Northern Trust Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 16, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the Northern Trust Corporation First Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Director of Investor Relations, Ms. Jennifer Child. Please go ahead.

Speaker 1

Thank you, Maddy, and good morning, everyone. Welcome to Northern Trust Corporation's Q1 2024 Earnings Conference Call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO Jason Tyler, our Chief Financial Officer John Landers, our Controller and Grace Higgins from our Investor Relations team. Our Q1 earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call.

Speaker 1

This April 16 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through May 17. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our Safe Harbor statement regarding forward looking statements on Page 12 of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up.

Speaker 1

This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Speaker 2

Thank you, Jennifer. Let me join in welcoming you to our first quarter 2024 earnings call. We're off to a good start for the year. Our results for the quarter reflect both strength in underlying equity markets and the solid progress we're making against our strategic priorities of optimizing growth, driving productivity and strengthening resiliency. We generated organic growth relative to both the prior period and prior year and saw healthy momentum and flows across our businesses.

Speaker 2

Within Wealth Management, we continue to see solid growth in client advisory fees and product level fees increased due to favorable markets. Our global family office performed particularly well in the Q1, adding several high profile client relationships. The launch of our book, Secrets of Enterprising Families and the nationwide events created around it have generated significant client engagement and proven to be an attractive source of new lead flow. Asset Servicing generated solid new business growth at attractive margins in the Q1. As we've discussed, our goal is to generate new business that is scalable.

Speaker 2

This means a greater proportion of new mandates that require lower levels of incremental costs. There were several notable wins in the quarter. Northern Trust was appointed to provide a full suite of asset servicing solutions to True Potential, a rapidly growing UK based wealth management firm, supporting approximately $33,000,000,000 in assets under management. Our open architecture approach, derivatives expertise and consultative manner were key factors in helping us secure this win. We were also appointed as the sole asset servicing provider for Sandlam Asset Management's $9,000,000,000 of funds domiciled in Ireland.

Speaker 2

The award builds upon an existing relationship with Sandlam Investments UK, an integrated trading solutions client. This win shows how increasingly our capital market solutions are becoming leading products for us, bringing new clients to the firm whose relationships then expand into core asset servicing and other ancillary products. The progress we're making and success we're seeing from our One Northern Trust strategy is most evident within asset management. By both enabling and encouraging teams to work in tight coordination, we are delivering clients the solutions and capabilities of the entire firm. More joint meetings between our Asset Management and Asset Servicing businesses is leading to more new business opportunities and wins.

Speaker 2

Asset Management has also bolstered the internal team that coordinates with our Wealth Management business and recently completed a national roadshow meeting with wealth clients and advisors in 29 markets. This provided increased visibility into NTAM's product leadership and performance, which should lead to increased flows from wealth clients over time. And in the Q1, Asset Management also launched several new laddered muni products geared towards wealth clients and the proprietary offshore money market fund for Japanese institutional clients. Overall, Asset Management generated positive liquidity flows for the 5th consecutive quarter and continued to generate strong momentum within active fixed income and alternatives. In closing, we entered the 2nd quarter with strong market tailwinds and positive new business momentum and are well positioned to navigate the ongoing macroeconomic and market uncertainty.

Speaker 2

And with that, I'll turn it over to Jason to review our financial performance. Jason?

Speaker 3

Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our Q1 2024 earnings call. Let's dive into the financial results of the quarter starting on Page 4. This morning, we reported 1st quarter net income of $215,000,000 earnings per share of $0.96 and our return on average common equity was 7.3%. As noted on the slide,

Speaker 2

our reported

Speaker 3

results included a $189,000,000 loss on the sale of securities related to a repositioning of the portfolio we completed in January. They also included a $12,500,000 FDIC special assessment, which is in addition to the $85,000,000 we recognized in the 4th quarter. Our assets under custody and administration and assets under management were up sharply on both the sequential and year over year basis. Strong equity markets coupled with favorable client flows drove most of the improvement in both periods. Excluding notable items in all periods, revenue was up 6% on a sequential quarter basis and 5% on a year over year basis.

