Northern Trust Corporation (NTRS) Earnings Call Transcript & Summary

Great. Well, I think we'll get started with our next session. Thank you, everybody, for joining us. Hope everyone is still having productive day here at Goldman Sachs. It's my pleasure to introduce Mike O’Grady, CEO of Northern Trust; and Dave Fox, the firm's CFO. With about $14.5 trillion in custody assets and $1.8 trillion in assets under management. Northern Trust is one of the largest global custodians with unique capabilities in the ultra-high net worth space within the wealth management channel as well. Over the course of 2025, Northern continue to pivot the business towards more profitable areas of organic growth, delivered better-than-expected NII results while also remaining hyper-focused on operating expenses. So with lots going on in the business. Thank you guys for joining us. Always a pleasure to have you here this time with the year to get your thoughts into how you're wrapping up '25 and your early thoughts in '26. So we'll get to all of that. So thank you for being here.

Look, why don't we start kind of there, right? So over the course of '25, you've made several strategic shifts, including kind of leaning more into the more sort of profitable institutional growth managing the balance sheet really well, making also a number of leadership changes. As you look out into 2026, talk to us a little bit about your top priorities for the firm and also some of the key milestones we should be mindful of for next year?

Great. So once again, thanks for having us here, Alex. Always pleased to participate in your conference. And what I'd like to start it is actually to go back two years just because that's where we set out the One Northern Trust strategy and have been executing on that strategy for the last two years. And the strategy is centered on three strategic pillars: one, around optimizing growth; the second around strength and resiliency; and then the third around driving productivity. And over that time period, of course, it's all about execution of that. And I would say that we feel very good about the progress that we've made over the time period. If you look at it from an optimizing growth perspective, it was about how do we grow our wealth and asset management businesses faster. Very strong profitability, organic growth, but we would like to see it higher. And we'll talk a little bit more as we go forward, but the whole idea there is investing more in the way of resources in order to accelerate that growth rate. And at the same time, improving the profitability of the asset servicing business. So continuing to grow it, but moving the margins up from -- in the neighborhood of kind of the low 20s up into the high 20s. And once again, making progress on that front as well. A lot of progress on strengthening resiliency. We talked about some of the investments we were going to make in technology and building out the risk and control environment. All of that has proceeded well and feel like we're kind of on the back half of that part of the pillar. And then driving productivity, again, levels of productivity that we haven't achieved in the past, just meaning a higher percent of our expense base, which has given us both the capacity to make some of those investments, but also, as you talked about, bending the cost curve in a very disciplined way. So I feel very good about that, also trying to hit our target financial model. And over that 2-year time period, revenue growth on average about 7% over that time period, positive operating leverage of about 2 points on average for each of those 2 years. 13-plus percent ROEs, double-digit EPS growth. So hitting on that. But as we go into 2026, it's -- yes, those are the same three pillars, but how do we accelerate on those with a particular emphasis on growth and the productivity to fund that growth.

Got it. Okay. So we'll get into all of that. That's a good way to kind of set up the conversation. Maybe starting with the asset services business. Over the last several quarters, you really emphasized a sharper focus on profitable growth, even kind of the way you just described it now within the institutional servicing even if that means perhaps being more selective on kind of what type of business you're bringing on and perhaps what kind of lower return, lower margin business, you sort of let roll off. Help us think through what that sort of comes down to when we think about the multiyear fee growth algorithm in that business on a net basis?

Yes. So I think one way to think about the algorithm, if you will, would be three variables in the equation. The first being around retention, right? So we have this base of business. As you know, the nature of what we do for those institutional clients is very relationship-oriented, multiyear oriented recurring services and recurring business on that front. So high levels of retention, kind of high 90s on that front. Now that doesn't come easily. That's why we have to put so much in the way of service and capabilities to be able to retain that business. But there's a tremendous amount of power in having that recurring base and having to be at that kind of high 90s level. That also does entail certainly at times. Things are either going to break your way or against you from the perspective of consolidation of clients. So you can have two businesses, two plans, whatever it may be, that merge, we can win or we could lose on those, but that can affect that as well. And there's other situations, of course, where the client has grown, and that's great. But we do have to look at the pricing, a relationship that is economically attractive to both sides of that relation. So that's on the retention side. And just think about it this way, like one additional point of retention is the equivalent of one additional point of growth. You don't have a new client and in many ways, more attractive, more profitable.

