that, that line end is gonna flatten out. That's obviously where all of our depreciation is, but we're gonna see an uplift of about $12 million in first quarter in equipment software, 100% of that coming from depreciation and.
that you started with as well. Mike, I don't know if you want to talk just more strategically about how you're thinking about this. Yeah, I would just add, Betsy, to your point, it is about trajectories and curves, if you will. So we've been on a downward trajectory with...
trust fees as a result of the factors that Jason has gone through. Obviously we're trying to drive that the other way, primarily through growth. I, you know, when it comes to NII, we've had a strong trajectory up. That's not likely to carry through into the new year or into 2023, just as a result of the rates, the
curve bend downwards sounds like it's a second half. We'll see that more in second half than in first.
Yeah, I think that's right, because as Jason saying some of these things, there's actions that we already took in the 4th quarter, which we had talked about on the previous call the intent to get going on those. And then more of them that are happening in the 1st quarter as well, and then carrying through. So you're right by the time you see the impact it's.
delayed relative to the action.
relative to the action. Okay, thank you appreciate it.
Sure.
And our next question comes from Brennan Hawken from UBS. Please go ahead.
Good morning.
Excuse me, good morning. Hope you guys are doing well. Hoping to get some more specifics here. So, the productivity office, you know, helpful that we're seeing that emerge. But, like, what are the objectives, right? So, what are the...
expenses have been a bit out of control, just being blunt, especially relative to the peer group and especially relative to the revenue trends. So, you know, investors are really, I'm getting hit a lot this morning on looking for some more details, better understanding and what specific metrics you're using and how we can make sure
to that you're hitting your goals when you're pushing through to make these changes.
Yeah, I can, first of all.
The thing that we look at to
litmus test how we're doing from an expense management perspective is still expense to trust fees and even pulling out the charges from this quarter, being in the you know, being anywhere near 120. That's not where the business is going to be in the long run. That's that's going to come down. And so then you start to think
more tactically, how does the productivity office look to do that? And just to be, you know, just say, what are the numbers associated with it? Historically, we have talked about productivity matching inflation. And when inflation was at 1 or 2%, we felt like we were doing that really well.
And with inflation at 8 or 9%, we are not going to get productivity to that level, but we should absolutely have productivity above 2% of our expense base.
Second, every group in this company has
productivity goals. We go through it all the time, every year, in our planning process. And then next, if you start to just think tactically, how is this office going to get at this work? What are the buckets that we're going to get at? I'll give you how the group is laid out.
First of all, it's technology. That's the largest component and the fastest growing expense item we have. That's $1.4 billion. And so we have to, we've got to get it technology costs. We accomplished a lot in 2022 and 2021, but we've got to do it efficiently.
And that means determining how we're purchasing, how we're developing technology, how we're consuming it, how we're delivering it.
Two is vendor strategy and how we're thinking about engaging with our partners externally.
three, investment governance. There are areas around the company where we're investing in growth for the business, we're investing to get deeper and stronger, but we've gotta accomplish those things, but at the same time test whether or not we still wanna be investing at the same rate, at the same timing.
And then lastly, fourth is a big pillar is workforce analysis. And, you know, a couple things there. That's, you already see us getting it, a larger severance than we normally take. And that should get to 300, 400 positions that will be impacted.
That's why we're focused on driving productivity across operations. Then even separately than this, we took out hundreds of
technology related contractors in fourth quarter.
just as an indication of how aggressively we're getting at this internally. And that's a big effort to do that. But again, we accomplished a lot and now it's time to turn the corner on it.
Yeah, and I would just add, I think Jason described it well, but think about it as bottoms up and top down. Right, which is each of the groups as Jason said, they have to have their productivity initiatives that work their way up to their productivity goals that are in the plan.
And then the top down part is the productivity office, which is doing things that can cut across the enterprise and also have the structure to work with the groups to help them meet those productivity initiatives. So that's the approach to it and again this is
We always have productivity as a part of the planning process, but as Jason is saying, when you have inflation like we do, you have to be able to ramp up those activities in order to get greater efficiencies.