Speaker 3

Expenses were up 4% sequentially and up 6% over the prior year. Cross investment and other servicing fees totaled $1,100,000,000 a 5% sequential increase and a 7% increase compared to last year. Excluding notables in both periods, all other non interest income on an FTE basis was up 11% sequentially and up 16% over the prior year. We experienced good momentum in our Capital Markets businesses, particularly FX Trading, where we saw strong client volume levels. Bond underwriting referral fees were also unusually strong, recognized within securities commission and trading income.

Speaker 3

Net interest income on an FTE basis was $535,000,000 up 7% sequentially and down 2% from a year ago. Overall, credit quality remains very strong. Our allowance for credit losses declined 9%, reflecting a reserve release of $8,500,000 and the impact of a $10,000,000 charge off during the quarter largely due to a large commercial loan. Non performing loan levels decreased from $64,000,000 to $37,000,000 the lowest level since 2,008. The non performing loans as a percentage of total loans remained stable at 8 basis points.

Speaker 3

Turning to our asset servicing results on Page 5. Assets under custody and administration for asset servicing clients were $15,400,000,000,000 at quarterend. Asset servicing fees totaled $640,000,000 Custody and fund administration fees were $437,000,000 up 6% year over year, reflecting the impact from strong underlying equity markets and new business activities. Other fees were up $6,000,000 sequentially due to seasonally higher fees for benefit payment services and other year end activities. Assets under management for asset servicing clients were $1,100,000,000,000 Investment management fees within asset servicing were $140,000,000 up a strong 11% year over year and 7% sequentially.

Speaker 3

Moving to our Wealth Management business on Page 6. Assets under management for our Wealth Management clients were $421,000,000,000 Trust, investment and other servicing fees for wealth management clients were $503,000,000 and up 9% year over year and 5% sequentially. Growth within our GFO business is particularly strong, up 11% year over year and 9% sequentially. Moving to Page 7 and our balance sheet and net interest income trends. Our average balance sheet increased 6% on a linked quarter basis, primarily due to higher deposit level.

Speaker 3

It declined 2% compared to the prior year due to lower borrowings. Average deposits were $112,000,000,000 up nearly $11,000,000,000 or 11% from the 4th quarter and were meaningfully better than our expectations. We experienced a stronger than expected surge in deposits late in the quarter with an ending balance up $8,000,000,000 or 7% to $124,000,000,000 Despite significant leverage capacity, we reduced our average short term borrowings by 11 percent relative to the 4th quarter and total borrowings by 6%. This translated to $535,000,000 in net interest income Following the securities sales completed in November January related to our portfolio repositioning and the increase in deposits, average cash on our balance sheet increased by nearly $10,000,000,000 or 38%. The duration of our securities portfolio is now 1.7 years.

Speaker 3

Average loan balances were just below $42,000,000,000 down 1% both sequentially and relative to the prior year. Our end of period loan balances were again elevated at $47,000,000,000 reflecting market timing dynamics. Our loans have since returned to approximately $41,000,000,000 The heightened activity at the end of the quarter did not have a material impact on net interest income in either the 1st or second quarters. The total balance sheet duration continues to be less than 1 year. Our average liquidity levels remain very strong with highly liquid assets comprising 58% of our deposits and nearly 50% of total earning assets on average.

Speaker 3

Our net interest income is highly sensitive to deposit levels and will continue to be driven largely by client deposit behavior. Assuming a stable rate environment, minimal incremental pricing pressure and some variability in deposit volume, we currently expect a 3% to 5% sequential decline in NII. Turning to Page 8. As reported, non interest expenses were $1,400,000,000 in the first quarter, down 2 percent sequentially and up 6% as compared to the prior year. Excluding notable items in both periods, as listed on the slide, expenses in the Q1 were up 4% sequentially and up 6% year over year, translates to 145 basis points of year over year trust fee operating leverage in the quarter.

Speaker 3

Our expense to trust fee ratio, however, remained elevated at 118%. I'll hit on just a few highlights, which exclude all notable items. Compensation expense was up a little over 5% versus the prior year and up 11% sequentially. The sequential increase reflected approximately $45,000,000 in seasonal equity incentive payments and the impact of current year incentives from higher profitability. Full time equivalent headcount was essentially flat sequentially and down 800 or 3% over the prior year.