And you guys are at around 90 you said and the goal is...

High 90s. Yes. And right. So do that, we have that, I would say, long track record on that front, particularly in the areas that we control. So not, truly I'll say, losing the client. The second variable, expanding client relationships. So roughly half of our new business comes from existing clients, doing more with existing clients. Some of that can just be from offering them additional services capabilities that we have. Some of it can be from the success of the client, the distributed growth of the model. So if you have won the client when they're a small asset manager, for example, but they are very successful and have flows in becoming much larger, that's going to expand the relationship on that front. And so we spend a lot of time trying to expand the relationships. It can be in capital markets. It's in asset management. So once again, the One Northern Trust strategy, that's a lot of that focus is not necessarily just new clients, but existing clients, how can we do more for them. And it's also this point, Alex, of if you have client relationships that are not attractive from a financial perspective, how can you make them more attractive by doing more for them? Or if you have to adjust the pricing, the other direction, that's what you need to do in order to get a balanced relationship. So it works on both sides. Maybe we've talked a little bit more recently about the fact that we want to make sure that we have the right profitability kind of across the portfolio of our clients. And then the third variable, certainly is winning new clients. And it's critical to the long-term sustainability and health of the business to win brand-new clients. And on that front, you're in the competitive marketplace, right? So you're likely either taking that client over from a competitor or winning a new entity, if you will, regardless the process to win is highly competitive, right? And so that's where we've talked a lot about ensuring that the new business that we win is attractive, accretive right out of the gate. And you might say, like, why wouldn't that always be the case? Well, some of it is because, one, you're in a competitive marketplace, so you don't know how others are, say, bidding the new client, but also with long-term client relationships, often, there's an investment period before you get to the level of profitability that you're looking for. And what we've been saying is, we, over the last several years, have built out particularly for the asset manager side of the business, kind of the full footprint for that business. And some of those clients were more investment-oriented clients, just meaning taking them on at lower margins so that we can build out the capability and move them up to be more attractive from a profitability perspective. Now that we have it built out, we're not doing, I'll say, nearly as many investments on that front. We want it to be profitable from the beginning, both in the types of clients. So you've seen kind of a greater lean towards asset owners, which are just higher margin clients for us overall. But also, you've seen it on the services that we offer. So certain capabilities just by their nature, are lower margin. You take those on in the beginning with the expectation you can once again expand the relationship later. And what we're saying is we're not willing to make as many bets on that front. We want that new book to be accretive right from the beginning.

I got you. So in terms of, I guess, what it means for organic growth in that part of the model, in the past, we talked about like kind of low to mid-single-digit organic growth. I think on the wealth side, it was a little different, but like on the institutional side, does this materially change that? Should we still kind of be in that ZIP code? Or again, does that mean it just kind of comes down to that.

It's close -- it may come down a little bit. I mean, frankly, we've still seen a lot of opportunities that have been very successful with the screen and this approach to it. That said, we do understand that we're taking the risk, if you will, of not winning as many new opportunities because of that, I'll call it, price discipline.

Yes. But then the upside to that, obviously, is like the incremental margin on the business that you do bring in should be significantly higher than in the -- and I know you alluded to that in a couple of places, but maybe we'll try to put a bow around that discussion. So if I look at the average servicing platform, margin is in mid-20s, you guys are hoping to obviously get that higher and really in the context of the whole firm moving in to kind of 30%-plus pretax margin. Where are you in that journey? How long do you think it will take you guys to get the margin in the asset servicing side of the business to a level that's more appropriate?

Yes. I would say we have a couple more years to get it to that high 20s level that we're targeting. Nice improvement this year, but it will take a couple more years of that type of progress to get it to where we think that's the appropriate margin.