Sure, sure. And everybody's dealing with inflation and it's certainly troubling and it's weighing on the results without question. So, and that was a lot of color and I appreciate that color, Jason and Mike. I would encourage you please to provide some actual metrics though.
to the investment community so that we can measure your progress, understand what your goals are, and actually have some visibility in order to think about where you're going and what you're trying to do, not just from a conceptual perspective, but from a numbers perspective, because I think that would really help in improving the confidence.
One follow-up question would be on wholesale funding.
Should I just took a look at wholesale funding was up again this quarter.
Should we think about it getting back to the 2019 levels where it was like mid 6% of the funding side of the balance sheet? Is that reasonable? Because it still looks like there's a little ways to go to get there or is this.
the upper end of the range and are you trying to limit that growth? There's nothing strategic that we've been doing in that area to bring it down. And so it is instructive as you're doing to look back at more historical levels. It's not to say that's the target, but it is to say that where we are right now is not
It's not reflective of any strategy that we have for lower levels.
not reflective of any strategy that we have for lower levels. Okay. All right. Thanks for the cover.
Thank you very much. We'll take our next question from Alex Blostein from Goldman Sachs. Please go ahead.
Good morning, Alex. Good morning, thanks for the question. So maybe pivot a little bit, I was hoping to spend a couple minutes on the wealth management and the global family office trends. You guys highlighted outflows, client outflows, asset outflows, I think, and both of those for the quarter. Thank you for watching today's short break.
You know, wealth management tends to kind of ebb and flow, but Global Family Office historically I think has been a source of stronger organic growth. So maybe help us unpack what's driving the outflows in both of these businesses and maybe also hit on the strategic price reductions that you mentioned. How much of that is fully captured in the Q4 results? Is there any
kind of negative carry over effect into Q1 as we think about fees and again maybe a little bit more color on the reasons behind these you know pricing reductions and what you'll ultimately expect.
Sure. So let's just walk the fees because that's probably what it's kind of how you're framing a question and you know fees down roughly 20 million dollars for the quarter. Right at half of that is markets.
And then a quarter of it is.
a quarter of it is the
re-pricing that we mentioned earlier. As this group knows extraordinarily well, on the asset management side of the business, fee compression is still persistent. We've not done those types of reductions a lot recently. We want to make sure that we're
And at this point, no plans to do more.
The other quarter of the decline was outflows, but that was product related outflows, so really client repositioning in the money market space, in the liquidity space. And we've seen a journey there for our clients across both wealth as well as asset servicing.
It's very closely aligned to what we saw in deposits of large decline as we came into COVID and decline as markets gained more confidence and then started to redeploy assets into risk assets.
And so if we think about the way we litmus test the business and wealth is to think about our Advisory fee frankly not the product side But what are the assets and what are the and what are the fees related to the advice we have with clients?
And that's gone well. In the quarter, client flows for wealth management from an advisory perspective overall were positive. On a link quarter and year over year basis, the net new business and flow activity that we track.
was positive low single digits, but it was positive. So the business is not in decline. What we're seeing is a a lot of clients deploying away from their historical mix of using our money market funds.
and then in this quarter, re-pricing of product.
Got it. As you think about pricing broadly for the products, not the advisory component, but if you think about the money market offering. Given the fact that money market funds are actually given a pretty healthy yield. Is there any thought around reducing your money market fees as well to become more competitive to
you know, maybe capture even more of those flows or prevent folks from leaving and seeking a better kind of yield options and net fees.
We look at it all the time and it actually it comes it's more that comes more into play on the institutional side and we've got a really we've got a very large and successful money market mutual fund business we do a lot of liquidity work for our clients and so even now there are some
strategic waivers that we have in the institutional side of the business where we're working pricing to ensure that we're as attractive as we can be. But it's not just pricing that clients look at on the institutional side in particular, they look at size and they look at the underlying quality of the assets. And so a lot of the ultra-large investors...
have investment policy restrictions on how big they can be within a fund. And so the fact that we've got funds that are 40, 50, 60 billion dollars, it enables those large investors to put money to work. And so the competition set is a little bit lower on the institutional side and we're above that threshold.
clients are, they're also thinking about deploying to, to building their own Treasury portfolios and laddering in portfolios there. And then potentially other product, they'll use ultra short. And so we do have high confidence that the mix of
the usage of this product is going to come back to where it was historically, and you're exactly right. It's a very attractive engagement for us economically.
Okay, thanks. I'll hop back into the queue.
