Northern Trust Corporation (NTRS) Earnings Call Transcript & Summary

Great. So thanks, everyone, for joining our virtual fireside chat this afternoon. I'm Brian Bedell. I cover the trust banks for Deutsche Bank. And so we are very excited today to have both the CEO and CFO of Northern Trust with us, Mike O'Grady and Jason Tyler, respectively. Just a quick bio. I know everyone knows Mike and Jason, but Mike is the Chairman, President and CEO of Northern. He joined the Northern back in 2011 from Investment Banking at BofA Merrill to become CFO and subsequently headed up corporate and institutional services before becoming CEO in 2018. And Jason Tyler is newly appointed CFO of Northern since the beginning of this year and also joined Northern in 2011 from Ariel Investments, starting out as the Global Head of Strategy before becoming the Global Head of Institutional Asset Management and then the CFO of Wealth Management before becoming CFO. Thank you both for being with us today. So I'll start out with some questions of my own and leave some time for questions for the participants. And just some quick instructions on that. You can ask a question via the Web portal or you can e-mail me at [email protected], whichever is easier.

So maybe to start with you, Mike, can you share your perspective of how the COVID-19 crisis is impacting your clients, mostly on the wealth management side, but I guess also on the asset servicing side, and how your employees are interacting with them? And maybe touch on what you're seeing in some of the -- maybe the communities you're operating in and how the whole work-from-home experience is going across the Northern?

Sure. Well, good afternoon to everybody. And Brian, I think your question is appropriate in starting with our clients because, to understand Northern, whether it's in an environment like this or, frankly, in any environment, that's where we would start as well with who are our clients? What are we doing for them? And how are we doing it? And we think that's how we differentiate ourselves. And with the clients, as you know, from our business, where we're focused on wealth management, asset management, asset servicing, our clients are some of the strongest institutions and families that are out there. And that's always good, and they tend to do good. I'll say, in any environment, but particularly when things are challenging, it is better to be aligned with both families, companies and institutions that are strong and are going to do well through this. And so they're holding up well. Their reaction, not surprisingly, is -- runs the spectrum of some being calm to others close to panic. But I would say that, in general, given the length of the acute stress that the clients hung in there, if you will, through this time period. So certainly, some are going to suffer on the credit side, which we'll be able to work our way through. But in general, the client base has been strong. As far as how our employees have been interacting with them, I would think about that as the services we're offering and how we do it. And yes, some of it's very consistent with what we would do in any environment, right, which is making sure that we are safeguarding and managing their assets for them. And when you're shifting to work from home in a remote environment, that can be challenging. But we have to answer the bell every day on that, and we've been able to. So whether that's settling trades and processing corporate actions or striking NAVs, but all that happened straight through this time period. But then there are some other needs that they've had, which happen in this type of environment where likewise, we've had to be there. And that, generally speaking, is more on the balance sheet side. So initially, in March, we saw a dramatic increase in deposits on our balance sheet, where clients were becoming much more liquid and, as a result, wanted to place that at a place that they felt was safe. And so we saw our deposit base expand dramatically in the middle of March and then come down a little bit end of March and then since then, it's come down a little bit further as well, but still at increased levels. And then also in becoming liquid, a number of these clients also drew on credit facilities, whether those are corporations or on the wealth management side. And again, having the capacity to be able to do that and feeling good about our underwriting and the strength of those clients, again, we were able to fulfill that commitment to them. And then the last thing I would say, just with regard to how we are interacting with them. We're known for having differentiated client service and a lot of that being delivered through our people. That certainly has been the case. But as much as we've utilized technology in the past, have definitely leveraged it much more in this current environment. And so on the wealth management side, just as an example, we dramatically increased the webcasts and digital communications that we've had, which has been a real positive for us, both with existing clients, but frankly, in bringing on new prospects as well. And so that digital aspect of it, not to mention just the ability to transact on your phone, iPad, computer, whatever it may be, has made a big difference. So I would say, overall, we've been able to meet our commitments and the expectations of the clients in the environment.

That's a good run-through. And maybe just one detailed question on the wealth management side and asset allocation. You obviously mentioned the increase in cash. Has that risk posture stayed consistent in the wealth management franchise as the markets have been moving up in April and May here? Or are people putting money back to work in risk assets across your wealth management franchise?

