Q4 2023 Northern Trust Corp Earnings Call
Please standby.
Good day and welcome to the Northern Trust Corporation fourth quarter 2023 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jennifer Childe Director of Investor Relations. Please go ahead.
Jennifer Childe: Thank you Bruce and good morning, everyone and welcome to Northern Trust Corporation's fourth quarter 2023 earnings Conference call. Joining me on are joining me on our call. This morning is Mike O'grady, our chairman and CEO, Jason Tyler, Our Chief Financial Officer, John Landers, Our controller and Greece Higgins from Orange.
Jennifer Childe: Mr Relations team, our fourth 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 January 18th call is being webcast live on Northern Trust.
Jennifer Childe: <unk> com 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.
Jennifer Childe: 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. Thank you again for joining us today.
Jennifer Childe: Let me turn the call over to Mike O'grady.
Mike Mayo: Thank you Jennifer let me join in welcoming you to our fourth quarter 2023 earnings call similar to the last few years 2023 presented a challenging operating environment, we experienced a combination of geopolitical instability highly visible bank failures and elevated inflation and interest rates I would like to thank our team.
Mike Mayo: Across the company for their tireless efforts to serve our clients under these difficult circumstances.
Mike Mayo: Turning to our numbers are.
Mike Mayo: Our fourth quarter results capped off a solid year of progress towards driving improved long term financial performance.
Mike Mayo: On a year over year basis reported fourth quarter revenue was $1 6 billion expenses were $1 4 billion and earnings per share were <unk> 52.
Mike Mayo: Our performance in the quarter included the impact of $261 million and notable items adjusting for the notable items in both periods fourth quarter revenue on a year over year basis was flat with trust fees up 5% and expenses up 3%.
Mike Mayo: We focused much of our efforts in 2023 on expense control.
Mike Mayo: Various structural and governance changes to enable sustained long term productivity improvement actions, including disciplined head count management vendor consolidation rationalization of our real estate footprint and process automation.
Mike Mayo: Although we brought our year over year expense growth down in each quarter. This year our expense growth in 2023 was still too high relative to our trust fee and revenue growth levels in recent years as such lowering the trajectory of our expense growth further remains a top priority this year as well.
Turning to the businesses, our organic growth continued to be below historical levels.
Mike Mayo: Though we saw improvement throughout the year.
Mike Mayo: Within wealth management for the fourth quarter and the year solid growth in client advisory fees was largely offset by product level asset outflows. We continued to see ongoing strength in the higher wealth tiers above $50 million in client assets, where our expertise track record and industry leadership are significant differentiators.
Mike Mayo: <unk>.
Mike Mayo: Our ability to harness the data and analytics from serving the wealthiest people in the world for more than a 130 years, coupled with our holistic advice driven culture sets us apart in the marketplace and will continue to be an important driver of our success drawing.
Mike Mayo: Drawing from our experience working with some of the most sophisticated families around the globe next month, the Northern Trust Institute will publish its first book.
Mike Mayo: Chris of enterprising families.
Mike Mayo: The book will provide a window into what works for ultra high net worth families who have succeeded generation after generation and what doesn't to help other families gain important insights and unlock value.
Mike Mayo: Book will be launched with a series of client and prospect events around the country, giving us a new channel to establish relationships and develop business.
Mike Mayo: Finally, as a testament to our exceptional client service and expertise in 2023, we were named best private Bank for family offices in the U S and best private bank for succession planning in the U S by the financial Times group.
Mike Mayo: Asset servicing generated solid new business growth in both the fourth quarter and full year, but this was largely offset by continuing asset outflows at the client level and generally lower transaction volumes and capital markets activities.
Mike Mayo: We performed particularly well with asset owners in the Americas in the fourth quarter.
Mike Mayo: Notable wins included the state of Nebraska investment Counsel pension plan and Costco's retirement plan.
Mike Mayo: We were also reappointed as asset servicing provider for the healthcare of Ontario pension plan.
Mike Mayo: Throughout the year, we also generated healthy momentum with asset managers in the U K and EMEA regions, where our solutions for alternatives and private credit were particularly well received.
Mike Mayo: We recently finalized terms with one of the world's largest private markets firms, which will add significant scale to our to our alternatives division.
Mike Mayo: This appointment is a testament to our ability to successfully compete for some of the largest and most complex mandates.
Mike Mayo: Our asset servicing business received numerous awards in 2023 for its innovation and industry leadership, including best outsourcing provider by Waters' European transfer agent of the year and administrator of the year by funds Europe.
Mike Mayo: Best Global custodian for asset owners by Asian Investor.
Mike Mayo: In asset management following several quarters of client outflows, we generated positive overall inflows in the fourth quarter, including healthy growth in index equity and our fourth consecutive quarter of positive liquidity inflows we've.
Mike Mayo: We've seen particularly good momentum in our high yield complex with 93% of our taxable active funds outperforming their one year benchmarks.
Our alternative funds have also continued to generate solid growth and remain an important driver of our fee revenue.
Mike Mayo: As a result, our product launches during the year focused largely on alternatives capabilities.
Mike Mayo: In closing, we enter 2024 with positive momentum well positioned to navigate the ongoing macroeconomic and market uncertainty.
Mike Mayo: Our focus is squarely on accelerating profitable organic growth, maintaining our expense discipline and driving greater resiliency and efficiency in our operating model.
Mike Mayo: With that I'll turn it over to Jason to review, our financial performance Jason.
Thank you, Mike Nuomi joined Jennifer and Mike and welcoming you to our fourth quarter 2023 earnings call, let's dive into the financial results for the quarter starting on page four.
Mike Mayo: Morning, We reported GAAP fourth quarter net income of $113 million earnings per share of <unk> 52, and our return on average common equity was 4%.