Thank you. We'll take our next question from Ken Houston from Jefferies.
Morning.
Hey, good morning guys. Jason, sorry to come back to NII, but I'm just wondering, can you kind of put that all into context for us in terms of if the balance sheets shrinking, you get a little bit of help from the repositioning. Can NII grow from here or based on what you still expect on the rate curve?
And, you know, I guess I guess that would be the question. Thanks. Yeah. Yeah. Yeah. No, I appreciate you pushing on that. The answer is yes, it can absolutely grow from here. And we anticipate that throughout the year. It will. And I don't think 1st quarter is going to see meaning. I'm not sure it's going to see meaningful growth, but the trajectories are still in our.
off, which helps us too. And so that's the only offset to that is volumes. And that's what you know we're not sure what that's going to look like. But even that remained relatively flat. Like it was you know at right it was at the top end maybe a tiny bit above of what our anticipation was last quarter.
So, if I look out through the year, absolutely anticipation for NII to be growing from this 550 level. So, if I look out through the year, absolutely anticipation for NII to be growing from this 550 level.
Okay, thank you. And my follow up to that is, how do you think about incremental betas from here in terms of deposit cost increases? You had said you had expected a decent move up this quarter. You did get that. So how do we just understand that mix of deposits and the beta that you're looking at? Thank you.
Sure, yeah. I mean the mix, I don't, I don't, we haven't seen that changing dramatically, but you're raising an interesting point, which is that the betas are actually different depending on the currency that you're talking about, and so I just think that's something that's important for people to think about, and then most of the way the industry also calculates.
beta is on just the interest bearing portion. I think it's instructive to think about the total beta as well because as we've talked about the mix of interest bearing to non-interest bearing changes over time and so that has an effect as well. But the beta is on the institutional side.
I think you got to call them close to 100% at this point. It varies by currency, but I think you got to call it close to 100%. And then on the wealth management side, it's less than that. It's, you know, and you can imagine for us to get to a blended level that I'm talking about and kind of that.
you know, 70 to 80 percent range, wealth is closer to 50, and the institutional side, you know, closer to 100.
Okay, got it. Thank you, Jason.
We'll take our next question from Brian Bizell from Deutsche Bank. Good morning, Brian . Good morning, folks. Good morning, Jason. Thanks for taking my question. Maybe just to also ask about NII, but actually more to focus on that deposit growth trend.
And you talked about 110 to 115 in one cue. As you come into second quarter, maybe it's hard to assess this early, but what type of headwind would tax payments be on that? And then sort of a related question would be, to what extent do you want to, or do you think you need to defend those wealth?
the strategic wealth deposits and raise the beta further as we get into 2023.
We're looking, I'll go in reverse order, and we've talked about heavy defensive wealth deposits. The economics are important and those are the things we want to be doing with our clients, hard stop. So we're going to do everything we can to defend those.
And you know, they're largely relationship driven, but there's also there are pockets where the Where our clients look really aggressively at rate And so we've got good governance and infrastructure to make sure we're doing we can to maximize that
And then throughout the year, you're just asking, what do we look, how are we thinking about it over the course of the year? We've tended, you can go back and look historically at first quarter to second quarter and see what kind of decline there has been. We don't think, we don't anticipate anything different this year. And then...
what I can tell you is that from there we don't expect that we have more of a flattish outlook.
But we've got to just remember that that second quarter decline does take place and history should be a pretty good judge
Yep, that's helpful. And then maybe just on expenses, you mentioned the equipment software of 12 million in the first quarter. Is that from the 229 level in 4K or is that 225 X the charge?
Yeah, thanks for confirming that it's off the 225 level.
Great, okay, great, thank you, I'll get back in the queue.
Thank you and we'll take our next question from Jim Mitchell from Seaport Global. Go ahead.
Morning, Jen. Hey, hey, good morning. Maybe just a little bit on the pension accounting. Did that get triggered again this year? And should we expect more charges this year?
So
Every year we come into it, we don't expect there to be to trigger settlement settlement accounting and.
It's ironic because in 2021 we had the thresholds, but then we did a larger riff and those ended up triggering. And then this past year was interest rates going up significantly that led to a higher level of retirement than we anticipated. And so in no year do we anticipate it at this time.
