NORTHERN TRUST CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• One Northern Trust Strategy: Underpinned by three pillars - optimizing growth, strengthening resiliency, managing risk, and driving productivity. Made significant progress in 2024 across these pillars.
• Optimizing Growth: Organic growth trajectory improved across businesses. Deepened client relationships, embraced joint calling program resulting in over 140 new business opportunities. For example, NTAM's asset management business partnered with other units to develop a money market solution.
• Strengthening Resiliency and Managing Risk: Designed and launched multi-year effort to uplift risk and control system. Invested in technology, matured cloud environment, bolstered cyber defenses, and automated processes. Created new operating model and made strategic hires.
• Driving Productivity: Focused on key areas like workforce and vendors. Ended 2024 with headcount 1% lower than two years ago. Asset servicing reduced headcount for seven consecutive quarters. Resiliency initiatives led to significant savings from automation and digitization.
• Business Unit Specifics:
  • Wealth Management: Grew sales talent by nearly 20%, enhanced lead flow channels, and saw steady improvement in organic growth trajectory. Increased wealth deposits by 9% and expanded segment pre-tax margin by nearly 400 basis points. Awarded Best Private Bank in the US for the 13th time in 16 years.
  • Asset Management: Refreshed strategy, made progress in 2024 through platform investment and core products. Launched multiple products geared toward specific client segments and aims to carry momentum into 2025 by investing in growth areas aligned with industry trends.
  • Asset Servicing: Pivoted focus to pursue scalable growth in core business, implemented disciplined criteria for new business generation. Capital markets business grew 17% in 2024 with ~50% growth from new clients.

Segment Performance

• Wealth Management: Assets under management for wealth management clients were $451 billion at quarter-end, up 12% year-over-year. Trust investment and other servicing fees were $547 million, up 14% year-over-year due to strong equity markets and modestly higher flows. The global family office AUM saw 5% growth.
• Asset Management: Realized positive net flows with 13% growth in liquidity surpassing $300 billion in AUM. Organic fee growth improved, and multiple products were launched to meet client needs. Delivered investment performance above benchmarks.
• Asset Servicing: Assets under custody and administration were $15.6 trillion, up 9% year-over-year due to strong market levels and client inflows (partially offset by currency movements). Custody and fund administration fees were $457 million, up 9% year-over-year. Investment management fees within asset servicing were $157 million, up 20% year-over-year due to favorable markets and new business activities.

Guidance

• NII Expectations: For the first quarter, NII is expected to be approximately $555 million to $575 million, assuming current market implied forward curve, flattish balance sheet, stable deposits, and modest currency headwinds. For the full year, NII is expected to increase by low-single digits on a percentage basis, assuming the market implied forward curve.
• Share Repurchases: Returned over $1.5 billion to shareholders in 2024, reflecting a payout ratio of 78%, including share repurchases of $938 million, the highest level in five years. Intends to continue returning capital to shareholders.

Risks

• Macro-Environment Impacts: Concerns about the macro-environment, including potential market downturns, which could impact the business.
• Central Bank Activity: Effects of central bank decisions on interest rates and liquidity in the markets, which can affect the company's net interest income and balance sheet.
• Market Volatility: Operational risks associated with surge volumes in different parts of the business due to increased market volatility.

Question and Answer

Q: Glenn Schorr asked about the durability of non-interest-bearing deposit growth and deposit pricing adjustments.

A: David Fox responded that non-interest-bearing deposits were up over $1 billion, likely with seasonality, and pricing adjustments were part of liquidity and balance sheet management, involving a fulsome review of deposit betas.

Q: Glenn Schorr inquired about alternatives being a big part of objectives across businesses.

A: Michael O’Grady stated alternatives cut across businesses, with solutions provided through 50 South Capital and a platform with private capital managers. Emphasized education of portfolio managers on private capital alternatives and offering advisory services to institutions.

Q: Brennan Hawken asked about the ROE targets and why they weren't higher.

A: Michael O’Grady explained the 10% to 15% ROE range accounts for different market environments and capital requirements. Aims for optimal combination of growth and returns, and in the quarter, ROE was over the top end of the range.

Q: Betsy Graseck asked about reducing headcount in asset servicing while maintaining service quality.

A: Michael O’Grady mentioned creating the Chief Operating Officer role to gain efficiency through centralization, standardization, and automation, leveraging technology and organizational changes.

Q: Ebrahim Poonawala followed up on global family office revenue growth.

A: David Fox stated GFO had strong organic growth in 2024, reached 5% AUM growth in Q4, and pipeline looks robust for 2025.

Q: Alex Blostein asked about expense to trust fee ratio targets.

A: Michael O’Grady said aiming for positive fee operating leverage to drive the ratio down, with a trajectory from 115 in 2024 to 113 in Q4, and targeting the 105 to 110 range for efficiency.

Q: David Smith asked about capital levels and use of capital.

A: Michael O’Grady said capital levels are strong, will continue share repurchases, and target being above closest peers while maintaining comfortable capital levels.

Q: Brian Bedell asked about wealth management product penetration and revenue pickup.

A: Michael O’Grady said wealth and asset management are working closely, with organizational changes to better align coverage. Sees opportunity to further segment solutions for different client groups, including ultra-high net-worth, through alternatives and broader capabilities.

Q: Jim Mitchell asked about asset servicing organic growth and pricing.

A: Michael O’Grady said asset servicing has balanced growth between asset owners and managers, with favorable pricing conditions in 2024 due to intentional new business selection.

Q: Steven Chubak asked about subdued AUM/AUC growth and pre-tax margin targets.

A: Michael O’Grady said asset servicing AUM/AUC decline was due to currency movements and market factors. David Fox explained pre-tax margin target of 30% is about the right combination of growth and returns.

Q: Gerard Cassidy asked about sustainable financial model.

A: David Fox said sustainable model involves controlling expenses and driving organic growth to weather market cycles, not relying on uncontrollable factors.