Speaker 3

Non compensation expense was up 7% year over year, mostly due to increased depreciation and amortization expense within equipment and software as new projects continue to be put into service and growth in tech spend and other consulting areas within outside services. Market related expenses such as market data, third party advisory fees and costs associated with our supplemental pension plans, which are sensitive to underlying equity and fixed income movements, were also up $13,000,000 year over year, which added 100 basis points to our expense growth. Finally, we experienced favorability in the occupancy line reflecting actions we took last year to rationalize our footprint. As we look out into the Q2, I'll touch on our largest expense categories. Compensation expense will no longer contain the seasonal equity incentives from Q1, but will include the impact from last year's base pay adjustments of $65,000,000 in the aggregate spread over the second, third and fourth quarters.

Speaker 3

It also reflects modest employee headcount growth associated with growth in the underlying businesses. All in, this should translate to a sequential decrease of $35,000,000 to $40,000,000 Within outside services, we could see as much of a $10,000,000 to $15,000,000 sequential lift, reflecting ongoing technology, including costs related to cybersecurity and other resiliency expenditures. We also expect to incur the lagged impact from various market related fees. Within equipment and software, we also expect

Speaker 4

see a $10,000,000 to $15,000,000 sequential

Speaker 3

increase, which roughly half is incremental depreciation and amortization. Sequentially, growth was flat in the Q1, so there's some timing related impact, but we don't expect to see the same step up in the second half of the year. Our capital levels and regulatory ratios remain strong in the quarter and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach was flat with the prior quarter at 11.4% as capital accretion offset a modest increase in risk weighted asset levels. This reflects a 4.40 basis point buffer above our regulatory requirements.

Speaker 3

Tier 1 leverage ratio was 7.8%, down 30 basis points from the prior quarter. In quarterend, our unrealized pre tax loss on available for sale securities was $710,000,000 Overall, we returned 2 $85,000,000 to common shareholders in the quarter through cash dividends of $153,000,000 and common stock repurchases of $132,000,000 And with that, Maddy, please open the line for questions. Thank

Operator

We will take our first question from Alex Blostein with Goldman Sachs.

Speaker 3

Good morning, Alex.

Speaker 5

Hey, good morning, Jason, Mike, Joshua, good morning, everybody. So wanted to start maybe with NII guidance down 3% to 5% for the Q2. It sounds like the biggest driver there is your assumptions around deposits. So maybe give us a sense of kind of where deposits stand today, perhaps what was the source of upside that you saw over the course of the quarter? And then just curious on within that guide, do you guys assume any benefits from the Visa proceeds that I'm guessing is going to be at least temporarily parked in cash?

Speaker 3

Yes. So go through a couple of dynamics there. 1, just going back to Q1 and what happened that we saw really nice improvement in deposit levels and it was across both asset servicing and wealth management. And the overall base increased nicely, but that end of quarter level of $124,000,000,000 there's some very chunky large clients that we always have in place and that sometimes can have mean to lead to significant increases. That is definitely the case at the end.

Speaker 3

So we have seen deposits come down in the 1st couple of weeks of the quarter. And but that said, the run up we had at the end of the quarter, that wasn't really the driver of the average. It happened very late in the quarter. So the end of Q1 in general was good. As we look out into Q2, we've got to remember that things like the buildup that we have in April for tax payments, which frankly part of the dynamic of where we ended the quarter, that starts to go away as tax payments get made and so deposits come down.

Speaker 3

That's one of the factors. And so we could even at this point be at a peak for the quarter. And then you asked about Visa, no significant lift from that in the quarter. You're right, it's going to be parked at least in the short run. We've got ideas on what to do there, but in the very short run, we'd be parked in cash, but not a significant lift.

Speaker 3

The impact is more from a capital and leverage perspective more than NII in the short run. And just in general, you got to remember, this has just been it has been very hard to predict deposit levels and it's not us driving it. We did a lot of work with clients to make sure they know that we want deposits and feel like we did a really good job on that. But this has been the most difficult area of the income statement to predict.