And the bad news is we're in the exact same boat this time, which is that we look at the thresholds with our outside actuaries, with our consultants, but we can't predict with high degrees of certainty what the experience will be from a retiree from a retirement perspective. And so we have to let that play through. That said, what we've experienced in 2021 is that we've had a lot of problems with the
more of a trend than what then certainly than what we're planning or anticipating.
Okay, and maybe just on capital, you had a nice sequential improvement in capital ratios. Is there any content you didn't really do much in the way of buybacks in 2022? Do you see that being a bigger part of the EPS story this year?
Yes, at some point. So if you think about the framework we've used historically, and I've talked about it a lot, there's no red flags there. We don't have to have all of those components of the framework saying green.
We look at it in combination at any given point in time and it were at 10-8 right now We also still have a billion six in AOCI that'll come down a little bit actually in a chunk because of the securities repositioning because we did that after the quarter and So we've got call it a billion four that's going to be accreting into capital over time
from Autonomous Research.
Morning guys.
On the fee side, I just wanted to check in on organic growth and competitive landscape this quarter and into 2023 for both the institutional and the wealth businesses. Thanks.
Sure, so different, I'd say different stories there and on, you start with the what we talked about wealth a little bit earlier and if we think about just the core underlying
business really focusing more on the account management side, then the business had a very strong first half of the year and the second half of the year was weaker. And we've also noted GFO is much stronger and then the regions but
Again, that's going to ebb and flow over time, but organic growth, the way we have calculated and communicated it historically was negative in the regions for the quarter and call it flat for GFO.
if you actually slightly positive for GFO, if you think about it on a year-over-year basis.
So it at least gives you a sense of where that business is and then on the but then again from the advisory side there even at the both over for the year over year and at the end of the quarter the advisory fees did well and so the core business they're strong just we think it's the product mix and other factors leading to the way we've calculated Organic growth as being negative
And asset servicing, different story. We talked at the early part of the year that we felt Pipeline was good. That Pipeline is started to onboard in fourth quarter and we feel good about the growth in that business. And so the proxy there...
should be more custody and fund servicing fees. Just as I talked about account management fees and wealth management, the proxy for the same corollary there is custody and fund servicing and that was a positive in fourth quarter. It was actually really attractive. We had new business that Mike talked about earlier coming online in the business to the tune of
kind of mid single digits and we feel like that business is back to its historical organic growth rate and that's evidenced by what we onboarded the one not business the one not onboarded business we have right now is higher than our three-year average and the pipeline of business they have that they're still bidding on in late stages
higher than the three-year average for the business. And so a lot of positive signs in the asset servicing business from an organic perspective.
That's helpful just on that starting to starting to onboard business and asset servicing. I think. In the past, you had talked about that not really coming online until the 2nd, half of 23. So is that a pull forward there?
Actually there's, go ahead Mark, 22. Yeah, I'm sorry, it was really 22 that we talked about there being business in the back half of the year. It was onboard, so that did come into place. We do have right now, there's a chunk of business that we know is onboarding in the short run. The pipeline's good.
And then you go out farther to the end of 23 and there's another chunk of large business that we're anticipating to come on in a couple different areas. 4th quarter and even into 1st quarter of 24 and so the pipeline for that business is at various stages is looking good.
Got it. Thank you.
Got it. Thank you.
Thank you. Our next question comes from Mike Mayo from Wells Fargo Securities. Please go ahead.
Hi, on the on the expenses.
Oh my, I get it. Look, you guys are dealing with the first decline.
in both stock and bond markets in over 50 years. You said you're preserving growth by investing in people in tech, there's inflation.
both stock and bond markets in over 50 years. You said you're preserving growth by investing in people in tech. There's inflation, but wow.
This is the worst quarterly operating leverage that I can recall for you guys. And for the year, it was negative operating leverage of 500 basis points. Even COP has grown twice the pace of revenue growth. So I guess what I'm looking for is more assurance that expenses haven't gotten away from you.
I get it. At the high level, you said it looks like you're right sizing headcount with severance. You took out hundreds of tech-related contracts. You have some kind of mainframe strategy. I just don't understand what that means from a bottom-line standpoint.
I guess the question is, you said your expenses to trustee ratio of 120% is unacceptable.
