Northern Trust Corp Q3 2024 Earnings Call Transcript

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

Question: Sharon Leung - Wolfe Research LLC - Analyst : Hi, good morning. This is Sharon actually filling in for Steven this morning. Jason, earlier this year, you had talked about the asset sensitivity across the different categories on the balance sheet. So cash 100% sensitive to short rates. Loans and securities, about a third floating. Can you give us a quick update on the floating rate mix just given that you've done a couple of securities repositioning actions since the last time you updated? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 23, 2024 / 1:30PM, NTRS.OQ - Q3 2024 Northern Trust Corp Earnings Call

Question: Sharon Leung - Wolfe Research LLC - Analyst : Yes, sure. Sorry. So earlier this year, you talked about the asset sensitivity across the different balance sheet categories, cash 100% sensitive to short rates and loans as well, and securities book about one-third floating. Just given some of the securities repositioning actions you've taken since that update, can you give us like a quick mark to market on the floating rate mix?

Question: Sharon Leung - Wolfe Research LLC - Analyst : Okay, great. And then as we look at our expense forecast beyond 2024, can you just frame how much of this year's expense growth was inflated by investments in resiliency, when those investments should be completed, and whether we should expect those investment dollars to fall to the bottom line or get redeployed elsewhere in the franchise?

Question: Sharon Leung - Wolfe Research LLC - Analyst : Yes.

Question: Sharon Leung - Wolfe Research LLC - Analyst : Great. Thank you very much.

Question: Ebrahim Poonawala - Bofa Securities Inc. - Analyst : Hey, good morning.

Question: Ebrahim Poonawala - Bofa Securities Inc. - Analyst : Good, and congrats, Jason and David, on your new roles. Just maybe following up on expense, and more broadly, going back to the leadership changes that were announced back in September. Maybe Mike, Jason, give us a perspective of -- I think I hear frustration from investors from time to time around just the focus on operational efficiency kind of not translating into bottom-line results. What -- should we read into these changes, realignment as something a little bit out of the ordinary in terms of what it means for operational efficiency going forward? Would love any perspective there. And how we should think about incremental expense spend? I heard what you responded, Jason. But I'm just wondering, is all of this baked into the expense base as we come out of the fourth quarter? Or will there be more additional expenses and investments tied to resiliency? Thank you.

Question: Ebrahim Poonawala - Bofa Securities Inc. - Analyst : Got it. And I guess, if I may follow up on just the NII question, Jason, for you. It was a positive surprise this quarter, when we look at that $569 million in NII this quarter. If we get some gradual rate cuts, given the positioning of the balance sheet, if the deposit backdrop is stabilizing, should we expect NII continues to grow from the third-quarter levels?

Question: Ebrahim Poonawala - Bofa Securities Inc. - Analyst : Thank you.

Question: Alexander Blostein - The Goldman Sachs Group Inc. - Analyst : Hey, good morning, everybody. And congrats to the whole team on various moves. Just to level set the NII discussion just one more time. So Jason, it sounds like Q3 had $10 million to $15 million of sort of elevated transactional activity. Do you expect that to basically fall off in Q4, and that's what's partially driving the kind of the sequential decline and maybe expand on kind of what those were? And on deposits, this is the right jumping off point to use as far as cost of deposits go, right? And then obviously, deposit betas are likely to be fairly high from there, but I'm just kind of trying to level set on the go forward potentially beyond the fourth quarter guidance that you have you highlighted.

Question: Alexander Blostein - The Goldman Sachs Group Inc. - Analyst : All right. Thank you for clarifying that. And then a question on expenses for you guys, just with respect to maybe longer-term expense growth algorithm. And Mike, I heard your answer to the previous questions around the organizational changes that you guys have made, which are obviously substantial and hopefully can further align the growth in the business with the expense structure. But I guess in the past, you talked about maybe this 5-ish percent bogey for expense growth over time, hoping to be below that. This year is obviously shaking out to be north of 6%, and there are some market-related items and stronger revenues to come along with that. So it's good news. But maybe help us sort of summarize, given these changes where you expect the firm's kind of longer-term expense growth to be over the next kind of couple of years?

Question: Alexander Blostein - The Goldman Sachs Group Inc. - Analyst : Got it. That's helpful. Thank you, guys.

Question: Betsy Graseck - Morgan Stanley & Co. LLC - Analyst : Hi, good morning. How are you doing?

Question: Betsy Graseck - Morgan Stanley & Co. LLC - Analyst : Good. So a couple of questions here. One on -- Mike, you mentioned the deepening of relationships as a key focus for growth going forward. Could you help us understand how that pivot is affected? Is there -- is that different from what you're doing before? Is it more -- just to key off the last conversation, is it more resources to hire? Or is it more products to deliver? And then how should we be thinking about where in the organization you have the most opportunity? Is this asset servicing, asset management, is it investment management, is it the wealth platform? Help us understand how you're thinking about where the pockets of opportunity are richest for those deepening of relationships?