Speaker 5

I got you. Yes, no, all makes sense. I guess as a follow-up to that, so we'll stick with NII related questions. You guys saw a pretty meaningful pickup in cash as you highlighted to $10 ish billion sequentially. How are you guys thinking about redeploying that over time?

Speaker 5

Should we generally expect the cash balances on the asset side of the balance sheet to remain fairly elevated, especially given the sort of uncertain rates backdrop and perhaps higher for longer? Or at what point do you feel comfortable extending that into securities? Yes.

Speaker 3

It's another dynamic that feeds into your first question actually. We brought duration of securities portfolio in and more importantly, which feeds into your question, the duration of the balance sheet is very short right now. That was strategic. We felt like that was the right thing to do. That's a big part of why we did the repositioning of the balance sheet.

Speaker 3

But at a point, we also might take the opportunity to extend a little bit. Usually, the rate curve means that that would be helpful. But in this rate curve environment, you might end up giving a little bit giving up a little bit of NIM. And so you're right, the cash is very elevated. Part of that is because of the chunky nature of some of the deposits.

Speaker 3

And you just want to stay very short there. And but part of it has been strategic as we've let a lot of maturities just roll and then obviously the repositioning was done intending to come to the shorter part of the yield curve. But where we are now and our anticipation of our view of the yield curve, we're more at a neutral point right now and depending on what we see in the economy might take an opportunity to step out.

Speaker 5

I got you. All makes sense. Thanks very much, Jason. Sure. Thanks.

Operator

We will take our next question from Ebrahim Poonwala.

Speaker 3

Good morning, Ebrahim. How are you?

Speaker 6

Good morning, Jason. How are you? So I guess maybe moving on expenses, I just want to make sure we heard you right. Comp expense is down about 35% to 40% sequentially. And then I think you counted services and equipment and software both up 10% to 15% quarter over quarter?

Speaker 3

That's right.

Speaker 6

So does that imply relatively flat expenses in 2Q? And I guess the question is, just give us some visibility around you've talked previously about the focus in terms of flexing expenses lower, bringing the expense growth below last year's 4.8%. Just give us a sense of the work that's being done, your level of confidence in terms of hitting some of those targets around the expense to trust fee asset ratio?

Speaker 3

Yes. So, first of all, that goal of 5 or below, that is still the goal. And secondly, it's early in the year and we got through Q1 and a little bit above that. But at the same time, we're still working very hard to get expenses down. And the numbers that we gave in the opening give a sense of some of the bigger line items, but there are other areas where we're continuing to push.

Speaker 3

And even on those items, we're continuing to push hard. We're constantly trying to find opportunities to get expenses down, enormous focus inside the company. And you're right to confirm the numbers that we had there in things like outside services where we've got tech services and even cloud migration and consulting. Those are all areas where we've seen some elevation all for strategic reasons, but we've got to find productivity and make sure we're finding efficiencies to get expenses where we want them to be early in the year and we're still pushing for that 5% or better.

Speaker 6

Got it. And just I guess one follow-up to

Speaker 2

Yes. One thing,

Speaker 3

just sorry to interrupt, everyone. Yes, I think as we think about the Q1 of the year, I think people should also appreciate how much the lift in markets had an impact on our expenses. And so you think about things anywhere from market data to 3rd party advisory fees to sub custody and referenced it quickly earlier on, but even something like the market's impact on our supplemental benefit plans has significant impact on expenses. But for that supplemental benefit plan expense, there's an offsetting increase in revenues. There's no impact to profitability.

Speaker 3

So, got to put that aside a little bit. And but the lift in markets definitely has an impact. And so, so a lot of the work that we've done in the Q1 and over the last year masked a little bit, but that's just something we should all keep in mind as we gone through this period of the S and P being up 25% year over year, 10% to 12% on a sequential quarter basis. That plays into expenses as well.

Speaker 6

That's helpful. Thanks for that. And just one quick follow-up. I appreciate that it's very hard to sort of handicap deposit behavior, but just give us a sense of pricing competitively, have things stabilized, gotten better today versus 3 or 6 months ago? Thank you.