But what is acceptable and when should you get there like 2024 2025? What kind of sense of urgency do you have because yeah, this is not the northern We've gotten to know over the past long while aside from your you know resiliency through tough times. Thanks
So Mike, it's Mike, to your point, you know, if you go back a number of years, where we were at levels that are like this, it's been a long time, and that's why it is considered unacceptable where we are. And we were effective in driving that ratio down into an area where, yes, we thought it was misguided.
of those, right? So, you know, beyond the challenging environment on the fee front, which is going to happen, you know, in at various times, we're trying to drive the organic growth there. And as much as we had, you know, good growth in the year, it was not one of our stronger organic growth levels. So,
challenged on the numerator both I would say conditions but also what we did on our part. And then on the other side, from an expense perspective, as Jason said, we got a lot done, not just this year but the last couple of years, and really making the company more resilient. And I'll get into a little more detail on that.
But just contextually, if you think back a few years, you know, with the pandemic, and then, you know, the last couple of years, you know, the technology infrastructure of the company is just critical to your ability to be just what you said, you know, which is, you know, resilient and therefore your clients in any set of conditions.
And so that's required a lot of investment in technology. Some of it, if you think about it, you have to be able to operate completely remotely and so you have to invest to be able to do that. And you also have to be reliable for clients. And so when it comes to modernizing all the technology you have.
you know, it does require investment on that front. And in the meantime, we also push forward with our digitalization efforts, you know, which is much more the client facing part of that, which is essential to being competitive and essential to growing. So it's been very active across that.
Some of that is non-discretionary, right? It needs to be done to be able to do what I said. Other parts of it, you do have more discretion in the speed, particularly around the digitalization front, and you're looking at the returns that you're gonna get for that.
So we've talked about things like matrix, which has been a meaningful investment, which will drive both productivity, but also will drive our capabilities and therefore revenue and organic growth on that front. The same thing is happening in wealth management, where we have to make sure that our interface with our clients is frictionless, as Steve would say in the...
more broadly, which we've done many times and need to just increase the focus on execution around those what I'll call more traditional ways to drive productivity. So you asked the question on okay, when does it get into that range? Is it 23? Is it 24? I don't know because I don't know exactly what's going to happen with the numerator and the denominator. Herzog No. 9 class into 3 0 1 g 0 1 2 1 2
but that's what we're driving towards is to get it into that range. And in the meantime, you know, also trying to drive profitability, meaning driving pre-tax margins above 30%. So that's kind of the view and the plan.
Can you give any specifics for the year? I know it's not always your style, but in terms of what kind of expense growth for the year, or what the savings are from the elimination of all the tech contracts, or even just if I think of investing along a J curve, it seems like,
You know, you're on this tech journey, like a lot of others are and some are still in the investing phase and some are in the harvesting phase. When do you think you go from investing to harvesting on this broader tech strategy, which. Seems to be impacting your expenses. Yeah, so I'll, I'll answer both of them. Let Jason add to, but, you know, we are clearly in the investing stage, but I would say, you know, and you're always investing of course, you know, in that because the.
that doesn't work, and so how do we bring that down? Now there's still going to be growth in expenses for the year because there are certain aspects that just carry into the year, right? So you do have base pay increases that flow in and you do have some of the technology costs, you know, that are amortization that just come into the year, but you know outside of that you're trying to do everything you can with productivity to
All right, thank you. All right. You said Jason was going to follow up. Well, I can give you a little bit a little bit more color on on the year if it's helpful and whatever information is helpful. Obviously, I'm happy to give what we see at this point, but. 1 thing is you're thinking about the next several quarters, not just the next 1 is.
Outside services was elevated and lots of things happening there in fourth quarter. Some of that's episodic, some of that is, has, I'm sorry, other expense. Some of that's episodic agency expense, supplemental pension plan. Some of those have more of a longer term trends. So think travel marketing that was actually
like the supplemental pension plan or market affected, but that should get to below $100 million and hopefully stay that way going forward. And then you just think about the impact also of compensation just to give you some color there.
We know base pay is going to come online in second quarter. That's going to be a $20 million lift.
And then to severance activity, we think that should, that's going to help us, help offset that a little bit, probably five to $7 million on a quarterly basis.
starting in second, third quarter. And then we'll have some additional hiring, but that's gonna be in line with the growth of the business. So that at least gives you a sense of some of the line items and then last one I can, visibility on equipment and software and the depreciation we've left that we've got coming into first quarter.
