Northern Trust Corporation (NTRS) Earnings Call Transcript & Summary

So next up, we're going to -- we have Northern Trust here for a fireside chat. I'm very pleased to have with us Jason Tyler. The bank's still -- I would call him still relatively new.

59 days. It's very new.

Yes, it is very new. A lot has happened in those 59 days. New CFO, we're happy to have you with us here in what I hope will be your first of many conference appearances over the next several years. Jason is joined by Steven Fradkin, former CFO, now President of Wealth Management since 2014. So I look forward to covering a fair bit of ground here with both of you this morning.

I guess this is a tough one. We'll start a little bit on the operating environment, but really -- let's start a little bit further back or higher up and talk about your priorities in the CFO seat? And what do you think, if anything, changes from your legacy of CFO shift for you?

It's ironic. There is a -- when the CEO of the company and the President of one of the businesses are both former CFO, you're right, the finance function is not broken inside Northern Trust. And so this is not a job to say go in and fix it. That said, there -- we've been on an evolution of change, and I think that evolution will continue. And so what are the things that we've been working on a lot, one, is we've talked about value for spend and our desire to make sure we are exhibiting tremendous discipline in expense management, and we put a target out of $250 million on a run rate basis. We're going to hit that. And that said, we don't want it to be an initiative. We don't want it to be a program every several years. And so a big element of my work early on is taking, driving -- is taking the whole concept of what was driving performance in 2013, now value for spend, and embedding that discipline culturally in the organization. It's a very high percentage of how I've been spending my time. And then the second dynamic is on things like using data and analytics more to try and either drive our business from a growth perspective or add additional discipline into how we think about expenses. And so -- and it's good Steve's here, he can touch on it in more detail, if it's of interest. But we've got -- about a year ago, Steve said, "Look, we've got 60 Wealth Management offices around the country. We've got 130-year operating history. We've got leaders all over the country." We have a lot of data on how we should be able to run a Wealth Management team. And that's one of the benefits of having scale in a business that you should be able to develop that sense. And so if there is anything we should know, it's how to run a Wealth Management team. And I think we've gotten to that point where we take that knowledge and put it into the way that we operate the business and make decisions on a day-to-day basis.

So let's take a step back and think about the organic growth opportunity across your businesses. And you've articulated targets, and this is what finance function presumably continues on pretty consistently, your targets of mid- single-digit organic fee revenue growth and organic fee operating leverage. And you've touched on the operating leverage and your determination to really make value for spend part of the culture. Talk about the mid-single-digit organic fee revenue growth target and kind of how the operating environment plays into that?

So like in the last few months, every conversation I have with either buy side or sell side, they come back to that kind of mid-single-digit 3% to 5% growth. And I asked our Investor Relations team, did we ever articulate that as a specific target? And we did. So we went back and listened, we actually did talk about it as more of an observation of what it was historically so -- but not as a target. Now I'm not saying that we should -- that we're not going to achieve that level, but we're very disciplined about what we say as targets. And we put the return on equity target out, but that organic growth rate is more of an observation of what it has been over history. Now that said, we are -- we think about organic growth as tightly internally as we talk about return on equity. And so it is the thing that if you talk to senior management, everybody would be able to rattle off how we've done on an organic growth basis over the past period, the past year. So it's very high on line for everyone. As we think about where that's coming from today, I'll take the C&IS business, and maybe this will be a good transition to bring Steve into the conversation to talk about what he's doing from a wealth perspective. The C&IS business is having very good organic growth opportunities from normal course of business of calling on global large asset owners. I think the larger -- the higher growth is coming on the hedge fund servicing and global fund servicing business, the fund administration business. But their activity, not just domestically, but I think it's almost equal in how they're doing domestically and more globally, particularly across the GFS business. The investments we've had around technology there has gotten clients excited about our ability to give them more realtime information, have integrated trading platforms where they think Northern can help them in different ways in their normal activities.