Got it. Okay. That helps. All right. Let's pivot a little bit. We spent a decent amount of time over the last two days talking about the digital asset ecosystem and it kind of hits financial services in a number of different ways. So I was hoping to get your perspective how that might affect a number of verticals I could see how it could be relevant in the, obviously, traditional custody space, how that could be relevant on the investment management side and some of the tokenization of money market funds. So evolution of the space, the role you guys see Northern playing there, any of that particular needle moving over the next 2, 3 years or not worth talking about?

Yes, It's worth talking about. I mean, obviously, it's an exciting time with digital assets and what's happening. And I'll say the marketplace is moving very quickly. And part of that is because the regulatory framework and environment is moving quickly now too. And I think about it in kind of two ways or two buckets. One is capabilities and then the other is commercialization. On the capabilities front, with the role that we have with our large, particularly institutional investor clients, we have to have the capabilities for them to interact in the capital markets. And so we can think -- before digital assets, you could think of other capital markets innovations, which were new and require different administration custody and processing. So think about like derivatives and all types of new instruments, we have to figure out how to do that for the clients. This is the same thing. So if it's -- whether it's stablecoins or tokenized assets, we have to have the capability to do that. Where we've been investing over the years here is making sure that, that an interoperable platform, if you will. In other words, it can be both digital and a part of the traditional platform that we do have so that we can provide those services to the clients. Importantly, the other side is the commercialization. To your point, are there opportunities to generate new revenue, new revenue streams from that. And that's where I think with tokenization, there will be opportunities because different assets or asset classes can be tokenized in such a way that there will be new services required for it. One example would be on the asset management side, for example, tokenizing a money market fund which we would look to do. And you can also see, as you know, there's so many other types of assets that right now are not really even kind of tradable or liquid, but in a tokenized form, could do that. It could be that way. And as a result, it could be a new type of fund or service we have to provide to that fund to be able to do it. If you said, okay, project out or forecast those revenues, that's the part where I would say too early to determine what that is, build out the capabilities and try to be innovative with what some of the opportunities on the commercialize...

How far in this capabilities build-out process are you guys? And is that sort of embedded in your overall expense framework as you think about areas where you need to kind of deploy incremental investments?

Yes. So I would say that we have tried to be, as you would expect, very targeted in the investments we're making there and the capabilities. That's a big part of how we have to approach everything, right? We're not in a position where we can try everything and put big dollars to it and hope it works out. So that's the way we've been very focused. If you've looked at some of the examples where we've done this, so tokenized carbon credit capability right? So it's an area where, hey, we can differentiate ourselves on this front, and it's not going to be a multi-hundred million dollar investment to be able to do that. And where I would say from a journey perspective on it, a lot of the activity so far has been kind of private blockchain, if you will. And where we're moving now is public blockchain. So it's going to require some investment to get there to be able to do that, but that's the next big stage, and we're very much in that right now. And that's in the marketplace, but also within Northern Trust.

Got it. Okay. Perfect. All right. Let's shift gears, spend a few minutes on the wealth business. It continues to be in a really, really important business for you guys, highly profitable that incremental disclosure has been helpful on just how well the margins held up in that business for some time. But at the same time, it's a really competitive space. And a lot of companies that I cover on the pure wealth side of things, continue to talk about going up market, going after the more high-end net worth end of the well spectrum. How do you defend your market share there? How do you think about organic growth in that business and looking at them both kind of the traditional sort of high net worth business as well as the GFO business?

