Northern Trust Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• One Northern Trust Strategy: Fifth consecutive quarter of positive organic growth and operating leverage. Pretax margin expanded nearly 200 basis points, EPS grew 14%. Return on equity 14.8%, shares outstanding decreased 5%.
• Enterprise Growth Program: Private markets integrated solutions gaining traction. Transition to client-centric operating model created 40 capability teams, yielding productivity gains.
• AI Adoption: Over 150 use cases, saving tens of thousands of hours, enabling efficiency in client service, workflow automation, etc.
• Wealth Management: Advanced strategic priorities, strong in regions, alternative investments accelerating, new business activity brisk but tempered by investment product challenges.
• Asset Management: New leadership at NTAM, focus on foundational capabilities and growth in alternatives, custom SMAs, ETF platform. Product innovation, liquidity flows, global money market fund expansion.
• Asset Servicing: Strong results, scalable growth in large asset owners, capital markets, alternatives. Notable wins, coverage of 75% top not-for-profit health care systems, capital markets activity strong, hedge fund services and private capital practices growing.

Segment Performance

• Wealth Management: Assets under management for wealth clients were $493 billion at quarter end, up 11% year over year. Trust investment other servicing fees for wealth management clients were $559 million, up 5% year over year. Pretax profit increased 11% over the prior year period, and the pretax margin expanded 250 basis points to 40.5%.
• Asset Management: In September, Mike Hundstedt was appointed President of NTAM. The third quarter saw product innovation with 11 new ETF strategies launched, including eight industry-first fixed income distributing ladder ETFs. Liquidity had positive flows for 11 consecutive quarters. However, AUC had fluctuations due to client restructurings and redemptions, but the fee realization impact was minimal.
• Asset Servicing: Assets under custody and administration for asset servicing clients were $17 trillion at quarter end, up 4% year-over-year. Asset servicing fees totaled $707 million, up 6% year over year. Pretax profit grew 14% over the prior year period, and the asset servicing pretax margin was up 150 basis points year over year to 24.7%.

Guidance

• Operating expense growth expected below 5% for full year, excluding notable items and currency.
• Full year NII expected to grow mid to high single digits over prior year. Q4 NII flat to marginally up 1-2%.
• 2026 NII expected flat to up 1-2% with mitigating factors like rate cuts, repricing initiatives, deposit pricing, and securities roll-offs.

Risks

• Fluctuations in asset management AUC due to client restructurings, redemptions, and fund conversions affecting fee realization.
• Competitive pressure on fees in asset management and servicing.
• Macro market conditions and regulatory changes impacting business performance, especially in digital assets and stablecoins.

Question and Answer

Q: Hey, good morning. Morning. I guess maybe this first Dave, where you ended on the NII outlook. The mid to high. Maybe address it two ways if you could. One, on the deposit trends, it felt like this the runoff was more than we expected. Are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet the Fed were to cut three or four times in quick succession? Does that put negative pressure on the NII? As we think about the first half of next year?

A: Yeah. Sure. Happy to answer that. You know, deposits actually did perform pretty much in line with what we had previewed. And they're actually up from last year at this time. So from that perspective, may be less than you had anticipated, but I think generally, in the area we we had anticipated. You know, we've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at $135 billion. But we think that Q4 deposits are gonna be, I think, a little bit higher on average during the quarter. You know, and since we've already posted a 9% year to date year over year NII growth, that's why we feel comfortable tweaking our our guidance a bit to mid to high single digits in NII. And then which would imply, frankly, that would be about flat to marginally one to 2% up in the fourth quarter. As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have a rate cuts built into our in into our projections. We not anticipating more than two rate cuts, in The US, next year, for example. We have carry in, that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are gonna be rolling off in in that quarter in the in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be you know, flat to up one to 2%.

Q: I wanted to start so I know on the pretax margin, and I know it bounces around quite a bit. But when you look at the revenue trajectory, expense trajectory, right, the guidance you're giving for 4Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium term target moving forward? And even if the Fed's cutting rates?

A: So to your point, Steve, that there there's certainly the impact of of markets and and, rates. And levels of liquidity in the marketplace. So there's lots of factors out there. But our view is that the financial model that we have definitely, should operate in that 30 plus percent pretax margin on an ongoing basis. So you have a quarter like this where you know, we we got there somewhat because of the environment, but also because of the provision release. That bumped it up a little bit. All the same, the the longer term trend longer term meaning over the last you know, couple years, has been an improvement in the pretax margin. So when you look at the year to date margin, it's closer to kind of 29%. And, we expect to move into to 30%. And then even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are. And so, yes, the the objective is to stay above that 30%.