Yes. So to your point, initially, a shift to cash and being more conservative. But I would say, on balance, it was not panic selling by any means. And in fact, this is where our whole goals-driven framework really benefited, I would say, us, but more importantly, our clients because we were able to go back to that framework and ensure that, in fact, they have the right portfolio alignment to meet their goals and were less focused on, well, wait a minute, this asset class is going to underperform or overperform in the near term, and so I want to trade in or I want to trade out. And so on the whole, they stayed in a relatively stable position. We have seen some of that liquidity get redeployed, so the cash levels are down a little bit from where they peaked out. But on balance, there wasn't a lot of volatility in the allocations from a flows perspective. Certainly, as valuations moved around, that changed the allocations, but not a tremendous amount of transacting.

Got it. Okay. And then maybe switching over to the asset servicing side of the business. Have there been any significant technological adjustments required for the servicing platforms or in facilitating the work from home with the asset servicing clients? And to what extent has any, I guess, previously won business been delayed in implementation? Or do you expect any kind of slowing of the sales cycle to impact organic growth as we move through this year?

Sure. Realistically, our operating model, and nor do I believe anybody was built for the idea of 90 plus percent of the employees working remotely for an extended period of time. And so without a doubt, coming into the beginning of this year, we had a very aggressive rollout of further work-from-home capabilities. Some of that's pretty straightforward in the sense of how do you get more laptops in the hands of the people that need to be able to connect in and work remotely. But a lot of it also is ensuring that your infrastructure can handle that dramatic increase in activity and volume. And so we've had to invest around the globe to make sure that our virtual network is strong, the firewalls are strong, things like that. And again, knock wood, we're fortunate that, that all worked well so that we could continue to operate. The other thing I would say is beyond technology, we did see the benefit of a global operating model as well in the ability to move certain work from market to market as different geographies shut down at different rates. And so a lot of the resiliency planning and stress testing and all that came in handy, if you will, as we went through it. From a new business perspective, I was quite pleased and we were overall that the transitions of new business that were, I'll say, scheduled and underway, we were able to transition them on the planned timetable. So we saw activity in March, in April of bringing on that new business, which was a big positive. And then as far as looking at the transition timetable through the rest of the year, there are certain transitions that will get pushed out to some extent. And that's not because of our ability to do it, but rather our clients are working remotely. And so having some time to be able to get positioned to be able to do that is important for them. And overall, I would just say the interactions with prospects, the RFP activity is still relatively consistent. So we haven't seen everything shut down by any means and have continued to have very active dialogues in the marketplace with new prospects.

Okay. Yes. That's a good update on that. And then maybe, I guess, just looking longer term, what types of more permanent changes do you think may emerge after the whole pandemic is over and maybe how you're servicing clients in Wealth Management and Asset Servicing and using that technology across the platform? So I guess, could there be a different cost architecture after the recovery that could potentially reduce your cost base longer term and enhance scalability?

Yes. The short answer, Brian, is no question about it. Yes. Now what exactly it will look like, that's what we've not only we've been on a path, of course, because you're always evolving the operating model, I'll call it, but this will accelerate that. And there's a couple of angles that I think are most relevant. One is certainly just digitization or becoming a more digital company. And the implications of that, yes, definitely allow us to operate in a virtual environment like that. So that's a positive. But also, there's a client benefit to that. To your point, on the wealth management front, we know that there are clients that, frankly, out of habit, just haven't utilized our digital capabilities previously. Then now, it's much easier to deposit that check on their phone than to go into an office to do that and to transact that way. And that's something that we expect will continue going forward. And the further implication of that is that, that also has a productivity benefit. That's essentially self-service, but in such a way that it's a positive for the client. And then shifting to the asset servicing business. As you know that, that's a relatively people-intensive process or part of the process. And that's one, again, where I see further acceleration of automation and utilizing technology in order to improve our productivity.

Yes, there's some definitely good lasting benefits, I guess, from this. Maybe switching gears a little bit...

Yes. And to be clear, just one other aspect -- sorry, Brian, that I didn't hit on. But that will also -- we talk often about our location strategy. It will have an impact on where you have various roles and whether they're in a facility or out of the facility. And I can't predict what percent will be remote in 3 or 5 years, but I'm certain it will be lower than where we are today, but higher than where we are -- where we were in January.

Where you were, yes. Yes. No, that's very interesting. Maybe just switching gears. I know this is being late May. We're about 2/3 the way through the quarter, and you guys typically like to give updates mid-quarter. So maybe, Jason, if you wanted to give an update on the current trends in the second quarter so far versus where you, I guess, you saw them at that last update on the earnings call in terms of certainly the balance sheet and net interest income and anything else you'd like to talk about?