Speaker 3

Pricing specifically in what's here in deposits, yes. We did see one of the biggest benefits we had in the quarter was that pricing came through better than we anticipated. We actually were up a couple of basis points in NIM and had anticipated that to go in the opposite direction. And so and we've been a broken record saying that we're not a price maker or a price taker in this. But I think a lot of the work that we did communicating with clients and bringing on high quality deposits, it helped.

Speaker 3

And so it appears that that pricing pressure that we were experiencing very significantly in Q3 in particular, it has abated things less pressure on that dynamic right now.

Speaker 6

Got it. Thank you.

Speaker 7

You bet.

Operator

We will take our next question from Ken Usdin with Jefferies.

Speaker 3

Good morning, Ken. How are you doing? Ken, if you're talking, you're muted.

Speaker 7

Hey, guys. This is Moksha on behalf of Ken. Could you just talk about your servicing pipelines and just your wealth management growth, just some more color on that would be fantastic?

Speaker 3

Sure.

Speaker 2

I'll start off with wealth management. So we did see nice organic growth in the Q1 and we expect that to continue as we go forward. As was mentioned in the commentary there, I continue to see it on the advisory fee side of the equation. And also, we've gone through a number of quarters where the product level fees and wealth management have been more of a headwind just related to flows in some of the specific asset categories, and we saw that subside in the Q1. So we expect that to also be a positive going forward.

Speaker 2

And you heard our family office business growing at a higher rate in the Q1, also seeing strength in ultrahighnetworks, which those are the 2 segments that we're primarily focused on. And I would say in asset servicing, the growth has been relatively broad based, certainly seeing strength with asset owners in North America, but also in Europe as well. So that has been a positive. And we're seeing it outside of, I'll say, core asset servicing with capital markets area being an area where with integrated trading solutions, we're seeing that as a, I'll say, increasingly utilized area for us to generate new relationships and then broaden them out from there. So I feel good about the breadth of the organic growth in that business as well.

Speaker 7

Got it. Just another question on just flow of client assets between cash and fee generating and where that stands?

Speaker 3

So the overall, the cash has been obviously a positive story, not just in deposits, but also in our money market mutual fund complex, which is up meaningfully sequentially and year over year. And that complex is very important to us. It's highly profitable. It's large. So our most sophisticated clients see it as a good opportunity to invest there with good yield with the benefits of being in a collective fund, but

Speaker 2

at the

Speaker 3

same time not having significant concentration. And so the overall liquidity and cash in the Investment Management business, but also in the broader financial model has played very significantly into the strength of the quarter.

Speaker 7

Thanks for taking my questions.

Speaker 6

Of course.

Operator

We will take our next question from Betsy Graseck with Morgan Stanley.

Speaker 8

Hi, good morning.

Speaker 2

Good morning, Betsy. Nice to hear you.

Speaker 3

Welcome back.

Speaker 8

Good. Thanks. Just wanted to make sure you could hear me. So I guess two questions. 1 on capital and I realized that your business model is one that is capital rich.

Speaker 8

And just wanted to understand how you think about capital levels, capital accretion and when is the right time to start leaning in more to buybacks given the excess capital that you have?

Speaker 3

So the you're right that the capital levels are strong and even with where we are right now at 11.4% CET1, I'd argue that that's a little artificially low right now. We talked about the fact that loans were elevated because of the operational dynamics at the end of the quarter. And so we expect RWAs already down as a result of loan volumes, which we mentioned earlier coming back more to normal levels. Plus we've got $700,000,000 in AOCI pulling the par, plus we've got Visa, and plus we're still returning on an operating basis at a good level. And so those are all good.

Speaker 3

They're also you're right to note that we like having strong capital levels and still able to develop good returns at these levels. And we also are always looking at where our peers are to make sure that when we say strong, it's not just absolute but relative. Now all that said, particularly with Visa coming online, you can imagine likely going to have an upward impact on the trajectory of share repurchase. It's not like we're going to do something enormous right away, but it goes into our capital framework. And with capital levels being higher as a result of that and even in anticipation of it, it obviously will have an upward lift, all other things equal.