Sure. So I think that's the right place to start, which is thinking about the marketplace and as you point out, like there are multiple tiers or portions of the market. And historical -- we cover most of those segments of the marketplace, okay? Where we've been the strongest is at the highest end. So if you start at the highest with Global Family Office, we have differentiated capabilities on that front, largely because of the integration of the businesses that we're in. So being in the asset servicing business, having those capabilities to deliver to family offices that want an institutional offering. But it also is differentiating with wealth management expertise at that level. So the trust in the state type experts. And on the asset management front, knowing what Global family offices want from an asset manager, so being able to provide OCIO specifically for the needs of family offices. So that's where we've been differentiated the most. And to your point, what we're trying to do then is use those capabilities and go down to the additional tiers in a more differentiated way. So over the last year, where we spent Time is What we've called Family Office Services. So basically on that front, saying, "Take those family office capabilities but provide them to ultra-high net worth families that may not have a family office, but want the capabilities". So think about like hybrid family office or virtual family office capabilities. And there, it starts with, I'll say, listening and doing the diagnostic as to what are the needs of that tier or those sets of clients. Once again, that has been very successful so far, much more to go because not every ultra-high net worth family is going to necessarily want all of those services. So it's a question of like how do you curate those in a way that fits their needs. And as we go into 2026, a lot of the focus then is going to be kind of the tiers below that, being able to differentiate more with what the needs are for those types of clients. And that -- it's more than just saying the services part or the product aspect of it but it's actually saying everything down to what type of technology platform should they have for a segment that doesn't have all of those complex needs so that we can compete even more effectively.

So really kind of locking in the client with extra capabilities as you kind of trickle that down to the...

Exactly.

Got it. SP1 Okay. Look, another important theme across the wealth space, which has been not surprising to you guys has been alts. We spent quite a bit of time on this theme as well. Talk to us a little bit about what percentage of your high net worth business even has an allocation to private markets. And as the world continues to shift, towards more assets going into the wealth space among privates, how are you thinking about that revenue opportunity for Northern Trust? Obviously, you have some capabilities internally. I imagine it's going to be a mix between your sort of proprietary products from 50 South Capital, maybe third party? How do you balance those two out? And how meaningful a revenue driver do you think that could be?

Sure. So first, just to talk about the opportunity obviously tremendously large market already, but one that's growing at a higher rate. And so in that sense, big opportunity. And then when you just start to think about from a Northern Trust perspective, once again, we cover all of those tiers of clients and the need and use of alternative is very different as you go through those tiers. So once again, at the highest level with Global Family Office, much higher allocations. Now a lot of those allocations were providing the custody, but we're not actually providing the asset management for alternatives. But it's still an opportunity. We know where the dollars are, we know where the opportunities are. We just have to be able to provide the right private capital investments on that front. So that's at that end. And then if you said below that, $500 billion in total of assets under management. Again, it's going to be different for a trust that has been set up for a particular purpose versus an ultra-high net worth family where the wealth is still growing, and they should have a higher allocation to alternatives. If you look at it overall, the overall allocation is below 5% on that $500 billion. So that just gives you an indication of the upside opportunity to the extent that we can provide the capabilities to do that. And I think about it in a couple of ways. The capability part, you summarized it well there, but we've had 50 South as a capability for 25 years, and their primary client base is our wealth management client base, right? And they are providing products that are tailored the needs of that wealth client base. So it can be fund to funds and it can be other more tailored alternatives that fit for that client base. That will continue to grow. They doubled the capital raise that they did this year from 2024. So it has momentum on that one. And the key there is just to continue to innovate with what's best for that wealth client base. So you'll see more of the kind of semi-liquid and other types of private alternatives that fit with the needs of our wealth management clients. That said, we want to make sure we're providing the full asset to the clients. That's what we call wealth management alternatives or WM Alt, and that's where we're putting the third-party managers on a platform and then we're curating for the client base. And there, in 2025, we'll more than have doubled the number of funds that we put on to the platform for that year. And so -- and yet, there's still the upside to do even more next year to provide more selection for the client bases. So again, the key is going to be, yes, have the core building blocks, but provide differentiated opportunities. And we actually can leverage some of the relationships that 50 South has over a long time period, to do one-off funds with some of those managers that are in particular sectors or capabilities on that front. The last thing I would say on the capability front there is it's more than just say, do you have the product and it all happens, right? You have to have the education, the technology platform, those foundational elements to be able to make that client experience, not only the investment performance, but the experience overall, something that's very positive and favorable, and we've made a lot of advances in the last year on that.

Yes. No, it requires a lot of handholding and advisers need that and may need that access. For the third-party products that are coming on to your platform, would you say that's a typical fee arrangement, meaning the GP pays you guys for placing the product on the platform? How does the commercial model work?

It depends on the specific circumstances on it. But generally speaking, for us, there is just a fee that we charge as a part of a client utilizing the alternatives platform, if you will. There are different models on how the economics could work.