Sure, Brian. Well, first, let me just give a couple of comments on the quarter and then see if you have follow-ups. But first, on net interest income. If you recall in the first quarter call, we did indicate we were expecting a 7% to 10% sequential decline in NII in first to second quarter. At this point, don't see any notable changes to that at this point. The spread between Fed funds and LIBOR certainly reduced more than what we had been predicting. But that's been offset with mix and size changes or at least relative to what our expectations were at the time. And then as far as deposit volumes go thus far in the quarter, you'll recall that we ended the quarter with about $130 billion in total deposits. And as is very typical, we saw that reduce, as Mike mentioned, but not to pre level -- crisis levels. The client deposits have generally remained above $100 billion in the quarter, and that's an increase from 1Q, averaged about $95 billion, and fourth quarter was averaging under $90 billion. So the $100 billion still elevated, but not -- certainly not at the levels we saw at the end of the quarter. And then on -- we'd make comments on the capital markets activities like FX trading and securities commissions and trading, certainly seeing that come down from the first quarter levels, but again, still above what we saw in the fourth quarter, although certainly lower than what we saw in the peaks in first quarter. And just a reminder, there's still over a month to go in the quarter. So these numbers will certainly change, but that's at least where we are at this point. On expenses, we're continuing to focus on driving efficiencies into the business. We mentioned on the call that we undertook a fairly aggressive approach to essentially replanning 2020 expenses. So just a couple of quick notes. One, our occupancy expense includes -- it actually included a onetime credit of about $7 million in the first quarter. And as we've discussed before, we've got some overlap in expenses relating to some of the office restocks that we've been executing. So we'd expect second quarter to be slightly higher than first quarter, even adjusting for that $7 million credit. And then, lastly, on equipment and software expense. As we mentioned on the call, this is a line where we see some growth coming relative to investments coming online that we've made. So we'd expect to be at or even slightly higher than first quarter levels for that expense category. But those are the big topics we'd provide commentary on this point.

Okay. And then just to clarify a couple of things. So the expenses is higher. You're talking about for those lines, not for overall operating expenses or are you seeing it for overall expenses?

Just for those line items. Yes.

Just for those lines, yes. Yes, okay. And then the average balance, I think you said over $100 billion in deposits. So you're talking about the average second quarter-to-date average deposit balances.

That's right. Yes. Compared not to the overall size of the balance sheet, that the balance sheet ended the quarter over $160 billion, and we've seen it in roughly $130 billion to $140 billion in total, but the client deposits in and of themselves that are right around that $105 billion level.

Right. Right. Okay. And maybe a question. It's actually I got from the audience as well here, but I was going to ask it. And that is just on the -- I know as we get into the summer, we get into the golf tournament. And obviously, there's, I think, uncertainty on that given the PGA schedule. But maybe if you want to comment on whether you think that is going to happen or just marketing around that generally, which usually raises third quarter expenses.

Sure. I'm glad to take that. And like many things, the golf season is uncertain. And specifically to the Northern Trust, which is scheduled for mid-August. At this point, it is scheduled, but we're not certain as to what the format will be. As you've seen, the PGA Tour is going to have their first, I'll call it, official post-COVID event in a couple of weeks, and it will be spectator only. And they have 4 of those, I believe, that are scheduled in a row there, and they have basically said that, that is the plan that they intend to have and see how it goes. And then based on that, they'll adjust the schedule after that. So that's what we know at this point, and we're just going to have to be flexible to see how it evolves.

Right. Right. Okay. And then just marketing, I guess, marketing around that. Any comments on just in general, I guess, marketing in this environment.

Yes. So we do think that in this environment, the Northern Trust brand resonates well. It's one that, again, we believe, is trusted by clients and viewed as being conservative. And so now is a good time to leverage that. So we are going to be launching a new promotional campaign in the U.S. around that focused on our wealth management business, trying to demonstrate our expertise, our strength through that. It's going to be called Navigate the Now. So trying to take what is a very long-term 130-year name recognition, but also demonstrate how it applies to the current environment that we're in. And I would say we're particularly optimistic on this, just given what we've seen on the digital front with some of the communications I talked about earlier. We've been doing multiple, multiple communications to clients and prospects in different forms through the last couple of months here, and we've seen a higher uptake in those. And maybe that's because there are more people that are frankly, sitting around their homes or apartments and have more time to listen to a webinar. And then as a result of that, it's just excellent information for us to be able to then follow up on what their needs are and tailor whether the advice or the opportunity that we might have to help them out. So that's going to be rolling out very shortly here, and we hope that it has a very positive impact.