Speaker 8

Okay, great. And then separate question just on, I think you mentioned earlier about opportunities to extend duration in the book, in the securities book at some point. And maybe you could just give us some context and color as to how you're thinking about that given the fact that typically you have a very, very short duration. So when you say longer duration, what are you thinking about in terms of how long is long? Thanks.

Speaker 3

Yes. That's a good focus and everything's relative. So we had gotten out to about 2 years on the securities portfolio a couple of years ago and now being meaningfully under 1 year, it gives you at least some sense of range. But I also think it's important to note everybody should take a lesson from what we've seen in the markets over the last couple in banking over the last year that deposits have a shorter duration than anybody anticipated. And so, unbiased, we're going to be shorter relative to history than what we have been before, but we're quite short right now.

Speaker 3

And particularly as deposits seem to be leveling off in general and a little bit more predictable, it gives us an opportunity, more confidence. And then we have to test, do we see the investment opportunities? And does the yield curve indicate to us that it makes sense to go out? And that's part of the reason that we've been shorter. We felt like it was going to be better to be at the short end of the curve over the last year that led to that repositioning work that we did.

Speaker 3

And so it's not going to be dramatic, but any given the way the shape of the yield curve is right now, any step out protects us nicely from significant declines in short term rates, but it gives up a little bit in short term NII.

Speaker 8

Yes. Got it. Okay. Thank you. That's very clear.

Speaker 9

Great.

Operator

We will take our next question from Brennan Hawken with UBS.

Speaker 4

Good morning. Thanks for taking my questions. Hey, how are you, Jason? I had a couple of follow ups. 1 on the deposit front.

Speaker 4

Jason, you commented how deposits have declined, but it seemed like you were commenting more on an EOP basis than versus the average. We saw the average balances up above that $100,000,000 to $110,000,000 range that you had previously talked about. We saw some stability in non interest bearing. So when we think about the go forward on an average basis, is have we hit a level where now things should be relatively stable comparing it to where we were on an average basis? I appreciate that you said this is the hardest part of the balance sheet to predict.

Speaker 4

So I recognize I'm asking a challenging question. Yes.

Speaker 3

And I think I said our overall financial results to predict. It's been really hard. That's you're right to point out that with the $120,000,000 the comments I made were relative to the $124,000,000 We have seen obviously balances come down. We naturally do the 1st couple of weeks of the quarter. But this dynamic of tax payments is one that can that can have an impact.

Speaker 3

And also just the fact that clients may be doing exactly what we were talking about a minute ago with Betsy's question of thinking about redeploying out of cash into different types of securities and maybe buying treasuries that has a dynamic as well or maybe moving into money market funds to pick up even if it's not 6 months or 2 years of duration picking up 45 days. And so all those dynamics have a downward impact on average deposits and we just want to make sure we're prepared for that as we think about the scenarios. We're trying to give you guys a reasonable estimate of the upside downside that we feel and but that having deposits down meaningfully in the quarter is that's inside our expectation of what could happen.

Speaker 2

And Brennan, it's Mike. Just to add at a very macro level, if you just look at deposits starting back pre pandemic and then quantitative easing And so some of this will depend on just the broader macro impact of tightening and when the Fed and other central banks decide to stop bringing down the size of their balance sheet. And I think then we'll reach a new level of normalization of deposit levels. And right now, we're, I would say, well above the pre pandemic, pre quantitative easing levels. So to the extent that we're closer to the end of quantitative tightening, the expectation would be that we start to settle out somewhere in this neighborhood.

Operator

We will take our next question from Brian Bedell with Deutsche Bank.

Speaker 9

Great. Thanks. Good morning. Good morning. If I can ask my first question on NII, just looking at the second half and of course everything is difficult to predict with deposits and everything.

Speaker 9

But if you can just talk about how Visa might work its way. I think there's a couple of stages of deployment, so it's more of a 3Q and 4Q lift versus 2Q. I think you said it was pretty minimal for the 2Q guide. So maybe just talk about the timing of that. And then, I guess, do you see a scenario in which you might actually have positive net interest revenue growth in 2024 versus 2023 given the really strong start to the year?