Mike Mayo: As noted on the slide our reported results included a $176 million loss on the sale of securities related to our repositioning of the portfolio that we completed in November.
Mike Mayo: They also included an $85 million FDIC special assessment.
Mike Mayo: Assets under custody and administration and assets under management were up sharply on both a sequential and year over year basis.
Mike Mayo: Strong equity and fixed income markets, coupled with favorable currency movements drove most of the improvement in both periods offset slightly by asset outflows in both periods.
Given the intra period market movements and lag effects of our fee arrangements markets had an unfavorable impact on sequential trust fee growth and a favorable impact on year over year trust fee growth on.
Mike Mayo: On a year over year basis currency movements had an approximate 90 basis point favorable impact on revenue growth largely within our asset servicing segment and 110 basis point unfavorable impact on expenses on.
Mike Mayo: On a sequential basis currency impacts were immaterial.
Mike Mayo: Excluding notable items in all periods revenue was flat on both a sequential quarter and year over year basis expense.
Mike Mayo: Expenses were well controlled up one 9% sequentially and up two 6% over the prior year.
Mike Mayo: Trust investment and other servicing fees totaled $1 $1 billion, 2% sequential decrease and a 5% increase compared to last year.
Mike Mayo: All other noninterest income on an FTE basis was down 6% sequentially and down 5% over the prior year.
Mike Mayo: Yes.
Mike Mayo: Net interest income on an FTE basis was $501 million up 7% sequentially and down 9% from a year ago.
Mike Mayo: Provision for credit losses was $11 million in the fourth quarter.
Mike Mayo: Overall, our credit quality remains very strong net charge offs during the quarter or $2 million nonperforming loan levels decreased to $64 million from $69 million in the prior period.
Mike Mayo: And nonperforming loans as a percentage of total loans remained stable.
Mike Mayo: Turning to our asset servicing results on page five.
Mike Mayo: Assets under custody and administration for asset servicing clients were 14 trillion at quarter end.
Mike Mayo: Asset servicing fees totaled $612 million.
Mike Mayo: Custody and fund administration fees were $420 million.
Mike Mayo: Assets under management for asset servicing clients were one trillion.
Mike Mayo: And asset management fees within asset servicing.
Mike Mayo: $131 million.
Mike Mayo: Moving to our wealth management business on page six.
Mike Mayo: Assets under management for our wealth management clients were 420.
$23 million.
Mike Mayo: <unk>.
Mike Mayo: Assets and trust investment and other servicing fees for wealth management clients were $478 million.
Mike Mayo: Moving to page seven and our balance sheet and net interest income trends.
Mike Mayo: Our asset our average balance sheet decreased 3% on a linked quarter basis, primarily due to lower borrowing activity and.
Mike Mayo: It declined 8% compared to the prior year due to lower client deposits.
Mike Mayo: Yeah.
Mike Mayo: Average deposits were 102 billion essentially.
Mike Mayo: Essentially flat with the prior quarter and meaningfully better than our expectations.
Mike Mayo: Experienced a stronger than anticipated increase in deposits late in the quarter ending the year at $116 billion.
At quarter end operational deposits comprised approximately two thirds of institutional deposits and institutional deposits comprised 75% to 80% of the total mix.
Mike Mayo: Despite significant leverage capacity, we reduced our average borrowings by $4 billion relative to the third quarter or nearly 4%, reducing both our FHA advances and fed funds purchased.
Mike Mayo: Shifting to the asset side of the balance sheet.
$3 2 billion Securities repositioning we completed in November involve the sale of both high quality liquid assets and non high quality liquid assets available for sale securities with a weighted average maturity of two to three years.
Earlier this week, we completed another $2 1 billion repositioning, which enhances our flexibility given the dynamic rate environment.
Mike Mayo: We will record an associated loss in the first quarter of approximately $200 million.
Mike Mayo: The proceeds of both sales were invested in short floating rate securities further reducing the duration of the portfolio, which is now one eight years.
Mike Mayo: Average loan balances were 42 billion flat, both sequentially and relative to the prior year.
Mike Mayo: Our end of period loan balances were up $4 billion or 9% over the third quarter, reflecting an increase in overdrafts related to higher levels of year end trading and settlement activity.
Mike Mayo: Our loans are sensor return to $42 billion.
Mike Mayo: The heightened activity at the end of the quarter did not have a material impact on net interest income in either the fourth quarter fourth quarter or first quarter.
Mike Mayo: As a reminder, approximately 75% of the loan portfolio is floating.
Mike Mayo: The total balance sheet duration continues to be less than a year.
Mike Mayo: Yes.
Mike Mayo: Our average liquidity levels remained strong cash held at the federal reserve and other central banks was down reflecting the decrease in borrowings, but high quality liquid assets comprised more than 50% of our deposits and more than 40% of total earning assets on average.
Mike Mayo: Our net interest income in 2024 will continue to be driven largely by client deposit behavior, which has been less predictable given the unique aspects of this rate cycle.
Mike Mayo: We expect the November and January Securities repositioning should provide an incremental $30 million and net interest income per quarter in 2024 relative to fourth quarter levels.
Mike Mayo: We currently expect first quarter net interest income to be in the range of $480 million to $500 million.
Mike Mayo: This assumes deposits remained stable, but deposit pricing continues to be under some pressure with further NIM compression possible as long as quantitative tightening persists and the deposit environment stays highly competitive.
Mike Mayo: Turning to page eight.
Mike Mayo: As reported noninterest expenses were $1 4 billion in the fourth quarter up 9% sequentially and up 5% as compared to the prior year.
Mike Mayo: Excluding notable items in both periods as listed on the slide the expenses in the fourth quarter were up just under 2% sequentially and under 3% year over year.
