Northern Trust Corp Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Betsy Graseck - Morgan Stanley - Analyst : Hi. Good morning. Excellent. Thanks so much. Okay. Yeah, sure, two-part question. First is just on the remaining embedded gains in the Visa that you still have. I know you mentioned that there's still some realization to come. Are you talking about the piece -- the one-third piece that's coming in the third quarter? Is that what you're referencing? Or are you referencing the broader point that you still have more Visa shares, and the next time this is able to get done, you'll have access there?

Question: Betsy Graseck - Morgan Stanley - Analyst : Right. And that's a function of the Visa side and the B shares being opened up to monetize. It's not only your decision to do that.

Question: Betsy Graseck - Morgan Stanley - Analyst : Okay, perfect. And then just a separate part is on the resiliency investments that you're making. What's your sense of the timeframe for the investments, as I would think it's a multi-year timeframe? But it'd be helpful to understand your point of view on that. Thank you.

Question: Betsy Graseck - Morgan Stanley - Analyst : Got it. Super. Okay. Thank you so much.

Question: Brennan Hawken - UBS Securities LLC - Analyst : Hey, how are you? Good morning, Jason. I'm curious to know, and I couldn't find a specific disclosure on this, so apologies if you have disclosed it separately, but could you tell me what percentage of your wealth management client assets are in advisory accounts and if you know what are the deposit costs for those accounts?

Question: Brennan Hawken - UBS Securities LLC - Analyst : What the deposit costs on those accounts would be?

Question: Brennan Hawken - UBS Securities LLC - Analyst : Okay. So I don't know if you were aware of this or saw this, but in the last week, at this point, three of the warehouses have come out and said that they are bringing up the deposit costs on advisory relationships up to equivalent to money fund levels. Wells and BofA did that in the second quarter. During the second quarter, Morgan Stanley, just yesterday, announced that they intend to do it in the third. Given that this is the direction -- some of the largest providers in the industry are going this direction, what are your thoughts and plans around making sure or aligning with this practice? And if you don't plan to, how do you intend to manage any legal or lawsuit risk on fiduciary issues? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 1:30PM, NTRS.OQ - Q2 2024 Northern Trust Corp Earnings Call

Question: Brennan Hawken - UBS Securities LLC - Analyst : Sure. Fair enough.

Question: Brennan Hawken - UBS Securities LLC - Analyst : Oh, that's a feature within the system where the advisor team or whatever could just adjust the sweep default and go into the money fund rather than deposit?

Question: Brennan Hawken - UBS Securities LLC - Analyst : Right. Well, in an advisory relationship, there's a little bit of a different dynamic, but I got it. Okay. Just given the focus on this, it might be helpful to consider disclosing some of these details going forward. I know you said you didn't have them today, but it might be helpful going forward. Appreciate that.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Hi. Jason, you mentioned the $200 million restructuring charge; part of that is severance. What were the underlying drivers for that charge? What might cause you to do that again? And what sort of future expense save do you expect from that, including for OpEx? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 1:30PM, NTRS.OQ - Q2 2024 Northern Trust Corp Earnings Call

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Okay. So a permanent reduction in salary is equal to about half the severance was some of that reinvested back in the firm where you're hiring elsewhere. Is that correct?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Okay, got it. And then just more generally, maybe, Mike, you're talking about productivity and the custody business. And it seems like you're committed in the custody business, but not just for growth, but for more profitable growth. You say you're bidding less, you're being more selective, you're picking your spot. So how would you describe Northern's positioning in the custody business today versus the past?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Got it. All right. Thank you.

Question: Brian Bedell - Deutsche Bank - Analyst : Good morning. Maybe just one on net interest revenue. Maybe, Jason, just your view on deposit betas across your franchise on the downside when the Fed cuts and if you could just differentiate between wealth and asset servicing. And I did see the interest-bearing deposit line on the average balance sheet. It's a smaller category, but that seemed to go down a lot. I just was wondering what was driving that. It's down to 253 bps from 315.

Question: Brian Bedell - Deutsche Bank - Analyst : On the average balance sheet, I think just the interest-bearing deposit with banks on the asset side seemed to go down a lot. I don't know if that's just noise or on the rate on that.

Question: Brian Bedell - Deutsche Bank - Analyst : And just differentiating between wealth and the asset servicing business in terms of those deposit betas? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 1:30PM, NTRS.OQ - Q2 2024 Northern Trust Corp Earnings Call

Question: Brian Bedell - Deutsche Bank - Analyst : So on the wealth, just to hammer the helmet, on the wealth side, across your franchise, do you think --

Question: Brian Bedell - Deutsche Bank - Analyst : Okay. And then just on expenses, is it all about the full year, or are you still targeting the 5% (technical difficulty) Expense is, for the full year, so I know the 1% up in 3Q. Are you still targeting the 5% or better expense growth for the full year, which would imply, I guess, a downtick in 4Q? And are you still also targeting positive fee operating leverage, and might that even be possible if net interest revenue continues to hold up? Might it be possible to generate operating leverage on total revenue for 2024?