The only thing I would add to that is that as an operator of the business, you can get into organic growth and what our market is doing and what our interest rate is doing, and how are you doing relative to your plan in last quarter and last year. But really, the fundamental marker for me is how are we doing relative to our competitors. Because in the end, all this noise washes out. And so we look very closely every quarter at stand-alone wealth managers, at segment reporting on who we consider to be our peers. And as we look at it, certainly from 2014 on, which is kind of when we really started to get religion on this every quarter on an annual basis, our revenue growth, whether you want to call it organic or not, is terrific and has performed very, very well. And that has been done without M&A. So a lot of times, when we're comparing to peers, we look good even though they're doing lift-outs and acquisitions, and we've done very little of that. So I don't want to diminish the importance of organic growth. We're very serious about it. But in the end, when you really think about it, it's sort of like someone saying, "I beat plan but everyone else outgrew us." It doesn't matter. So we have to play the game on the field. And our most closely watched metric is really how we're doing on revenue growth, fee growth, expense growth, et cetera, vis-à-vis our top group of peers.

And I'm curious, putting this together, you talked about that revenue growth number being in historic look back, and you're completely correct in terms of my recollection of that being set and articulated as this is what it's been historically and there is no reason why this should change on a going-forward basis. And so I'm curious, as you think about whether or not what happened historically can continue prospectively, what are the factors -- not looking at day-to-day, but what are the factors that could cause you or to feel like you should grow faster or slower than that over the next 5 to 10 years, both in aggregate? And then let's talk about Wealth Management relative to the 5% organic growth projection.

Well, we do think about pricing as part of that. And so a big element of how we're doing from an organic perspective will be the level at which -- and it's never that clients aren't pushing hard, it's just -- is there a mode where clients are pushing extraordinarily hard or normally hard. And so that's always going to be a big element. And frankly, the better markets do on the institutional side, in particular, the more clients will come back and test whether or not -- particularly on the asset-based fee structures, whether or not they should revisit. And then there is another dynamic of we go through cycles of even thinking about where we are from an innovation perspective. And so when we bought the Omnium platform from Citadel in 2011, that was the very beginning of laying the seeds for new technology that we would be able to take to the institutional client base, both on the hedge fund servicing and the overall fund servicing side. And so it doesn't happen right away, but the cycle is based on where we are from an innovation perspective also plays into it.

And I would just say that from our Wealth Management business unit perspective, demographics is one piece. Where your growth -- you can -- as we were saying earlier today, smart people and bad businesses generally do poorly, and people with average intelligence and good businesses can do pretty well. You can draw your own conclusions where we are on the continuum. But we're in -- we believe that we're in a very good business. If you look at most of the pundits, they -- the outlook for Wealth Management, particularly at the upper end of the spectrum, is positive. So that hopefully will give us more growth opportunities. But to Jason's point, so there is demographics, there is pricing and just the data going -- data point, our fee realization improved year-over-year, which is really, I think, very different from most wealth managers, asset managers and what's going on. And I think that's a testament to the value proposition that is resonating with clients. And we'll always be subject to some variability on our revenues because interest rates move around, but we feel very good about the markets that we're in, the position that we occupy in those markets and our ability to win in the marketplace. So we're optimistic, notwithstanding what markets and viruses are throwing at us day in and day out.

Okay. So let's stick with this format in terms of Wealth Management, and it's a very highly fragmented market. Your -- you compete with very large and sophisticated institutions, and your clients can be very large and very sophisticated as well. And I think both of those dynamics in part work against the market consolidating, which we're seeing in other financial services businesses. So I'm curious, when you think about this level of sophistication in terms of the competitive environment, how do you really differentiate yourself? Is it still the relationship? Or is it more?