Mike Mayo: Although not just a few highlights excluding all notable items compensation expense was up 2% year over year. This reflected the impact from 2023 base pay adjustments, partially offset by reductions in incentive compensation and head count head count actions taken year to date.
Full time equivalent head count was down 200, or 1% sequentially and down 500 or 2% over the prior year.
Mike Mayo: Excluding notable items in all periods non compensation expense was up 3% year over year.
Mike Mayo: Equipment and software expense was up 10% year over year, largely due to increased amortization expense.
Mike Mayo: Recall that as much as two thirds of this line item is comprised of depreciation and amortization expense.
Mike Mayo: And finally, we realized 200 basis points of trust fee operating leverage in the quarter.
Mike Mayo: Turning to the full year results on page nine.
Mike Mayo: Trust fees were down 2% in 2023, largely due to asset outflows in weaker transaction volume, partially offset by the elimination of rate driven fee waivers and new business generation.
Mike Mayo: Excluding the impact of the two securities repositioning other noninterest income was down 9%, reflecting weakness in foreign exchange trading and other capital markets activities.
Mike Mayo: Net interest income was up over $100 million or 6%, which largely offset the decline in the other noninterest income categories. This translated to flat total revenue growth.
Mike Mayo: Our reported expenses were up 6% for the full year to $5 $3 billion.
Mike Mayo: Excluding notable items in both periods as listed on the slide the expenses were $5 1 billion in 2023 up four 8%, which compares favorably to 2022.
Mike Mayo: As we've noticed previously we expect to bring the expense growth rate down further in 2024.
Mike Mayo: We have clear line of sight to two key areas of increase base pay adjustments within compensation expense and depreciation and amortization increases within equipment and software.
Mike Mayo: On a blended rate, we expect to provide base pay adjustments of approximately $65 million in 2024, which will hit our compensation line beginning in the second quarter. This compares to base pay adjustments of $80 million in 2023.
Mike Mayo: Within equipment and software expense, we expect a 65 million or 10% increase in 2024 <unk>.
Mike Mayo: Combined these two line items will drive approximately 3% increase in operating expenses above 2023 levels, along that said, we expect to continue to generate meaningful efficiency gains from our productivity office and have identified further opportunities for improvement.
Mike Mayo: As we look out to the first quarter, we expect the following first quarter compensation expense.
Mike Mayo: We'll include our annual equity incentive payments.
Mike Mayo: Including those for retirement eligible employees, along with modest employee head count growth associated with growth in the underlying businesses. This should translate to a sequential increase of.
Mike Mayo: A $50 to $55 million.
Mike Mayo: <unk> benefits expense is expected to increase by approximately $10 million due to seasonally higher payroll taxes.
Mike Mayo: Turning to page 10, our capital levels and regulatory ratios remained strong in the quarter, we continue to operate at levels well above our required regulatory minimums.
Mike Mayo: Our common equity tier one ratio under the standardized approach was flat with the prior quarter at 11, 4%.
Mike Mayo: As capital accretion offset a modest increase in risk weighted asset levels.
Mike Mayo: This reflects a 440 basis point buffer above our regulatory requirements.
Mike Mayo: Our tier one leverage ratio was eight 1% up 20 basis points from the prior quarter.
Mike Mayo: At quarter end, our unrealized pre tax loss on available for sale Securities was $924 million.
Mike Mayo: We returned over $300 million to common shareholders in the quarter through cash dividends of $156 million in common stock repurchases of $146 million.
Mike Mayo: For the full year, we returned approximately $980 million to common stockholders, including common stock repurchases of approximately $350 million.
Mike Mayo: And with that room. Please open the line for questions.
Mike Mayo: If you'd like to add.
Your question. Please signal by pressing star one on your telephone keypad.
Mike Mayo: Limit yourself to one question and one follow up.
Speaker Change: If you are using a speaker phone. Please make sure. Your mute function is turned off July youre signals from sorry, Craig.
Speaker Change: Again, Please press star one to ask a question.
Speaker Change: Pause for just a moment.
Speaker Change: Okay.
Speaker Change: We'll go first to <unk>.
Speaker Change: <unk> with Evercore.
Speaker Change: Good morning, good morning.
Speaker Change: So I appreciate all the other numbers you helped us with charter.
Speaker Change: Try to peak a little bit more under the covers so deposits stable heard your thoughts on <unk> NII.
Speaker Change: On the further deposit pricing pressure. So the question is as we go throughout the year.
Speaker Change: Do you have any window into.
Speaker Change: That stability in deposit sticking around.
Speaker Change: And then.
Speaker Change: With the combination of 75% floating rate loan book and still pressure on deposits.
Speaker Change: Is it is it reasonable to assume that NII might go.
Speaker Change: Down in second quarter forward before stabilizing later in the year and rising.
Speaker Change: I know, that's a little bit further look into the future but.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Very reasonable way to frame looking out further into the year and you are right for us to say full year numbers at this point, it's just too early but it is good to think about what how the assets and liabilities are going to react.
Speaker Change: Blooming rate cuts and.
Speaker Change: It's helpful to think back on how the.
Speaker Change: The impact to NIM occurred with rates rising initially was very different than what happened eventually when betas were much higher and I think on the way down we might have a similar situation where the first cuts may be different than the later ones.
Speaker Change: And two things jump out in my mind. One is we've never tried to be a price setter in deposits. Our goal has always been keep the deposits in the house and we were very aggressive at following what we saw market pricing wise.
Speaker Change: And the second thing is that as we get these initial cuts.
Speaker Change: We could see the market.
Speaker Change: We are reacting in a way to keep deposit cost deposit yields for clients hire to hold onto deposits and so I think initially might be tougher than what happens eventually now all that said.