Okay. Fair enough. All right. Why don't we shift gears a little bit. David, I'll bring you into the conversation. Let's talk about the financials. Q4 is almost at its tail end. So a good time of the year to give us a bit of an update on how things at tracking towards your expectations. And just to kind of remind everybody, you talked about NII finishing the year up mid- to high single digits year-over-year, implying Q4 flat to maybe marginally up versus Q3 levels. And you obviously talked about expenses being within the 5% range for the year. So let's start there and any other updates you want to share with us?

So NII is cyclical, right? And so when you think about what I talked about last time, the deposit levels drive most of that -- most of the NII results. And so last quarter is typically a seasonally low quarter for us. And when I gave the guide, I was basically saying that I felt as if we're going to have a recovery going into Q4. So what I would tell you is that if anything, I've had stronger conviction around the guide that I gave you before, and they have responded well. Deposit levels have responded well. In addition to that, we've taken other measures in the quarter, whether it's back book repricing, securities portfolio and other issues that we've tried to address on our deposit pricing to protect that going into it. So I would just say I would reaffirm strongly the guidance that I gave you before going into the fourth quarter for NII. On expenses, listen, the 5% or below is has been with me the entire year. I'll be very happy when it's over. But I think we've totally changed the way we do our expense planning. It's very dynamic. And so I continue to be committed to that below 5% for this year. And there's nothing I see on the horizon that would cause me to change that, if anything, the dollar strengthened a bit this quarter. So that headwind went away. So strong on both, okay, going forward on both those guys.

Okay. Anything notable on the fee side for Q4, again, the quarter is...

Yes, I mean on the fee side, but our lag fee structure that we've got in asset servicing, we have a month lag in wealth management. You did see a pretty big sequential increase in the markets from June 30 to September 30, right? So that's going to be very positive, right, for us. Pipelines are strong. The fee -- the restructuring we talked about in the last quarter within the institutional side will have no impact in the fourth quarter on fees themselves, right? So I think fourth quarter should see some reasonably strong fee progression.

Got it. Okay. And then when we think about the drivers of NII to your point, you feel really good about -- I guess you said Q4 will be flat to marginally up quarter-over-quarter. So it's probably fair to assume it's more up than flat just given the sort of confidence you just alluded to in the...

You can do the math, we were up 9%, I think, year-to-date as of September 30 and so you can do the math from there in terms of...

How much of the improvement in deposit base in Q4 you think is truly seasonal versus something that you're seeing kind of on the core organic growth side of the business that might sustain more elevated deposit level as we look out into 2026 as a jumping off point for '26 NII?

Yes. Like I said, the pipeline is strong and it tends to grow with the underlying business. So part of the deposit growth will definitely be a function of some of the new business that we brought in, in the quarter. I also just think it's a function of -- if you look at the entire return we get in NII, deposit growth isn't the entire story, right? So it's the biggest component of it. But there's a lot we've been doing around sweating the assets that we get. I mean you think about the cash we generate in the asset servicing business, we have really put a concerted effort around making sure that we price our deposits appropriately and that we invest the money wisely and we take advantage of opportunities in the marketplace to really do more there. And so I think folks have been surprised at our NIM levels and how we've been able to manage that, that's been intentional, right? So it isn't just deposits. It's also a whole bunch of other measures that we're taking including currencies and other things to maximize that balance sheet potential.

I got you. So I guess when you think about '26, just to build on that a bit, on the last quarter's call, I think you talked about NII will be flat up, marginally, 1% to 2% year-over-year in '26 to '25. A lot of reasons behind it is things you just sort of talked about around the proactive actions you've taken around the balance sheet. I think within that, you also talked about two rate cuts. We'll see what happens today. We'll see what the forward curve has done. How do you feel about that original guidance if you were to get more than two rate cuts from here?