Question: Betsy Graseck - Morgan Stanley & Co. LLC - Analyst : No, you finish up, sorry.

Question: Betsy Graseck - Morgan Stanley & Co. LLC - Analyst : Thanks very much for those examples. That was very useful. I just wonder, holistically then as we're thinking about not just the expense line, but just the overall impact on profitability. When you think about what you're looking to accomplish and opportunities you see in this pivot, how should -- how do you think that's going to translate into return on tangible or return on common equity? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 23, 2024 / 1:30PM, NTRS.OQ - Q3 2024 Northern Trust Corp Earnings Call

Question: Betsy Graseck - Morgan Stanley & Co. LLC - Analyst : Okay, thanks so much. Really appreciate it.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : Hi. I see 135 years best-in-class private banking relationships, all the -- the One Northern Trust initiative and everything else happening. And then I see a stock price that has lost its premium versus the Trustbank peers and even trade 3 points below Morgan Stanley or something. So I'm just wondering, how much -- and maybe this is an opportunity, and if it is, let us know why. But how much of this is business mix? How much of this is the environment? And how much of this is execution? And I hear what you have to say, strategy drives structure, drives execution to drive results. I guess that would drive the stock price. But I'm just trying to wonder how or why the same cast of characters can generate better organic growth in their new roles? And I saw the press release come out with the CFO and COO and Head of Wealth and Head of Asset Servicing and Head of Family Office, all changing at the same time, I just haven't seen something like that, or I don't recall something like that. So Mike, you have a big perspective on that. So can you give that perspective and why you think this will change things? Thanks.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : And then maybe just as one follow up, so the incremental extra that we might be able to expect by that fresh perspective by the managers bring in their new roles, maybe Dave, as it relates to the CFO function -- or Jason is right next to you. But incrementally, what would you like to emphasize a little bit more? Maybe it's already started. And Jason, what would you like to emphasize a little bit more and well to take it to the next level? Thanks.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : All right, thank you.

Question: Brennan Hawken - UBS Securities LLC - Analyst : I'm good. Thanks for taking my question. So I actually wanted to circle back on expenses. And totally appreciate the commitment that was made operating leverage and driving down expenses to fees. But based on the fourth-quarter guide, I think my quick math suggested that we're going to be north of 6% on expense growth in 2024. And Jason, as you're sort of last act as at least CFO in name, right before the press release went out, you had said that you made another commitment to keep 2025 sub-5%. And so Dave is an internal candidate, so does that 2025 commitment hold with a new CFO? How should we think about it? And how -- importantly, I understand operating leverage matters and whatnot, but expense growth has really been an issue. It's gotten more elevated here in recent years compounded a bit with inflation, but it's not a new issue for Northern. How is it that you guys can get this under control to a point where you can have a more steady cadence of operating leverage without having the bar quite high?

Question: Brennan Hawken - UBS Securities LLC - Analyst : Okay. I look forward to getting some meat on those bones in the coming quarter. So that's great. If I could transition into the balance sheet, it looks like loans pulled back a decent amount this quarter. I don't think you touched on it. What caused that? And how should we be thinking about loan growth or the outlook for growth or further decline in balances from here? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 23, 2024 / 1:30PM, NTRS.OQ - Q3 2024 Northern Trust Corp Earnings Call

Question: Brennan Hawken - UBS Securities LLC - Analyst : Thanks for that.

Question: Glenn Schorr - Evercore ISI - Analyst : Hi, thanks. Good morning. Maybe another question on the wealth side. We always want to grow wealth. It's a great business, and you're great at it. You talked about the concept. Maybe drill down a little bit more, because I think you've been making some investments in people, products, and new geographies. Maybe talk a little bit about that and include maybe a comment about the Hamilton Lane collaboration that you had a press release on yesterday. Thanks so much.

Question: Glenn Schorr - Evercore ISI - Analyst : All right. Thanks so much for all that.

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Good. How are you? Congratulations, Jason. Mike, you touched on Northern One a number of times in your prepared remarks as well as your answers to questions. As outsiders, investors, how should we measure the success of what you're trying to achieve? Your peers are using similar types of programs as well or strategies. I was wondering if you could somehow point us to some metrics that we can review regularly just to measure your success in pursuing this strategy?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Very good. And I apologize screwing up the name Northern One -- One Northern Trust. Thank you. Jason, coming back, I know you touched on the net interest income expectations for the fourth quarter. And with the balance sheet duration, I think you said the entire balance sheet is about a year, and securities portfolio is a little longer than that. If the forward curve is correct, and we do see a Fed funds rate by the end of next year in that 3.5% range, let's call it, and the long end of the curve stays anchored above 4%, so we get a positive slope in the curve -- I'm not asking for a guidance number on '25 NII. But generally, is that a favorable net interest income environment for you folks? Or can you share some color there?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Very good. And is it fair to say that -- I think you pointed out to us in your Q when you give us the interest sensitivity table that you guys are asset-sensitive presently at the end of the third quarter. Is that a fair statement? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 23, 2024 / 1:30PM, NTRS.OQ - Q3 2024 Northern Trust Corp Earnings Call

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Appreciate it. Thank you so much.

