Northern Trust Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• One Northern Trust Strategy: Centered on being the client's most trusted financial partner, leveraging the firm's capabilities to deliver seamless solutions. Example: Collaboration with Timeline, a U.K. discretionary fund manager, to provide integrated investment, fund infrastructure, and operational support.
• Alternatives Growth: 50 South Capital had a record fundraising year, Wealth Management built out its third-party funds platform with year-to-date raises exceeding targets, alternatives advisory services saw 66% YOY AUM growth. Fund launch pipeline tripled compared to prior years.
• Business-Specific Strategies:
  • Wealth Management: Expanding Global Family Office, reorganized into 4 regions, appointed new leadership, and invested in revenue-generating talent.
  • Asset Management: Scaling alternatives platform, expanding custom SMAs, and launching new fixed income ETFs.
  • Asset Servicing: Focused on scalability and client centricity, strong position in alternative investment managers with assets under administration near $1 trillion.
• Cost Management: Expense growth 4.8% YTD, on track for below 5% full year, modernizing operating model and leveraging AI to enhance productivity and automation.

Segment Performance

• Wealth Management: Assets under management for Wealth Management clients were $469 billion at quarter end, up 12% year-over-year. Trust, investment and other servicing fees totaled $539 million, up 5% year-over-year. Pretax profit increased 18% over the prior year period, and the pretax margin was 37.2%.
• Asset Management: Scaled alternatives platform with 50 South Capital having a record fundraising year, secured a $1 billion equity mandate with Saudi Arabia's public investment fund, and planned to launch 11 new fixed income ETFs in the third quarter.
• Asset Servicing: Assets under custody and administration were $16.9 trillion at quarter end, up 9% year-over-year. Asset Servicing fees totaled $692 million, up 6% year-over-year. Pretax profit nearly doubled over the prior year period, and the pretax margin was 23.2%.
• Capital Markets: Revenue was up 15% in the first half of the year, with more than 30% growth in both outsourced trading and currency management.

Guidance

• Expenses: Continue to expect total operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements.
• NII: Full year net interest income (NII) expected to increase mid-single digits, assuming a modest decline in third quarter deposits in line with seasonal trends and mostly stable deposit mix.

Risks

• Currency Movements: Favorably impacted revenue growth by ~90 basis points in prior year, unfavorably impacted expense growth by ~100 basis points; similarly, impacted revenue growth ~110 basis points and expense growth ~130 basis points relative to prior period.
• Regulatory Changes: Capital levels and regulatory ratios are affected, with common equity Tier 1 ratio decreasing and RWA growth driven by lending and capital markets activities.
• Market Volatility: Impacting asset values and client investments, potentially affecting AUM and fee income.

Question and Answer

• Q: Curious on initiatives across alternatives and fixed income ETFs, push vs pull?

A: Characterized as pull due to market shift towards private markets, with push internally to provide alternatives. On fixed income ETFs, it's about meeting client needs for efficient, transparent exposures not fully covered in existing portfolio.

• Q: Decision to tighten ROE range from 10%-15% to 13%-15%?

A: ROE has been in the upper half, with greater comfort in capital framework, expecting to continue executing to maintain range.

• Q: Scenario for M&A from shareholder return perspective?

A: Focused on executing strategy, but will consider inorganic opportunities if they improve value proposition with high standards.

• Q: Timing to achieve 30%+ pretax margin?

A: Depends on normalized market environment, expecting to move towards 30%+ margins by 2027 with continued execution.

• Q: Color on deposits strength and normalization?

A: Deposits were strong due to risk-off trade, normalizing back to pre-trade levels with seasonal trends, and influenced by large client deposits.