Yes. And your brand obviously did a similar thing after the financial crisis, where you view it as a place of safety. And I know that resonated pretty well across wealth management in the years after the financial crisis as well. So probably a good time to leverage that, like you said. Maybe just shift a little longer term. Maybe just ambitions. What are your ambitions to expand your current capabilities in both Wealth Management and C&IS and Asset Servicing? Maybe talk about either new regions. I know you've done -- you've been working more on a less of a branch-intensive focus in Wealth Management and more -- you've been moving upstream in that and, obviously, more digital. But are there regions you'd still like to have a better presence in? And then maybe if you want to talk a little bit about some products, like FlexShares, obviously, it's been very successful within asset management. So maybe just some comments on that.

Sure. So as far as markets and market segments, I would say that -- although we definitely look to enter new market segments, we still feel like the greatest opportunity is to deepen our presence in existing segments. So if you just think about the largest wealth segments across the U.S. Again, there were a couple we weren't in. Philadelphia was an example, and we've established a presence there. So this is really still more about how do we increase our share of the growing markets, whether that's the Northeast or Silicon Valley or in Florida. And that's provided us with the growth that we've had and again, I think continues to demonstrate opportunity for us going forward. The one thing I would say, Brian, that's maybe in addition to that is instead of just thinking about market segments along the lines of either geography or level of wealth, we've also focused more recently much more in on what we would consider personas. So segments within the segments, whether that's family-owned businesses, whether that's corporate executives, entrepreneurs. And so we found that, that additional angle enables us to further tailor our capabilities for the marketplace there and again increase the presence and the penetration. As far as products, I'll shift a little bit to asset servicing, where I do think that what's happened here not only obviously has had an impact on us, but we talked about our clients. And more of our clients, particularly the asset managers, are looking at the opportunity to outsource more of their, I'll call, noncore activities. And while traditionally, that's I'll call it, back in middle office, and there's more of that, but there are other areas like outsourced trading or as we call it, integrated trading services, which we're seeing the highest level of demand for that type of service. And it integrates in very well with everything else that we're doing. And it also enables us to kind of further move up to what would be considered front office and analytical capabilities that we can provide. So again, a lot of opportunity around those types of what we would consider services or often get characterized as products.

Yes. That's a great run-through. I do have actually a couple of questions from the audience here just on some clarification on what you said about second quarter, Jason. Just on the balance sheet. The -- you mentioned the Fed fund -- the LIBOR to Fed funds been compressing. But with the same NII guidance, just to clarify your thinking, I guess, is that the balance sheet size is doing better. And maybe if you want to comment either on the -- better than you initially thought at least, comment maybe on the loan side of that. I think, Mike, you did mention that people were drawing some credit lines. So maybe if you can comment on loan balances quarter to date. And is that offsetting some of the spread compression that's a little bit more severe than initially thought.

Yes. And a lot of factors go into it. Mike did mention that loans were hanging in there pretty well. And so I think in general, if I were to sum up the balance sheet movement since first quarter, it would be across the board, volumes are down, but not to pre-crisis levels. And there has obviously been very significant move in what happened with -- if you look at what happened with LIBOR relative to where it ended the year at 176. It ended the quarter at 99 basis points. On the call, I think it was like 62 basis points. And here we are at 17 or 16. But we have had some offsetting circumstances. And we obviously were expecting LIBOR to decline. So not -- certainly not all of that reduction was a surprise. And then there are some other factors you expected more severe reductions, and those haven't materialized to date.

Right. Right. Okay. No, that's good. That's a good clarification. And then maybe just on -- maybe if we could talk about credit for a second. Just -- obviously, we have the $60 million provision in the first quarter and probably too early to say how second quarter is shaping up. We're already hearing some banks talk about, in general, provisions being in the same ballpark, depending, of course. So any color on how you're thinking about building the reserve as we're moving into the second quarter?

Well, 2 thoughts. One is -- the first quarter was a very good illustration of how in an environment where we're more reliant on macroeconomic outlooks, it is very tricky to predict where those outlooks are going to land at the end of a quarter, especially as we sit 5 weeks out, and I think some of the institutions, us included, we finished the quarter and then very shortly thereafter, the updates that we do internally would change. And even from where we sit today, even if we look at the -- even if we updated the assumptions that we talked about, there's so much more that goes into the ultimate outcome. There's a governance process. There's a sense of overlaying what we think are going to happen in different aspects of the economy. And so without going through all those things, certainly preliminary to provide an update on where our outlook plus all of those additional factors would land at the end of the quarter.

Yes. So it's still very much a macro-based environment as opposed to like a specific credit issue environment at this stage.

Yes. And I just -- I would remind people that a lot of our portfolio is -- it's more providing liquidity to our clients. But even then, we're -- so many of those different factors go into playing the ultimate outcome and what gets taken as a provision number. So it's just -- it's early to really to provide information on that.

