Northern Trust Corp Q2 2025 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. I wanted to just dig in a little bit on the decision to tighten up the range for ROE. I think it's from 10% to 15% to 13% to 15%. And within that, understand where the line of sight is that you have on the expense ratio with the operating leverage that you're delivering? Where do you anticipate you can take this expense ratio to as you move forward over the next several years in the medium term?

Question: Ebrahim Poonawala - Bank of America - Analyst : Good morning so I guess, maybe Mike, so thanks for kind of going through that on in your prepared remarks in terms of strategy update, et cetera. I guess as we think about independence or some version of mergers. I guess, is there any scenario in which you think M&A would make sense from a shareholder return perspective? Or do you think the uniqueness of the Northern franchise the scale in the custody business, all of that kind of make just M&A unattractive strategically? Like how should we think about it outside looking in as shareholders?

Question: Ebrahim Poonawala - Bank of America - Analyst : Got it. And I guess maybe just sticking with capital deployment. Is there just give us remind us how you think about pace of buybacks relative to just given means the stocks obviously done well year-to-date. Is there a certain valuation price to earnings, price of tangible book multiple where buybacks begin to look less attractive? Thank you.

Question: Ebrahim Poonawala - Bank of America - Analyst : Got it. Thank you.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : Hey, I'm going to continue the line of discussion. There's been so much press and it must be disruptive to your clients and employees and perhaps annoying, but it still comes up among investors. And I hear your commitment to independence; 135 years be around for generations to come. And you've mentioned the short term, four quarters of growth and operating leverage medium term, higher ROE targets long term One Northern Trust. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 23, 2025 / 1:00PM, NTRS.OQ - Q2 2025 Northern Trust Corp Earnings Call So I hear you loud and clear. And Mike, you're before Northern Trust, you certainly know about dealmaking. So that's all clear. But it doesn't stop others from saying, hey, maybe we want to buy you. You've been in that state for the last, I'd say, three decades. So that's also nothing new. Having said that, under what circumstance would you consider ridding the custody business because you talked about scalability, the first word when you gave the update there and perhaps that could use more scale or the way I think about, I think of the crown jewel is the private bank and the asset management and the asset servicing. You're trying to optimize more, but maybe strategically you could do more there or alternatively, maybe you could buy somebody else to get that scale.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : Got it thank you.

Question: Alex Blostein - Goldman Sachs - Analyst : Hey, good morning, everybody thank you for the question I appreciate all the extra segment disclosure on the margins, profitability and obviously, the target as well. That's all very helpful. I wanted to ask you guys around the timing to achieve some of these. So you've had the 30% plus pretax margin as a target out there for a little while. It's helpful to understand the pieces a little bit. But as you think about how long it will take you guys to get there, and ultimately, what interest environment does that contemplate? Because obviously, there's a lot of profitability related to NII and you're talking about profitability of the firm as a whole. So I'm curious kind of how that plays into the rubric?

Question: Alex Blostein - Goldman Sachs - Analyst : Got you. That's helpful. And just a follow-up on NII. I heard the guidance for the full year, obviously implies something in the maybe $5.70 range per quarter, I guess, from here on. As you look at the balance sheet, I think I heard you say a little bit less than one year duration overall with rate cuts kind of how you're thinking about the trajectory from NII off of that jumping off point? And are there any things you could do today to mitigate the effects of potentially lower interest rates in the US?

Question: Ken Usdin - Autonomous Research - Analyst : Hi, good morning, Dave, I was going to ask you to follow up on your comments about the Asset Servicing fees. You mentioned that the transaction activity was really strong. I'm sure part of that's just the core business, but was part of that just in relation to the April dislocation? And I guess kind of how would you help us understand the push and pull between organic growth and market health that you already have baked in for the third quarter versus some of the stuff that might have been like above trend just given the environment?

Question: Ken Usdin - Autonomous Research - Analyst : And will those be out? Do you know when those will be lapped? Are they lapped in the third quarter or after the third quarter?o after the third quarter, those have been lapped definitively. So right now

Question: Ken Usdin - Autonomous Research - Analyst : No, go ahead. You follow up.

Question: Ken Usdin - Autonomous Research - Analyst : Yeah, and a follow-up just on the Wealth side. Just like the layout that you gave and that Mike gave in the prepared remarks and the slides. Is there any change in just the organic growth rate in wealth. I know you have a lot of these initiatives going forward. But when do you think we'll start to see a definitive like observable change in the organic growth rate there?