So actually it was three rate cuts if you think about it, I mean, because December is a rate cut potentially today. okay? So there's December, and that will have an impact to the entire year. Then we're anticipating March and September, right, two more rate cuts. So actually it's three when I talked originally about it. We think we've got mitigating stuff that we can do, and that's why I gave you sort of a flat to make sure that we don't have a dip going forward. Now you've got to make a lot of assumptions if you're talking about a full year projection. You've got to make assumptions around the yield curve and everything else and deposit levels. We also think we're going to have some growth in our business, in our pipeline, right? They'll drive higher deposits. And we're also not seeing a full year of effect of some of the deposit pricing stuff that we took. That's continuing. That isn't over, right? So we're kind of reaching the end of it. But at the end of the day, we haven't lapped it yet, right? You've got that coming into it. We've got all the back book repricing going to do, we can reinvest that at a higher yield going forward. So all these other mitigating factors, right? We certainly think there's upside there. But at the end of the day, I know I can reach that sort of flat if everything is normalized going forward. with some upside potential.

Got it. Okay. Let's hit on expenses as well. You lived with sub-5% all year. There's going to be another number you're going to have to live with in '26. So if you'd like to share that with us, that will be helpful. But bigger picture, I know everything we talked about today, obviously continues to focus on driving margins, driving efficiency throughout the ecosystem. What's the plan on that, again, near term into '26? What kind of growth expectation should we think about?

We did it little bit different. We haven't locked our plan in yet for '26, but we did a little bit of a different planning process this time in the sense that we -- and Mike talked about it. We started with productivity first, right? And then we looked at our investment. We want to make in-year investments expenses. And then basically, that spits out of expense growth, right? Then we went back and looked at it again and prioritized the investments. And then we try to drive higher productivity going into '26, right? So they're all interlinked, if you will. What I will say is that we are still planning on a muted environment going into '26. We're not expecting or anticipating or relying upon the markets to basically bolster our results, right? So we still have to operate within a pretty tight band on expenses, right? Now if the markets are in our back and we see great growth opportunities and things like that, we can always reassess, but we've put this dynamic planning process together for a reason. We can look at it every quarter, right? And we can basically say, what's going on in the marketplace? How is the business going and adjust. We have a very detailed list of our capital expenses and our investments we can make during the course of the year, and we can toggle and be flexible on that, right? But we've built the discipline on the expense side to know how to flex up or down, right? So to give you an exact number, it's really a positive operating leverage mortality that we've got right now, right? And Mike talked about it. We've had consistent positive operating leverage. That's going to be our North Star at the end of the day. We don't want to starve our growth businesses from key investments going forward. But we also want to have that discipline to say, if the markets are muted, we had a liberation Day earlier this year, which was -- S&P got down to almost 5,000. We have to be in a position to be able to maintain the rigor around expenses, right? So we're going to maintain that rigor and we know what the levers are, and we know how to pull them.

Got it. So I think you put it well, like North Star being positive operating leverage and not to paraphrase, but it sounds like you guys feel you could still get there even when NII is flat in '26 versus '25 and maybe a little bit of wiggle room around like the market activity?

Absolutely.

Yes. Okay. Great. We got about a minute left on the clock, so maybe just real quick on capital return priorities as well. I know it's also important you guys accelerated that opportunistically when you can, as you think about '26, any thoughts on the buybacks?

Yes. And so '25, just to finish off on '25, I think what I said before, was we think we're at 110% as of the third quarter, and we're driving towards at least 100% for the year, right? Now capital, I always get this question, and Mike and I talk about it all the time, there's probably about 7 or 8 different inputs into capital, right? So when you think about your loan activity, you think about your ROE, you think about potential M&A opportunities, you think about your buffer you want to have over the G-SIBs, all that stuff kind of factors into it. But at the end of the day, we'd hope to be able to kind of keep the same clip we had in '25 to the extent that, that makes sense relative to everything else we're looking at. We like the buffer that we've got, right? Now it's 11% to 12%. We've been more in the 12s in the 11s. If it leaks into the 11s, that's not a problem for us, right? So again, hard to land on the head of a pin because $700 million of RWA is equal to 0.1. And that can happen really quickly in our business, given the size of our client base.

That's right. Great. Okay. Well, great note to leave it on. Thank you both very much. I appreciate you guys for participating again this year.

Great. Thank you, Alex.