Question: Brian Bedell - Deutsche Bank Securities Inc. - Analyst : Thanks. Good morning, and congrats to you and everyone else on the organizational changes. Maybe a question for you, Jason, and Mike could chime in too, maybe. But just going back to the organic growth comments, I appreciate all of the comments you've talked -- you've discussed in Q&A. In the wealth segment, first and foremost, I think, we're focusing on organic revenue growth as opposed to asset growth. So I just want to confirm that. And do you see more of that organic growth coming internally? So from, let's say, selling more or providing more Northern Trust investment-managed product, doing more lending potentially within the wealth segment, other things that you can do internally as opposed to getting new customers, so would we see more of the organic growth -- revenue growth coming from that? And if you could just think about maybe just what type of target organic growth rate are you looking for in wealth over time?

Question: Brian Bedell - Deutsche Bank Securities Inc. - Analyst : Super helpful. And then maybe just a couple of cleanup questions. Just one on loan pricing. It looks like the yields went up. Is that a factor of the lag? I think you've got about -- correct me if I'm wrong, but I think three-quarters of the book prices within three months, that's variable rate, and then there's a portion that prices over a longer time period. So just maybe if you can talk about the pricing relative to rates in that book? And then just one on expenses, and thanks for all the commentary on expenses. It's great. Just one question there would be that expense growth, which looks like 6% this year. You're targeting to bring that down. If you do have a really strong revenue year and you're generating operating -- positive operating leverage on total revenue, and your expense trust fee is moving towards your goal, is it possible that you'd still have expense growth that could be 6% or higher in that scenario?

Question: Brian Bedell - Deutsche Bank Securities Inc. - Analyst : Agreed.

Question: Brian Bedell - Deutsche Bank Securities Inc. - Analyst : Yes, thank you for that. And just on the pricing, I was talking about the loans, the variable rate loans on that, not the market. Is it three-quarters of the book, I think, of the loans were variable rate and reset within three months and a quarter reset later? So the lag is what drove the yield up this quarter? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 23, 2024 / 1:30PM, NTRS.OQ - Q3 2024 Northern Trust Corp Earnings Call

Question: Brian Bedell - Deutsche Bank Securities Inc. - Analyst : Got it. Thank you so much.

Question: James Mitchell - Seaport Global Securities LLC, - Analyst : Hey, good morning.

Question: James Mitchell - Seaport Global Securities LLC, - Analyst : Yes, good morning. Jason, just maybe on the capital return, you guys have been stepping up the buybacks. Capital ratios are pretty flat, and as you pointed out, still well above the minimum. So is this something we should expect this level for the intermediate term as profitability improves and rates are pretty stable, so OCI looks good? Can you keep this level up? Or is this is sort of a high watermark on the buyback side?

Question: James Mitchell - Seaport Global Securities LLC, - Analyst : Right. Great. And then when you think about the monetization of the second half, of the Visa shares, that's obviously a tailwind. Do you contemplate maybe longer term, intermediate term of a lower than 12.5% CET1 given the excess you have? Can you take it to 12% or lower?

Question: James Mitchell - Seaport Global Securities LLC, - Analyst : Okay. Great. Thanks for taking my questions.

Question: Vivek Juneja - JPMorgan Chase & Co. - Analyst : Hi. Thanks. Good morning. A couple of questions. Firstly, Mike, Jason, you all mentioned the incremental spending for resilience, modernization, et cetera. That's what's driven your expense growth to the 6% level. How much has that added? Would you say it's 200 basis points to the growth rate this year? And if that goes away in three quarters, what would that -- does that bring you down to -- since you won't need to spend that, 4% or below in the second half of next year? Any more clarification on that? Any more color on that?

Question: Vivek Juneja - JPMorgan Chase & Co. - Analyst : A separate question for you, Mike. There was a question earlier about the organizational changes. Why not use this opportunity where you're making such a lot of changes at one shot to bring in some more talent from the outside?

Question: Vivek Juneja - JPMorgan Chase & Co. - Analyst : Thank you.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : Hi. Thanks for my follow up. Yes, so did I hear you right, you said you're targeting organic growth and wealth 2.5% to 3%? How does that compare to the last few years? And when you benchmark that versus peers, how does that stack up when you see growth in the off-state private equity? Some other brokers just seems like it's more than that, and maybe it's just the sandbox where you compete? Thanks.

Question: Mike Mayo - Wells Fargo Securities LLC - Analyst : Thank you.