Question: Ken Usdin - Autonomous Research - Analyst : Great thanks a lot, Mike.

Question: David Smith - Truist Securities - Analyst : Any color on what's driving the strength in deposits this quarter?

Question: David Smith - Truist Securities - Analyst : Got it. So it's normalizing beyond typical seasonality so far in the third quarter?

Question: David Smith - Truist Securities - Analyst : I think you said that flows and Asset Servicing were relatively neutral in the second quarter. Any detail you can offer on segments where you're seeing stronger growth versus where there's more opportunity for catch-up?

Question: Brian Bedell - Deutsche Bank AG - Analyst : Great. I appreciate all the extra color on in the slides and your commentary today and the businesses. It's really great. Two questions. Maybe the first one, they're both going to focus on Wealth Management, but the first one, going back to the efficiency initiatives within Wealth Management, particularly on the digital side and AI and automating some more of the services. Can you comment about like how that's enhancing the ability for client delivery and relationship management and just thinking about some of your differentiating aspects as a Wealth Manager, obviously, the personal relationship side is a huge one. Is there any risk of getting too automated? Or rather do you see it as really just enhancing and actually strengthening the relationship? And then in that vein, you've always you've gone sort of upmarket for really the last couple of decades in terms of the services. Any interest in moving little bit down market within the wealth spectrum to potentially improve that organic growth rate?

Question: Brian Bedell - Deutsche Bank AG - Analyst : That's great color. And then on alternatives, you mentioned, I think, a 5% or less than 5% penetration across the franchise. But GFO, obviously much more much higher, more institutional based. If you can you strip out the allocation between those two segments? And I guess what I'm getting at is, excluding GFO, what do you really see as the current penetration and therefore the runway? And do you currently have all the right products available? And what I'm really getting at is like the access to the largest, even publicly traded alternative managers or private market managers that have democratized product in the channel. Do your clients have full access to those yet?

Question: Brian Bedell - Deutsche Bank AG - Analyst : Right, that, that's super great color thank you so much.

Question: Gerard Cassidy - RBC Capital Markets Inc - Analyst : Okay, great thank you for taking my question.

Question: Vivek Juneja - JPMorgan - Analyst : My question, a follow-up on some of the questions that have come up on the call today. I hear you want to increase your operating margin on the custody of the servicing business to the high 20s. Why is that good enough? I mean, given your mix like you've got hedge funds, that's an attractive margin business, as your peers have talked about. Your peers are well above that, some of your peers are well above that today about your high 20s. So why would you not consider something much more value additive more quickly rather than over a multiyear period? And think about alternatives like getting spinning off or merging the custody part. If the Wealth Management is where your unique service ability is, why not split the two? Why is that not a consideration?

Question: Vivek Juneja - JPMorgan - Analyst : And the high 20s, Mike. Sorry, go ahead.

Question: Vivek Juneja - JPMorgan - Analyst : And Dave, let me thank you join the course of applauding you on the increased disclosure has taken us several years to get there, but thank you for doing that.

Question: Vivek Juneja - JPMorgan - Analyst : Yeah.

Question: Brennan Hawken - Bank of Montreal - Analyst : Good morning thanks for taking my question. I recognize you've gotten a lot of questions on this. And I also appreciate that it's disruptive. I really do. But some of your shareholders have asked me to ask a fiduciary obligation question here. Mike, I'd like to explore your conviction that remaining an independent company is in the shareholders' best interest. A couple subpoints, like you said in your prepared remarks that you're well positioned to continue to create value. But when I pull up the comp function for Northern and Bloomberg, which just shows the past five years, the stocks lagged like all of the relevant benchmarks and the close peers. I appreciate that your some of your customers want you to be independent, but the company isn't structured as a mutual, so it's owned by the shareholders, not the customers. So why be so categorically closed off to exploring those options when the independent path has resulted in the stock lagging?

Question: Brennan Hawken - Bank of Montreal - Analyst : Right. Okay. Mike thank you for the clear and thoughtful answer to what can be a very charged question. So I appreciate that. And for the first time, and I don't know how long I had my follow-up actually is related. Great to see the ROE target come up, but like if this is if you guys are moving all in and staying independent and totally committed, why not re-underwrite some of these targets? You said you've been at the upper end of the new range, but you also said that recent performance has sort of lagged. So why not up the ante and make the ROE target range in its entirety, not just the lower end, but the upper end too, move higher and really press for some value creation?

Question: Brennan Hawken - Bank of Montreal - Analyst : That's great thanks so much Mike.