That levels out a lot. There's some growth. You know, call it a couple million dollar, one or two million, a couple million dollars a quarter after that, but nowhere near this level. And so a lot of the, that's where you get to what's the impact of those hundreds of contracts coming out. We're starting to flatten that.
depreciation and amortization line which sits within equipment software which has been the fastest grower. It's just reflective that we've gotten a lot of work done.
Okay, thank you.
Thank you. We'll take our next question from Gerard Cassidy from RBC. Please go ahead.
Gerard Cassidy from RBC. Please go ahead. Morning Gerard.
Hi Jason, coming back to the expense topic and conversation on the salaries, can you share with us?
The cost of those salaries, is it going more to entry level folks, or is it more your senior people? And then second, are you at risk of losing people, which is why you had to bump up salaries? And maybe a little more details about just the salary portion. Yeah.
So two very different dynamics happening the the the actions we're taking this year are not across the board much more targeted than they have been historically and very centered around frankly around technology and some and some operations oriented functions effectively and so that just get gives you a sense of where we're going and and then to
Why we've had some of the increases some of the salary increase we had last year obviously was an inflation related higher than average merit increase But a lot of the growth we had last year was doing off cycle adjustments to retain talent specifically in the wealth management business and We think that's that that's largely done at this point can never claim that that's you know with certainty that that's fully over but that was meaningful and
You know how important that franchise is to us and how important that talent base is, and so we were gonna defend that base. And that episode, that seems to be over at this point, and we're more to a business as usual growth rate across the organization, but we're identifying areas where we can get significant salary run rate savings and getting after those aggressively. Very good, and then as a follow-up, can you share with us, can you share with us,
On the sale of the fixed income portfolio, which resulted in the losses that you reported, can you give us some color on what types of securities were sold and the yields of those securities? And then by reinvesting the proceeds from that sale, how long will it take you to earn back that loss that you had to take to exit the portfolios? Yeah, so what we looked for was, were securities that have that had
the combination of a couple of things. One, poor RWA treatment, and secondly, lower coupons, lower yield. Third, that they still had significant time to maturity. So that bucket ended up being two, two and a half billion dollars. The coupon on those was
in the 2% to 2 and 1 quarter on average and the reinvestment of those coming in at you think about in earnings on reserve balances at the Fed in the 4 and 1 half range at this point. And in terms of the in the 2% to 2 and 1 quarter on average and the reinvestment of those coming in at you think about in earnings
The payback on that is more like a three and a half years, but remember from a regulatory reporting perspective we had already stripped out the unrealized loss in that portfolio and so the drivers of this were very largely around the opportunity to improve capital ratios. Not that we needed to improve capital or liquidity, we didn't, but the...
Seeing the opportunity to benefit CET1 in the form of lower RWA treatment help improve liquidity ratio and at the same time not hurt the economic value of your earning stream was very attractive to go after and that that's really what led us to do this. Great, thank you.
opportunity to benefit CET1 in the form of lower RWA treatment, help improve liquidity ratio, and at the same time not hurt the economic value of your earning stream was very attractive to go after and that that's really what led us to do this. Great, thank you. Sure.
I think we'll take our next question from Steven Chewbac from Wolf Research. David? Hi, good morning. So, Gerard actually asked my question, but I did want to clarify one item relating to the securities portfolio repositioning, which is whether you have any appetite to actually engage in further repositioning of the book from here.
We'll take our next question from Steven Chewbac from Wolf Research. David? Hi, good morning. So Gerard actually asked my question, but I did want to clarify one item relating to the securities portfolio repositioning, which is whether you have any appetite to actually engage in further repositioning of the book from here. Well, let's just make sure that we're meeting now.
We would have appetite frankly, because it's an attractive thing to do, but at the same time, we feel like we've harvested just about everything that's there. And. And I'm glad you asked the follow up because as soon as I finished, I realized George, and now you might be interested in just a little bit more colored corporate bonds within the 2Billion was about.
to HQLA assets, pick up capital, pick up liquidity and no impact from an economic perspective and in fact making it positive.
That's great. Thanks for taking my follow-up.