Speaker Change: Volumes matter a lot and it's obviously been extremely hard for us to predict where volumes were going to go and we saw in October.
Speaker Change: Better than we anticipated in November was better than October December was better than November and so volumes are going to be critical and what happens in the first half of the year and it's just super hard to predict.
Speaker Change: I definitely appreciate that.
Speaker Change: This one might be a little bit easier to follow up on fee operating leverage.
Speaker Change: I mean just.
Speaker Change: It means of pricing alone or the markets alone the markets had a strong into the fourth quarter.
Speaker Change: Your fee.
Speaker Change: Run rates would probably be a lot better going into the first quarter.
Speaker Change: With your comments on even more sharper discipline on expenses.
Speaker Change: Do you expect to make some meaningful progress.
Speaker Change: Early on in the year and this fee to expense ratio.
Speaker Change: Yeah Yeah.
Speaker Change: Youre right to call out that there is a there is a lift the launch for entire coming into the year and.
Speaker Change: I don't know, if I'd say meaningful, but but but it's definitely higher and the lag effects will help us as we walk into the year.
Speaker Change: And so that's the math of it but then more strategically.
Speaker Change: We do feel positive about the pipeline in both asset servicing and wealth management and underneath both businesses.
Speaker Change: Our asset management business is incredibly important and Mike.
Speaker Change: Mike mentioned in his commentary some early signs of.
Speaker Change: Of flows back in and we always think just as we do on deposits just keep the money in the house it keep the client assets in the house, but if our asset management business does better than that helps as well and so I think the strategic component is also we're drilling early signs of some positive.
Speaker Change: <unk> movement from an organic perspective.
Speaker Change: We'll go next to Steven <unk> with Wolfe Research.
Steven: Search excuse me.
Steven: Good morning, David.
Steven: So I was hoping to maybe just unpack like the deposit discussion a bit further and specifically just get a sense as to how you are.
Steven: Thinking through the impact of ongoing said Qt it does feel like a lot of liquidity in the system has come out of our RP, that's provided a bit of stability or at least has helped drive better deposit resiliency over the last six months, but with the <unk>.
Steven: <unk> expect it to be exhausted over the next call. It three to four months just wanted to get a sense.
Steven: Once that happens how you expect deposit flows to ultimately trend.
Speaker Change: Yes, I'll start and Mike May have thoughts too because we talk about this a lot and it's more predictive than it is quantitatively spitting out results frankly, but youre right.
Mike: My sense is that the ERP program had a really significant impact on deposits and <unk>.
Mike: It was effectively competing with banks for deposits and now that it's come down I do think that that's been a help.
Mike: From here is different and I think we have to think about the fact that rate movements are going to also have an impact on how clients think about deposits and with the deposit costs haven't gone up so much in the second half of the year and again that was that had a big impact on deposit cost.
Mike: And client behavior could see that having an impact this year as rates come down and so I think it's not just the ERP program, but how clients think about.
Mike: Instead of 5% rates, how they think about 3% rates and comparing that to maybe more of a risk on trade and so.
Mike: We've got to think both about the program and the rate environment.
Speaker Change: I would agree with what Jason said, there just as there was a transition on the way up with Q E. There's going to be a transition on the way down.
Speaker Change: Unchartered territory for everyone on Qt and how they go about that and when they might stop.
Speaker Change: More aggressively seeing their portfolio come down so I think that the timing of that will matter and then also we saw with client behavior.
Speaker Change: As rates went up more of the liquidity moved into treasuries.
Speaker Change: And that had an impact on us and as we come down I think over time.
Speaker Change: Out of the funds that have moved into treasuries will start to move into other alternatives and as Jason said, our objective is to work with the clients and really try to meet any of those needs and keep the dollars in the house.
Speaker Change: That's great and just for my follow up.
Speaker Change: The.
Speaker Change: The duration on the asset side of the balance sheet admittedly has been a little bit more volatile, especially given some of the repositioning actions you talked about.
Speaker Change: The asset betas with rate hikes were quite elevated for you guys in some of your trust peers as well just wanted to get a sense as to what percentage of the asset side of the balance sheet. If we took a snapshot today.
Sensitive to movement in short rates as we do prepare for eventual rate cuts.
Speaker Change: We can do it in three buckets and.
Speaker Change: Did you just take cash obviously, a 100% of that the second loans and roughly three quarters.
Speaker Change: Is.
Speaker Change: Our rate sensitive and you think about the securities portfolio and I'll give you two numbers to play with one is the duration is meaningful.
Speaker Change: Now about one eight but.
Speaker Change: Also just the weighted average maturity of the portfolio. I think is also helpful, which is a little under four years.
Speaker Change: And we call this.
Speaker Change: Balance the duration of the balance sheet that is just us doing a weighted average across those effectively just to give a sense of the impact of.
Speaker Change: The large size of the cash component and the large floating component of the loan book.
Speaker Change: And Jason could you just clarify what percentage of the Securities book Today is Florida.
Speaker Change: Yeah.
Jason Tyler: Yes, its about a third of the <unk>.
Jason Tyler: Book is.
Jason Tyler: As floating.
Jason Tyler: Slide.
Jason Tyler: We'll go next to Alex <unk> with Goldman Sachs.
Jason Tyler: Yeah.
Alex: Hey, Jason Hey, Mike Good morning, everybody.
Alex: Just building on Steven's question for a second.
Alex: Given the fact that rates are expected to come down and you guys have actually been I guess shifting the balance sheet to be maybe a little bit more floating for the right reason and obviously been a good trade for NII for last quarter this quarter.
Alex: Any expectations to actually start locking in higher yields going forward and maybe extending duration a little bit I know this is pretty quick you guys have just kind of gone the other way, but the balance sheet effectively became a little more floating as rates are about to come down. So just curious how you're thinking about that.