Speaker 3

Sure. So just on timing of Visa, you're right. We'll be able to get a portion of it done in here in Q2, but some of it will bleed over into Q3. And if you're just correlating to what's the impact on NII, obviously, that it doesn't have that much lift just because we're not getting as much timing from it. But you're right, there will be some lift.

Speaker 3

But I'd come back to the biggest benefit Visa is more on its capital and our liquidity. If you think about the most simplest component of putting those dollars at the Fed at IOER or IORB, then you don't get a dramatic lift beyond what would happen with a $500,000,000 or $700,000,000 deposit coming in. And so at no cost, but it's not that dramatic of an impact. And so the real help is a little bit longer term and us being able to think about strategic ways to deploy that and ensuring that we get a good return on it. So we're trying to keep a lot of different paths open, but and again, this is also half of the position that we're talking about this year.

Speaker 3

There's still another half to come hopefully next year and some of that may bleed further.

Speaker 9

And then on the possibility for NII growth in 2024 given the strong start?

Speaker 3

Yes. I think it's you started with it. It's so early in the year to predict that and to predict where things go. We're still getting some lift from different components of maturities coming in and other elements. And so there are some tailwinds that we have, but it's very difficult to predict that far out.

Speaker 9

Okay. Yes. And then just on expenses, the Q2, the numbers you gave, obviously, that was just the biggest categories, but it looks to me like that implies that maybe a $10,000,000 to $15,000,000 drop in expenses, the guidance that you gave, not including other things. Just I guess if you can confirm if that's accurate. And then based on your comments of working harder on expenses and getting some of this what looks to be some of that seasonal lift in the second half kind of getting pulled forward, should we maybe expect less expense build in the second half versus the Q2 that we typically see on the seasonal lift?

Speaker 9

And then putting that all together, is I know you're targeting obviously positive operating leverage on fees, but if you actually have a good NII backdrop, maybe we actually see positive operating leverage inclusive of NII, so on total revenue?

Speaker 3

Yes. So I'm going to hit the second and third parts of that. You broke up on the first. I'm going to ask you to repeat it when I go through part of it. On the second half lift in expenses, absolutely right.

Speaker 3

2nd quarter is a big step up. It's a big step up in both outside services and equipment and software, not seeing those types of increases in the second half at all. Not saying they're going to be flat, but definitely not. That's not the trajectory that we will be on. And we're working very hard to find productivity.

Speaker 3

And some and a lot of that can be inside this year. And so still work to be done there. And then as we think about fee operating leverage, that's what we focus a lot on. I mean the NII is unpredictable and it's less correlated from a management perspective to expenses. And so the real focus is on fee operating leverage.

Speaker 3

And so and that's how we think about the financial model and ensuring that we're being disciplined about the expenses relative to what we're that improves our chances of getting good fee operating leverage, but wouldn't comment on overall operating leverage given

Speaker 9

It was just a technical on the guidance you gave for 2Q. I think it implies expenses down like $10,000,000 to $15,000,000 versus 1Q, just on at least the categories that you talked about and the 3 different ranges that you put out there. Just want to make sure that was I want to confirm that was accurate.

Speaker 3

Yes. Let me I can go through the chunks that we talked about really quickly. So the implication would be that compensation would be down $35,000,000 to $40,000,000 and equipment, software and outside services each up $10,000,000 to $15,000,000

Speaker 9

Yes. Okay, great. Great. Thank you very much.

Speaker 7

You

Speaker 8

bet.

Operator

We will take the next question from David Smith with Autonomous Research.

Speaker 3

Hi, David.

Speaker 7

Good morning. Just speaking a bit more about balance sheet positioning, setting aside the somewhat artificial nature of the 10 ks asset sensitivity disclosure that everyone has, you give us your best real world guess right now for the incremental NII impact of more versus fewer Fed cuts putting both pricing and balance sheet volume dynamics together?