Sure. Thank you. We'll next go to Mike Brown from KBW.
Good morning. I just wanted to follow up on one of the capital and insurance purchase questions from the Jerry when I remember the last time that you saw it that pat.
from earlier. I look at your capital ratios, you're well above your minimums, which is consistent with how you've always managed the capital. But you've got a number of tailwinds on that front. And Jason, you mentioned that you plan to resume the buybacks at some point. I guess it seems to me that there's really no time like the present.
My question is, should we expect the share repurchases to engage in a more meaningful way in the first quarter? And when we think about the full year, what are the guardrails we should consider for your capital ratios as we think about modeling capital return from here? Sure.
So we won't comment more on timing. And if I get to the guardrails, it's instructive, I think, to look. And again, none of these are 100% determinative. They're just part of how we think about it. But these are the factors we think about. Look at the absolute levels, which tells you to look at history. Look at where we are relative to peers, and then relative to people who we know.
over the last several years and it's because we wanted our clients had loan demand and they wanted us to be there in FX activity and SEC lending and we did that because we had, it was because we were able to because we had the capital strength and flexibility to do that. So that's the thing that we're also.
looking forward on to make sure that we're not missing any significant changes in client demand that might impact our behavior. But you're right in that sitting at 10-8, much better position. And then back to this concept of a billion for an AOCI pulling apart over the next several years, plus the return on equity in the business is still attractive. And so.
Sounds like, I guess, how are you thinking about that loan demand from here? Our view is it sounded like it was kind of softer going forward, but you should be thinking about that.
kind of alluded to the fact that maybe you want to be there to meet client demand. So are you expecting that loan demand to pick up here in 2023? And then I guess just one other follow-on on the capital side. You guys think about, how do you think about inorganic actions here in terms of capital allocation? Like you said, you're talking about the capital allocation.
see any other opportunities to change your strategic asset mix and scale so that perhaps that could be another avenue that you would consider on a capital allocation front.
Sure, so on loan demand, I always remind people super spiky. On the base of business we have and the clients that we have, they can come with really significant transformation.
asks and we're happy to do it because a lot of times they've got potentially billions of dollars in assets and then they might have a liquidity need and they don't want to liquidate the asset. It's a great opportunity for us to help them at very large dollar amounts. It solidifies relationships well and so we just don't look quarter to quarter at the at loan volumes as much as I think it's appropriate to for other instances.
in capability. We're just thinking opportunistically if things come up, we've got the capital to be able to look at it. We have talked about having more of a bias at this point toward wealth management. We've done some things from an acquisition perspective in asset servicing over the last several years. They've gone well, but we've got a whole product.
circle there that we feel good about we do in wealth, but the more we can bring on attractive wealth clients that don't necessarily have the holistic product approach that we can bring it's a great opportunity for us to create value. And so that would be top of the list, but
no problems we're looking to solve from a mixed or scale perspective. Okay, very interesting. Thank you for taking my questions.
Thank you and we'll go to our last question from Brian Biddell from Deutsche Bank.
Morning, Brian . Great, thanks for taking my follow-up. Let me switch gears a little bit just on the wealth side. To what extent are you seeing any impact from some of your entrepreneur clients that may have had lower valuations in their private businesses or in their public businesses?
Or are you seeing any kind of pullback from those clients? Is it significant or is it really just not that big a deal? Brian , it's Mike. I would say we definitely are seeing a different perspective on the part of the.
the clients that you're talking about or prospects, right? I mean, a lot of the activity in 2021 beginning of 2022 was as a result of business owners who were selling their businesses, were monetizing assets. And so that was an uplift for us and with the reduced activity that you're seeing of
IPOs and market activity there, but then also certainly in the private marketplace, lower activity there. Definitely has had an impact for us of just less market opportunity for us.
Thanks. And then just one more on expenses. A lot has been asked and answered, but just in terms of the onboarding for the asset servicing pipeline, do we expect what is typically in the business where you have some onboarding expenses ahead of when the contracts are installed and generating revenue? Is that something also that might create some noise for 2023? In the 4Q?
we'd want you to be thinking ahead on.
Great. Thank you so much for taking my follow-ups.
We will now turn it back to our speakers for any closing remarks.
Thanks very much for joining us today. We look forward to speaking with you again soon.
Thank you, and ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.