Alex: Yes.
Alex: It's on our mind, a lot and as we're talking about it and we have brought the duration down and one of the benefits of that is that it does makes it makes it a lot more flexible because the markets have been really dynamic and so.
Alex: There will come a time when I.
Alex: And my I anticipate where we would say it's time to step out a little bit or our bias over the last year has obviously been to go shorter and that's played out I think right.
Alex: Day rates have played out we had it we had a view and not materially but it worked in our favor and but from here I think we do have to think about.
Alex: It's not locking in as much as just taking the downside risk off the table of a dramatic reduction in rates.
Alex: And so there is some component there that we'd say, we can naturally hedge against.
Speaker Change: I gotcha that makes sense.
Speaker Change: I wanted to follow up on my second one is just around the expense outlook.
Speaker Change: 23 was super noisy, there's a bunch of one timers, obviously, so I just want to clarify a couple of things so.
Speaker Change: The ultimate messages that 2020 for expense growth expected to be lower than 2023, I think the core expense growth in 2003 was about 5%. So just wanted to confirm that and then the core base you're speaking to is it still kind of five 1%, maybe $5 2 billion.
Speaker Change: Cork.
Speaker Change: Core expense base off of which we should think about 'twenty four.
Speaker Change: Yeah, so confirm the 'twenty four 'twenty three number we think of as 5% just a little bit less than that right at about four eight.
Speaker Change: And the we are working from a base in 'twenty three of five one and.
Speaker Change: Probably worthwhile to invest a minute and just fixed line because youre right theres been.
Speaker Change: A few things so if you walk the.
Speaker Change: We reported 5284, and then you take out in the year.
Speaker Change: Severance related charges with two occupancy charges that totaled about 13.
Speaker Change: There was that client capability right off we mentioned in second quarter 2006.
Speaker Change: FDIC Special assessment 85.
Speaker Change: And then there is a small equipment credit of $4 million in the third quarter that we mentioned as well.
The severance related charge in Q2 was $39 million just to make sure I give you the numbers on everything and so let's work that tells US who would work from a base of five one.
Speaker Change: We'll go next to Brennan Hawken with UBS.
Brennan Hawken: Hey, Brian.
Brennan Hawken: Hey, good morning, Thanks for taking my question.
Brennan Hawken: We'd love to follow up on that on that last question actually so thanks for clarifying the base that's helpful.
Number one just to confirm you did mentioned that.
Brennan Hawken: It would be.
Brennan Hawken: Inclusive of adjusting for the write off of the.
Brennan Hawken: Client capability, just wanted to confirm that.
Brennan Hawken: Just to clarify the message on the investing.
Brennan Hawken: Super clear that you are working to drive expense growth lower than you saw in 2023, but you also laid out an uplift of 3% from base pay and software.
Brennan Hawken: Does that represent.
Brennan Hawken: <unk> to gross or do you have sufficient levers to offset at least some of that.
Brennan Hawken: It's not a floor, but it does give you a sense of.
Brennan Hawken: What's already in.
Brennan Hawken: In the 'twenty four base from which we are working and so we've got to use productivity to to get aggressively at that some of our productivity work is already reflected in that but we've got to do more of this year and I just want we wanted to be super transparent and the things that we already know.
Brennan Hawken: Know that are in the 24.
Brennan Hawken: Increase.
So that you guys can predict what what that level is.
Brennan Hawken: Okay.
Brennan Hawken: And is the write off of the capability that was in other operating expense part of the adjustments to sorry, if I missed that.
Brennan Hawken: Yes.
Speaker Change: Our next question comes from the line of Mike Brown with K B W.
Speaker Change: Mike.
Mike Mayo: Okay, great. Good morning, Thanks for taking my questions.
The sequential increase increase in the noninterest bearing deposits that was positive to see this quarter.
Mike Mayo: Just touch on maybe some of the key drivers. There was this supported by some of the new business activity that you referenced in the prepared remarks and then.
Mike Mayo: I appreciate the comments on the deposits and the potential for the stability here near term but.
Mike Mayo: I guess focusing on the Niv is can they stabilize at this level either in terms of like an absolute dollar basis or as a person.
Mike Mayo: <unk> of the total deposits.
Mike Mayo: My observation and looking at it is that it's.
Mike Mayo: It's less percentage driven and more what is that base.
Mike Mayo: And the reason I mentioned that was a lot of that.
Mike Mayo: Okay.
Mike Mayo: It comes from.
Mike Mayo: One of the.
Mike Mayo: Channels in our institutional business.
Mike Mayo: And it actually performed better than the rest of the institutional business and looking and looking at it over the last few weeks and so it just tells me that that that client that sub client channel behaves on its own and it looks like that has flattened out somewhat not necessarily.
Mike Mayo: Calling it a plateau at this point, but it's certainly behaved a little bit better than the rest of the institutional book.
Mike Mayo: And another component is the.
Mike Mayo: The wealth book, which that deposit base increased in the quarter. It was not dramatically, but it was nice to see that up on average and obviously, we saw overall the whole the whole deposit book.
Mike Mayo: Very flat, but nice to see that the the the wealth book doing well because even though the noninterest bearing is obviously highly attractive economically the wealth deposits are very attractive as well not at zero, but theyre very attractive in that that component did well in the quarter.
Speaker Change: Okay, great. Thank you for those thoughts Jason.
Speaker Change: I guess on the other servicing side of the business.
Speaker Change: Hoping you can maybe just touch on the competitive landscape in the alternative asset side of.
Speaker Change: <unk> of the business.
Speaker Change: How do you think about maybe that opportunity for Northern Trust and how are you.