Speaker 3

Yes. It's assuming you're right to point to the supplemental disclosures have the sensitivities to it. But if you're thinking more about those are more stressed up 100 basis points, 200 basis points and more. If you're thinking more about single or double rate cuts, then it's difficult to it's actually difficult to tell. And you can see just assuming what's more likely of a 25 or 50 basis point decline, we're going to be following the market and what happens there.

Speaker 3

And there are scenarios in which you could see banks trying to hold on to deposits and others saying that they want to hold on to margin. And so even on the way up, it was not a linear exercise for us. The betas were very low at the B and A of the increase. And then at the end of the increasing cycle, the betas were very, very high, in some instances over 100 percent. And so it's just difficult to predict right now.

Speaker 3

There's no science. We debate internally even what the most likely impact is for these first couple of cuts on the way down.

Speaker 7

Okay. And then one other NII follow-up. Do you think you're done with securities repositions at this point? Or could we see another one later in the year?

Speaker 3

Unlikely. We'll see another one. We got a lot of the a lot of what we did, a lot of the very low yielding securities. And remember, there was real benefit from a capital perspective as well in being able to take some of the securities that had negative RWA treatment and reinvest those in cash at a point of the yield curve where we felt that's where we wanted to be incrementally from a strategic perspective, from an investment perspective and also have improvement from a capital perspective. That trade, each time we've done it, that component of the repositioning has lessened an impact.

Speaker 3

And so it is much less likely, but that's just given the current state of the yield curve and how we feel about the economic environment.

Speaker 7

And lastly, anything you can do to help us think about using the Visa proceeds for organic versus inorganic investment opportunities?

Speaker 3

Yes. It's we're obviously looking really hard at ways internally to make sure we're investing anywhere we can to grow at attractive capital levels. Our return on capital is targets are 10% to 15% and we're putting that same type of framework in place as this capital comes in. And to the extent the best thing we can do is grow with our existing types of businesses and with our existing clients. That said, we have not been short capital before.

Speaker 3

And so it's not like there are things we could do, but we couldn't afford it from a a capital perspective. And so it's not like there's a laundry list of things we can say, oh, now we can go get this done. And so we're going to be prudent and patient, but at the same time not hesitate to reflect our capital framework, which at this point would indicate all other things equal a little bit bias heavier on share repurchase.

Speaker 7

That's helpful. Thank you.

Operator

We will take our next question from Steven Chubak with Wolfe Research.

Speaker 10

Good morning. This is it's actually Sharon Lung filling in for Steven this morning. Just a quick follow-up on non interest bearing deposits. They seem to have stabilized this quarter and are now about 15% of the total. Do you think that this is kind of like a good trough level even if you see continued deposit pressures related to QT, etcetera?

Speaker 3

They it's definitely flattened out in terms of even the percentage decline despite the fact that we had an overall increase in deposits. And so non interest bearing deposits performed well relative to what we would have expected and definitely seem to have flattened out. It didn't grow as much as the rest of the base, but performed well in the period. So not predicting a significant movement down at this point.

Speaker 10

Okay, great. And then just a follow-up on AUM and AUC growth. You saw healthy expansion, but can you talk about what maybe drove some of the pressure on fee rates across your businesses this quarter?

Speaker 2

Yes. The fee rates,

Speaker 3

I think, is I always caution to focus on that when we apply it to our asset levels, whether it's on assets under management or assets under custody, because only a portion of the business, roughly half is even tied to asset levels. And then a lot of the contracts that we have get to transaction volumes and then there's significant mix shift. Areas like our family office business are going to have a lower overall yield on assets relative to the regions in wealth management, for example. And then there's other components in asset servicing that are very similar. And so we actually don't do a lot of analysis on as we're unpacking the quarter or the year or the year, we're not looking at those rate changes as the biggest indicators of what's happening in the business.

Speaker 3

We're looking more granularly at what's happening with our clients, the mix within different products and what's happening in the regions and family office, etcetera.

Speaker 10

Great. Thank you.

Speaker 2

Sure.

Operator

We do not have any further questions. I would like to turn the call back over to Jennifer Childs for closing remarks.

Speaker 1

Thanks, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again in the future.

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Earnings Conference Call
Northern Trust Q1 2024
00:00 / 00:00