Well, relationship absolutely matters. I would point to a couple of things. One, the goals-driven methodology that we have to help clients figure out how to deploy their assets is in our mind, without question, a differentiator. It's iPad enabled, it's visual, it's very technically savvy but very easy to understand for people who don't live in the financial world every day. So our goals-driven approach is unique. Secondly, something we call holistic advice. It's not just about managing money for affluent people, it's about all -- and anyone can manage money for affluent people. Some will do it better, some will do it worse. But affluent people have issues that the rest of us don't have. They have banking issues. They have fiduciary and planning issues. They have family governance issues. It's integrating that advice into what we do. And again, we've got 130 years of history. We serve about 30% of the Forbes 400 wealthiest Americans. So we have great pedigree and experience. So goals-driven holistic advice. Third thing I would say is the fiduciary side. The more affluent you become, the more issues you have of getting assets down to the next generation, complex trust in Delaware and so-called graphs and a whole bunch of things. And then lastly, there is a technology component. The Wealth business historically was very wealth-oriented. I know my team, I know my portfolio manager, and it still is, for us, very human. But technology matters and making the experience have less friction or be more frictionless. And so you combine the approach, the holistic, the fiduciary side, technology and ultimately relationship. And on any one of those variables, we have very strong competitor who's just as good. But finding competitors who can get that total bundle right is very difficult. So we feel like we're in a good spot.

So let's talk about the family office for a minute, and that's a 15-ish percentage piece of your Wealth Management fees. And it's been your faster growing segments. So let's talk about the size of that segment and kind of family office eligible formation, if you will. You've got these -- you drop 30% of the Forbes 400. Is that how you define the family office market? Can you get from 30% ultimately to 40%? Where do we see growth continuing now that this is really kind of a focus point?

Yes. So the family office business is, for us, around about 450 clients. We have more clients than that, that have family offices but those are the ones that are the biggest, most complicated so -- that are in that group. It is growing faster than -- the way we organize family office and 3 regions: east, west and central. Family office has the fastest growth rate. Though I would say, it's a little bit unfair because in the region, if we come across a family that is large, complex and has the need for family offices, we route them into the family office. So family office has its own direct activities and, if you will, skins off some of the biggest opportunities for the regions. But that's a dynamic business with a very sophisticated set of clients who have enormously complex needs. I mean we have clients with family offices with 10 people. We have family offices with -- family office clients with 1,000. So there is a really wide range here. But I would say that's an area where we are an undisputed leader and extremely well positioned. And that's the one piece of our business, our Wealth business, that is more global. Our traditional Wealth business is very U.S.-centric for a whole host of reasons. But our family office business is more global, not from the U.S., but European families, Middle Eastern families and increasingly families in Asia.

Well, so that takes us into my next question, which is about opening up new markets. And Philadelphia is obviously not outside of the United States, but let's touch on that. It's a possibility of physically locating in some of these markets where there has been tremendous wealth accumulation, and you have always played a more domestic strategy. And then let's talk about the decision to open Philly.

Yes. So at our peak, we had, within the U.S. in Wealth Management, about 85 offices. That number today is closer to 60. And the first point I would make is that oftentimes when businesses are closing stores or closing offices, they're encountering a headwind. They're shrinking. The business has changed. We have grown straight through that. We have more clients, more assets, more everything. But what we found is that small offices are more difficult venues in which to give our clients the best advice. Our clients are big and complicated. So where we had small offices, we just found that if you have $80 million but the office only has 8 people, the interplay, the nexus of intellectual capital that you get in bigger office doesn't work. So overtime, very slowly, as leases came up and so forth, we exited. Right now, our footprint is good. We like it where it is. We opened in Philadelphia late last year. It's sort of one market that we always scratch our head why we weren't there, and it was no good reason other than we were occupied elsewhere. Our goal is not really to have a certain number of offices. Again, we're 60-ish. We don't have a goal of 65 or 70. We will go where we need to go. But increasingly, we found in some of the, for us, smaller markets, we deploy what's called a virtual market strategy. I don't want to use any city names because I don't want to offend any cities. But there are cities where the most affluent people do not want their wealth managed by the local institution because it's sort of everyone's business. And so we have some segments of our business that are booming, really impressive. We're there every month and the clients say, "We see more of you from Chicago or Miami or wherever you're coming from than we do the local institution we used to work with." So we like our office eyes. There are no big plans to expand that. Yet, we're not afraid to do so if we find the right market under the right circumstance.