Speaker Change: If you could just talk about your capabilities today, and maybe where youre investing too.
Speaker Change: Take some share in that space.
Speaker Change: Yes, Mike So I'll address that.
Speaker Change: We believe that the alternative space or broadly speaking just.
Speaker Change: Private markets is Ed <unk>.
Speaker Change: Major opportunity for us on the asset servicing side and that largely follows with what's happening in the marketplace from an investor perspective, and so we expect that market to grow and we think we have the value proposition that is.
Impelling within that you heard in my comments earlier that we recently won a very large mandate with one of the large private markets firms and it was after an exhaustive process that we went through to win that business very capabilities oriented very global.
Speaker Change: As to the.
Speaker Change: <unk> necessary in the footprint necessary to do it.
Speaker Change: So again, it's an area of focus for us and one where we think we're going to be able to continue to grow as the market grows and as we're able to take share.
Speaker Change: Thanks, Mike I appreciate the commentary there.
Speaker Change: Sure.
Speaker Change: Well go next to Ryan <unk> with Morgan Stanley.
Ryan: Hi, good morning.
Ryan: I have a question on capital. So your CET, one ratio of 11, 4% well above the regulatory minimum well above last year's level and then we got the comment letter.
Speaker Change: Bob will end game, a couple of days ago, and there's clearly a lot of industry pushback, there youre earnings generation from NII looks a little bit higher than consensus expected, so putting that altogether, how should we think about how northern's approaching buybacks. This year in this quarter is there any room to maybe lean in a little bit there.
Speaker Change: Sure so.
Speaker Change: You are right in the tee up of the numbers, there's obviously room we'd.
Speaker Change: We did a fair amount of buybacks in the quarter, a little bit more than we do on average and we're always looking at that relative to other opportunities we have to invest capital and so in the near term and the near term we're thinking about does it make more sense to invest in <unk> effectively.
Speaker Change: To say, we could we could grow the loan book more we could do more in FX. So we could do more in SEC lending or do we want to reposition the take a different repositioning in the securities portfolio. The repositioning. We did this year are all helpful to capital because in going shorter.
Speaker Change: And out of non <unk> into HLA on that those are all helpful to capital and but you also know how closely we look at peers and we take pride in the capital levels. We have we think it's part of our financial model and our business model and talking to clients and being able to evidence to them how strong our capital bases and.
Speaker Change: So there's definitely room, but we.
Speaker Change: We also got to have in mind, the Basel endgame, which you referenced briefly it's still unclear and we did do a comment letter, which you referenced but it's unclear what the impacts are going to be we think we're in good position relative to peers, but want to keep an eye on that but we're.
Speaker Change: We'll also think about additional stock repurchases as we always do given given alternatives we have.
Speaker Change: Okay, Great and can you also update us on your expectations regarding ability and climbing to dispose of the class B visa shares and would that potentially have any impact on <unk>.
Capital and buybacks outlook.
Speaker Change: Yes, so just for people, who don't followed as closely we own just over 4 million visa B shares and that the current exchange rate show that translates to about $1 $7 billion and there is a proposal that is going to be voted on next week I think.
Speaker Change: That would enable the b shareholders to monetize.
Speaker Change: <unk> of the holdings. So what are we planning to do one.
Speaker Change: At this point Theres nothing to do with the proposal is still outstanding and we've got to wait and see what the shareholder vote looks like even assuming it passes there are timing restrictions to it and but that said.
Speaker Change: This is not a strategic asset for Northern Trust and so you should read into that it's not something that we're saying we're going to we're going to hold onto beyond what the restrictions would enable us to do.
Speaker Change: And we're discussing all of the options there is likely going to be a combination of a few tools that will take but early to give details on that at this point.
Speaker Change: Okay.
Speaker Change: We will go next to Brian Bedell with Deutsche Bank.
Brian Bedell: Hey, Brian.
Brian Bedell: Hey, good morning.
Brian Bedell: If I can just clarify.
Brian Bedell: Jason a couple of things you guys done earlier, just to make sure I heard it right.
Brian Bedell: The incremental NII from the two portfolios security sales is $30 million annualized.
Brian Bedell: And that comparison period is <unk> versus <unk>.
Brian Bedell: Correct.
Speaker Change: Yes, so you broke up a tiny bit, but I think I'm, following where you're but don't hesitate to tell me if I Miss it so.
Speaker Change: The November repositioning helped in the in the quarter.
Speaker Change: I call it $6 million.
Speaker Change: And but that should be helpful going forward to the tune of in the neighborhood of $15 million a quarter.
Speaker Change: The January repositioning, which we mentioned for the first time, a little while ago that should help in the quarter.
Speaker Change: About 15 round numbers about $15 million a quarter.
Speaker Change: Per quarter Okay.
Speaker Change: And then on the expense side, maybe just.
Speaker Change: And tried to get some more clarity on the total expense growth I think you said.
Speaker Change: <unk> expense being up 50% to 55 in <unk> versus <unk>.
Speaker Change: Good afternoon.
Speaker Change: Alright, and then employee benefits up $10 million versus for Q2.
Speaker Change: Correct me, if I'm wrong on that and then just translating that into your expense growth through the year. Obviously, there is lots of different levers.
Speaker Change: But is.
Speaker Change: Is the idea to try to improve on the 3% expense contribution from that from a total growth perspective or.
Should we be thinking you have expense growth to a better than 5%.
Speaker Change: Potentially higher.
Speaker Change: 3%.
Speaker Change: Can you improve that trust.
Speaker Change: SD ratio.
Speaker Change: Yes.
Speaker Change: Yeah. So.
Speaker Change: Couple of things one.
Speaker Change: Confirm your numbers are right on first quarter and the step up remember both of those are.