Right. Right. That makes sense. And then maybe just talking about -- one question I've been getting from investors is for Northern for a little while here is the Value for Spend program. Obviously, you've achieved your targets there, but you've reiterated that this culture is ingrained across the employee base. So maybe if you can just talk about how you're seeing that still play out, especially in this environment as we go through the year. And the -- your view of driving that expense to trust fee ratio down more?

I'll start, and Mike may have final comments. But you -- can you hear me?

Yes. I can.

Got it. So the -- it's a culture -- the word that you mentioned really, Brian, it's really important, is culture. And we took Value for Spend, and we wanted to make sure that it was embedded in the culture. It drives a sense of urgency. It drives a sense of analysis. So much of what we're doing right now is embedding those components of a philosophy and to ensuring we continue that laser focus. And we've talked about the different ways we think about expenses, from inflation to productivity to growth-oriented expenses, to investments. And in each one of those buckets, there are areas that are less variable and there are areas that are more variable, some that are very macro-driven and some that are not. And a big part of what we were doing at -- when we were -- and hopefully, what we will look at as the heat of the crisis was to look at the components of our expenses that were more variable and ones that didn't -- weren't just susceptible to macro factors, the ones that were reflective of business factors where we could make an impact. And I feel good about the amount of time and effort we placed on that. And interestingly, it was not just on the operating expense side. We took the same approach on capital expenses. That takes longer to play through on the income statement, but we took that same level of discipline and precision through that process. And that's how we anticipate these things in the future. Mike?

Yes. I would just add to that, that when it comes to productivity, and it's something that I've been involved with and focused on for some time period, one of the most important factors to achieve it over time is creativity and trying to come up with new ways to think about the business and how you deliver your services. And so the reason why I mentioned that is because with this shock to the system overall, I think it's, in many ways, uncovered more creative ways to think about productivity. Have we had to invest in order to get 90% of our employees to work from home? Yes, which is what we've talked about here. You have to roll out laptops and strengthen the infrastructure. But having said that, it's also showed us our ability to operate in a work-from-home environment. There are the obvious implications of that with regard to real estate and what that means over time. So you may not -- you won't realize immediate savings on occupancy. But over time, it absolutely will shape how you think about those costs. I mentioned digitalization and the benefit from a self-service perspective. But in addition to that, there are tools that are available that allow you to determine the productivity of a group or of workers on an automated way, in an automated basis. And so that likewise presents opportunities to improve the productivity. So plenty of work. But to Jason's point, I think it's a combination of you need to be granular on it and really understand your cost drivers, and then you need to have a culture that is focused on constantly trying to be creative and innovative on how you generate productivity over time.

Yes. No, that makes total sense. And just one -- we're almost out of time here, but I mean if I can squeeze in one more question from the audience, and that's just on capital management. And it's certainly in this current environment. We've had some companies cut dividends. And maybe if you could just talk about the sustainability of your dividend and the growth over time? And with the CCAR process coming up, any comments on how -- any changes in that process might impact Northern, if at all?

Jason, you want to hit it?

Sure. Just unmuting, sorry. So a couple of thoughts. One, I know there's been a lot of talk recently about what will happen with dividends, in particular. We -- from our perspective, it's not just a unilateral decision that's being made by management. It's -- there are different stakeholders that weigh in effectively on that, ranging from the regulators ultimately definitely have a say, but also our Board of Directors is very involved in that process. And then a lot of the people on this phone call, the -- our investors. And so we're constantly thinking about those different approaches. I do think that the CCAR process this year, actually, in some ways, ironically might help. First of all, I think the Fed, all signs show that they're probably going to come back a little bit sooner than originally anticipated with responses, particularly around the stress capital buffer. And then, secondly, the approach they're taking of having the specific components of capital planning less bifurcated and thought of more as a holistic approach. It provides a little bit better of a planning approach for us to be able to look at how the company is doing. That said, even though Northern's in a position where we did come into the health crisis with stronger levels of capital in general and also, our view is that even though a lot of these macro factors have a very strong impact on revenue, the business model and the financial model are strong, and it enables us to continue to show strong return on equity levels, even despite all the headwinds that we're facing from the crisis and then coming into the recession.

Yes. That's great color on that. We are out of time. So I'd like to thank you both for being with us today. And I don't know if you have any closing comments you'd like to say?

Mike?

No. Appreciate everybody taking the time to spend an hour -- or 0.5 hour with us.

Yes. We really appreciate it. Thanks very much, and stay safe and well, and we will talk soon.

Thanks so much, Brian.

Thank you.

Take care, everybody.