Question: Brian Bedell - Deutsche Bank - Analyst : Okay. Great colors. Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 17, 2024 / 1:30PM, NTRS.OQ - Q2 2024 Northern Trust Corp Earnings Call

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Hi, Jason, Mike. Good morning, everybody. So I wanted to follow up on the questions Brennan was asking earlier, just as far as the wealth dynamics go. And just, I guess, a couple of questions around that. I guess one, it sounds like you're evaluating still what the competitors have done. So is it just kind of a matter of time before you guys decide to kind of go through the same process? Or I guess if you choose not to, and outside of competitive pressures, are there any other ramifications that might kind of force you and the industry to go down the same path? So in other words, are you hearing anything from the regulators? Are you hearing anything from potential risk of litigation that could sort of ultimately force the industry to go in this direction? So that's the first question.

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Yeah. So the wealth deposits with advisory relationship where the firm has a fiduciary duty.

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Sorry. But I guess if the industry goes to [5%], and you're saying you're at market, but the market is at 5% on deposits, does that mean you guys would have to go to the market rate at 5%?

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Got it. Okay. And then in terms of the sizing, I think in the past, you talked about -- I think about a quarter of the deposit base was wealth, the other 75% was institutional. So the quarter that is wealth, can you delineate like kind of what the US deposit base is?

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Just like what's the US piece of that is. Is there a way to delineate that?

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Got you. Understood. Thank you. And then just my follow-up question is around expenses. So you guys are implementing incremental savings initiatives. So it kind of makes sense, and that's causing maybe incremental technology spend this year. As you sort of think about long term, and we've talked about expenses to fee ratio for many years now, but given that it's still proven to be pretty sticky at this kind of 115%-ish range, what's the goalpost as you kind of put this all through and maybe it takes a year, two years, three years? But what are you driving towards, and how long do you think it'll take you to get there?

Question: Alex Blostein - Goldman Sachs & Company, Inc. - Analyst : Got it. Great. Thank you guys very much.

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Hi. Thanks. A couple of questions. Just want to understand, Mike and Jason, the severance charge that you're taking, it's a much larger severance charge than we've seen you take in many years. I guess the Visa gain gives you that opportunity. When do you expect to start to sort of have that show up in the compensation line and over what period?

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : But you've taken the charge right upfront, okay. All right. And so when you talk about the under 5%, I tell, you said, Jason, that it's unlikely this year. Should this make it much more likely next year, where do you -- given especially the severance benefit that bleeds in over the next 18 months?

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Okay. And again, related to the Visa, pardon me if I missed anything because there's a lot of earnings going on this morning, but buybacks, you did some. Over what period should we see the rest, given that you've used about a couple hundred million? Now, I know that's all pre-tax, but how much more should we expect to see and how soon?

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Okay. Thanks.

Question: Ebrahim Poonawala - BofA Global Research (US) - Analyst : Hey. Morning, and thank you. And I'm sorry, Jason, if I'm being repetitive. I just wanted to make sure we heard you correctly. The stock was on about 8% at one point, still down a lot. I just wanted to make sure that your messaging on NII is essentially saying you expect third-quarter NII to be relatively flat, given the decline in balances should be offset by the investment yields. Am I hearing that correctly? And you're not really seeing any impact from these sweep deposits that have impacted some of the other banks, given where you already priced deposits for your customers.

Question: Ebrahim Poonawala - BofA Global Research (US) - Analyst : And from there on, rate cuts, if we get them in September, should be a positive for the NII or negative?

Question: Ebrahim Poonawala - BofA Global Research (US) - Analyst : That's helpful and clear. And on the fee revenue side, apologies if we missed this, I think you mentioned you lost a client that's going to have a few million dollar impact. I'm just trying to get a sense of what your expectations are for fee revenue, all else equal, as you think about the third quarter.

Question: Ebrahim Poonawala - BofA Global Research (US) - Analyst : Got it. And if I can sneak in one quick follow-up on expenses, the actions you took this quarter might take -- you're not guiding for this, my takeaway is it probably sets up for an even better or lower expense growth for 2025. Is that the right way to interpret that relative to whatever you do in '24?

Question: Ebrahim Poonawala - BofA Global Research (US) - Analyst : Extremely helpful. Thank you.

Question: Brennan Hawken - UBS Securities LLC - Analyst : Hi. Thanks for taking my follow-up. I just wanted to draw a specific understanding because it was a little unclear with Alex's follow-up to the question on the wealth deposits. Did you say that the advisory wealth deposits are currently priced at 5%, or they have the option to elect for money funds that could yield 5%? I'm just trying to square all the complementary.

Question: Brennan Hawken - UBS Securities LLC - Analyst : Got it. So just to further add a little color to my question, the option to move into money funds was available at most of the wire houses, too, and they made this move. But it's my understanding, due to concerns about fiduciary obligation and whether or not just basically paying out that level, would be just necessary from a legal perspective. So it sounds like from your answer, you guys don't have any plans to make any change at this stage. Although, as you said, depending on competitive pressures, you may seek to make adjustments going forward.

Question: Brennan Hawken - UBS Securities LLC - Analyst : Excellent. Thanks very much.

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Thanks. Just wanted to clarify, Jason, a comment you made, which was rate cuts, 25 to 50 basis points, should not have material spread degradations. So does that mean if we do have rate cuts, those would be hurt -- that would hurt your NIM and NII? That you are asset sensitive?

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Okay. What did you see with the ECB 25-basis-point rate cut that has come through? Have you cut those deposit rates by 25 basis points?

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Okay. That means you've passed on the full 25?

Question: Vivek Juneja Juneja - J.P. Morgan Securities LLC - Analyst : Sorry. That's just -- as I said, there are too many earnings calls today, and you are overlapping with others. So that makes it hard to keep up with all of them.