Speaker Change: Fully seasonal Brian so the step up in first quarter, just because that's when that's the booking of our retirement eligible equity grants and so that in and of itself is represents the vast majority of that step up and then similarly, the we've got a higher payroll tax and first quarter just as we have.
Speaker Change: The caps on that level, but both of those numbers come back down for a second third fourth quarter that said second quarter got a build in the.
Speaker Change: Base pay adjustments that we referenced which is that $65 million that that'll be a second third fourth quarter.
Speaker Change: So all of that said the goal is to do better than the roughly 5%. We did this year. The 3% was not seen as that again back to it's not seen as a floor, but who also.
Speaker Change: That's a big difference to go from five down to three and so we're using the productivity to do everything we can to get materially better than the five but the fact that we're walking in with three already in the base is just going to make it difficult and so.
Speaker Change: I think it's the end.
Speaker Change: And then the last thing I'll mention is.
Speaker Change: For us we're anticipating organic growth that's our.
Speaker Change: We target.
Speaker Change: Organic growth targets for each of the three businesses.
Speaker Change: We want to continue to be a growth company that is important and.
Speaker Change: That drives some expenses in addition to expectation of what we're doing from a revenue perspective, and so it's hard to fine tune much.
Speaker Change: To say is it between three and five.
Speaker Change: If we're not doing as well from an organic perspective, we're going to be working really hard to say what else do we do to make sure. We're doing the right thing and we get positive fee operating positive operating fee operating leverage.
Speaker Change: We'll go next to Jim Mitchell with Seaport Global.
James Mitchell: Good morning, Jim Hey, Good morning, Hey, good morning.
James Mitchell: Maybe just follow up on that last comment just maybe a little more detail it seems like organic growth in <unk>.
James Mitchell: Three this tough environment, a little mix. So it seems like youre more optimistic across the board. So you can kind of just give us a little more thoughts detail on.
James Mitchell: The organic growth prospects this year.
James Mitchell: Sure sure Jim It's Mike I'll start off here.
You're absolutely right, we've gone through I would say a time period, where the organic growth has definitely been strained and lower than our historical levels and there is a number of factors behind that that we've talked about over the preceding earnings calls that relate to client activity that relate to some of the.
James Mitchell: Outflows that we had in the asset management business, which obviously impacts then wealth management and asset servicing and the reason why we're so positive going forward here on organic growth some of those trends as we've talked about have turned around and so we see good inflows into asset.
Management.
James Mitchell: That aspect of it as a lift going forward to our organic growth, but then also the strategies that we have in place.
James Mitchell: Drive profitable organic growth.
James Mitchell: Where we've been focused as a company is in a couple of areas. There are a few areas one.
James Mitchell: It is really looking at the portfolio of our growth so historically asset servicing.
Has.
James Mitchell: <unk> been the majority of the organic growth and looking forward, we're looking to shift that more towards the more scalable parts of our business. So wealth management and asset management that doesn't mean that the asset servicing business will not be growing. It's just we're very focused within that business.
James Mitchell: The areas that scale the most.
James Mitchell: So if you think about the nature of all the things we do for clients on that front. Some of those activities are more scalable more profitable than others and so we will lean towards those areas I mentioned the success, we've had with asset owners in the Americas, you know a lot of that is that custody and <unk>.
James Mitchell: <unk> services on that front, that's some of the more scalable services that we have.
James Mitchell: And it's again not to say that we won't be doing.
James Mitchell: The business with.
James Mitchell: With the asset managers, So fund services, but some of those areas are more resource intensive and so we're going to be really disciplined about the types of business that we take in that require hiring more people investing more in particular technologies around that and then the last thing I would say just around the organic growth and why were optimistic on.
James Mitchell: It is.
James Mitchell: The businesses are working I would say much more closely together in how we go to market. So as we would call. It here one Northern Trust I.
James Mitchell: <unk> is our approach to the marketplace. So it's not separate businesses, but rather to the extent that we're going to approach it a client or a prospect to work with them. It's going to include multiple offerings from across the businesses, particularly asset management with asset servicing on the front.
And as part of a bundle that we're offering to the clients and then certainly with wealth management as well you heard in some of our earlier commentary the advisory fee component of wealth management has been growing nicely through the year, we think that it can grow at a higher rate, but importantly, the more that we can do on the product.
James Mitchell: Side with those clients as well so as we talk about the transitioning.
James Mitchell: With quantitative tightening for example, and the move out of short term treasuries to the extent that we can help those clients move into fixed income funds for example.
James Mitchell: It's a real opportunity for us so a number of things that we're doing.
James Mitchell: Proactively try to drive that organic growth.
That's really great color, Mike and maybe just a quick follow up on deposit pricing, Jason you talked about still.
Speaker Change: Some pressure on an overall deposit cost is that lags still on pricing or is that an assumption of a negative mix shift out of that ibs, what's kind of driving further pricing pressure on deposits.
Speaker Change: Okay.
It's lags.
Speaker Change: We actually in the fourth quarter.
Speaker Change: Made some.
Speaker Change: Agreements on pricing that will come into play in first quarter more than they did in the fourth quarter and it didn't didn't drive deposit volumes higher in fourth quarter, but it is something that as we tried to do more fine tuned predictions of what first quarter would look like it's something that we factored in we think that cost could be.
Speaker Change: <unk> cost will be higher and that's part of the reason why even though we ended it.
Speaker Change: Final, one and I indicated that December was better than.
Speaker Change: November and October we think we're still going to be flat to down a little bit in the first quarter, largely because that that pricing element.
Speaker Change: And in general we do with.
Speaker Change: Our view is that as the fed does reduce rates.
Speaker Change: We're we're going to have client conversations about it and again, we're not a price setter, but highly committed to making sure our clients leave their deposits here.
Speaker Change: We'll go next to Rob <unk> with autonomous research.
Rob: Alright, good morning, guys.
Rob: One more question on expenses I'm curious, how you would approach.
Rob: A hypothetical year, where revenue growth comes in.
Rob: Better than expected and what that might mean for expense growth I guess the core question is what takes precedent your expense to fee ratio or the absolute level of expense growth this year.
Speaker Change: I'll start and Mike may want to add to it.
Mike: Historically, we'd say well, we want to we want to grow in.
Mike: But we have talked about ensuring that we were committed to more of an absolute number in terms of the expenses and we've also committed to more scalable growth.
Mike: We're already having conversations internally about ensuring that we're highly disciplined on.
Mike: Bringing on business that is scalable and so I think that that is a change relative to how we've thought about it before where there is more of a desire to bring on business at always at attractive margin, but our commitment to scalable growth is going to be is higher at this <unk>.
Mike: <unk>.
Mike: And that means that the expenses shouldn't be as volatile with anticipation or even line of sight on new business coming on that brings with it a high degree of expense.
Speaker Change: I agree with what Jason said, there just to add to your point were outside of our range on expense to trust fee ratio. So we're trying to drive that into the range and so as jason's, indicating we're leaning towards trying to get into that range sooner rather than later.
Speaker Change: Okay. Thanks, and then on NII would just love to get your thoughts on the sensitivity there as it relates to <unk>.
Speaker Change: Current scenarios from the fed what's the impact of say, one or two fed cuts this year as opposed to say.
Speaker Change: Scott.
Speaker Change: Yes, those are the scenarios, we're looking at but I'd come back to this theme, it's just going to depend on how well, we're able to hang on to two to.
Speaker Change: To spread and we.
Speaker Change: Theres just been highly variable and I think our ability to predict just over the last couple of quarters has been really hard, but I feel I feel really good about the volumes that stayed in place and so I think our approach has worked but it makes it makes it is going to make it less predictable and it's the opposite of what we just talked about on the expense side, Ironically where were.
Speaker Change: We wanted to be more predictable and the expenses to try and get that expense to trust the ratio, where we want it to be on the deposit side. There is more flexibility and more willingness to follow where the market goes to make sure we're holding on to client assets.
Speaker Change: Well go next to Mike Mayo with Wells Fargo.
Mike Mayo: Good morning, Mike.
Good morning, Hey, Good morning, this is Rob routs out Mike.
Mike: Wanted to follow up on the the commentary a little bit more.
Mike: As we calculate it.
Mike: Assets under custody were down about 5% year over year, you mentioned client outflows.
Mike: How much of that is kind of risk off versus actual pricing pressure. What is what was the new business. This year and what's the outlook for pricing pressure versus new business as we look into 2004.
Speaker Change: Yeah, I'll start and then Jason you can fill it out but.
Speaker Change: First of all I, just think you need to take into account that we are compensated sometimes on the asset level, sometimes on the transaction.
Speaker Change: Levels and transaction volumes were lower during the year, so that drove some of the weakness in the custody.
Speaker Change: Fees, there from a pricing perspective, I would say nothing in particular as far as the competitive environment that is driving custody pricing too.
Speaker Change: Much lower levels, if you will I would say its relatively stable on the on the pricing front there.
Speaker Change: And as I look at just the.
Speaker Change: Underlying details of how we did I think youre leaning more toward the asset servicing business. The net new business for the year was it was positive and year over I am just thinking year over year for the quarter.
Speaker Change: Asset servicing hit its mark on net new business that the issue with the company as some of the other things happening as we get into transactions and then what we referenced earlier in our clients going through.
Speaker Change: Their asset levels declining.
Speaker Change: But.
Speaker Change: Much less of a repricing story relative to prior years and the business is winning if we just look at their win rate and the market. It is strong. So a lot of this year. The impact came from these other dynamics of lower transaction volumes and same number of clients, but less assets.
Speaker Change: Okay. Thanks, and then if I could follow up on.
Speaker Change: Well I guess can you talk about.
Speaker Change: The competitive dynamic there and especially in global family office is a little bit of deceleration in the growth rate and any changes.
Speaker Change: Areas that youre looking to grow their inside the U S or out.
Speaker Change: Yes.
Speaker Change: You are right to call. It GSO had a lower much lower growth rate than it has over the last couple of years. It's been the last couple of years have been excellent for that business and this year was weaker but we always talk about the fact that is the spike es business that we have very small number of client activity can lead to.
Speaker Change: Meaningful change and it's also one of the businesses, where with what happens under underneath from <unk> and.
Speaker Change: In investment management perspective.
Speaker Change: Can have a meaningful impact on how the business is doing so.
Speaker Change: But we've.
Speaker Change: We've actually invested heavily in that business, they've got a lot of accomplishments in technology and some of the things that they have done with their wealth passport. Their overall technology platform. We feel is industry, leading its industry, leading to just the way that they've now enact.
Speaker Change: Interacting with clients from that platform perspective, where clients are able to do with multiple accounts and reporting and client asset movement, all coming in a lot of it's all cloud enabled and what we've done recently and so highly.
Speaker Change: Market, leading from our view in terms of what we're doing and we're continuing to invest in that business from a technology perspective, so there's more coming which makes us feel very optimistic about what that business is going to do over the next couple of years.
Speaker Change: Okay.
This does conclude the question and answer portion of today's call I would like to turn the call back over to Jennifer Childe for any closing comments.
Speaker Change: Okay.
Jennifer Childe: And thanks, everyone for joining us today, we look forward to speaking with you again soon.
Speaker Change: This does conclude today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Yes.
Speaker Change: Okay.