Northern Trust Corporation (NTRS) Earnings Call Transcript & Summary

Great. For those that weren't in the morning session -- the breakfast session, I'm Jason Goldberg. I cover the U.S. large-cap bank stocks here at Barclays. Thank you for coming for our 24th Annual Global Financial Services Conference. We've got a very strong lineup of banks basically running all day in this room and very pleased to kick it off with Northern Trust. We have both Dave Fox, Chief Financial Officer; and Jason Tyler, President of Wealth Management. Gentlemen, thanks for making the trip.

Thanks, Jason. All right. So I also heard record number of people at this conference, 24th year. Congratulations. That's a big deal.

Thank you. It is. Thank you, I appreciate that.

It's going exactly 2 years actually at this conference when Northern announced a leadership realignment with Dave succeeding Jason as CFO and Jason becoming President of Wealth Management, which includes Global Family Office business that Dave previously led. So maybe just looking back, what do each of you view as the most meaningful change in Northern Trust trajectory since then? How has this cross-pollination influenced the firm, how the firm allocates capital, evaluates opportunities? And perhaps can you just discuss the One Northern Trust strategy from both a corporate financial perspective and a business unit growth perspective.

Before we dig in, I'll let Dave should kick off and do the corporate side. I'll just say it was really funny. 2 years ago, we were here, and we did meetings all day, and we had the press release lined up to be distributed as we came off stage. And the timing was really funny because if we had started this right after the market closed, then I think it was 20 minutes. We could have -- we actually were thinking about announcing it so that we could talk about it on stage. But I promise, at least to my knowledge, there is no press release about org change teed up for this afternoon.

Yes. No, I mean, I think from the corporate end, the idea behind One Northern was really to take a lot of the concepts we developed for Global Family Office, which sort of, sits at the center of the Venn diagram of all our businesses and take that, sort of, DNA and knowledge and push it out so that a lot of our clients could benefit from the same kind of synergy across all the businesses. And ironically, Jason and I actually put together a large part of that when he was running distribution within asset management. So it's been a really iterative process, but I think it's been great for the firm overall. So I think that's one of the biggest changes. The second big change really has been how we allocate capital and how we look at productivity and expense. And I think all credit to the entire management team at Northern for, kind of, getting on board with this, but it's really a focus of figuring out productivity first. And once you've got that, sort of, bucket nailed down, then you can inform how much you can invest in a given year, and then that will inform how much expense growth you're going to get. And so a lot of that discipline has been driven over the last couple of years, which is why I think you've seen that we've been pretty good at keeping our expenses, sort of, where we want them to be.

And then we won't both answer every question, but since you asked specifically on this one, I think people have heard us talk about One Northern. And so we're at least trying to illustrate for investors, what does that really mean practically for the business. And so a few things. One is, I think, even as you think about our alternatives business, our clients were telling us they wanted to be doing more in alternatives. And we had capabilities there, but they wanted us to accelerate. We didn't have to go to the market and establish new partnerships. Our internal proprietary 50 South business is one of the industry leaders in alts, largely in fund of funds, but also very strong in doing alternatives advisory for the very upper end of our client base, including GFO business, which Dave ran for 9 years. And so that's a good example of how we've come together. And we've had really successful launches coming out of that with their partnerships with managers being able to leverage the fact that they've got such a strong captive client base internally. And so that's been really helpful. And then even in marketing. And so we work really hard on the upper end of the market, but we do a lot of digital marketing as well. There are a lot of people that are selling their business and they're thinking about what to do once that liquidity takes place. They may not know a list of 2 or 3 or 4 firms or who's the best and so been working internally with our marketing team to aggressively go after that space. So people are able to find us when they're doing research, and it's changed a lot. It's not just doing URL searches anymore. Now LLMs are so much more important. And so that's been a key component of what we've been doing. And then even in our other corporate groups, HR, we've been ramping up very aggressively how we're thinking about recruiting and even retaining talent.

I guess maybe a follow-up, Jason, right, you're 2 years into this new role. Maybe just talk about your confidence to continue to grow this business.

Yes. So maybe I'll answer that in one way more qualitatively and then in another more quantitatively. Qualitatively, what's jumped out at me in the last 2 years is that both clients and -- clients and also potential partners, they want to be part of Northern Trust. And so last week, I was on the phone with a client, very sophisticated, very large client who runs a financial services company. I called them to give them a really small update on something that he and I have been talking about. What I thought was going to be a 30-second conversation. He said, "Look, while I have you, I want to run something by you." He's been thinking about changing the dynamics of the business to bring somebody else in. It turns into a 40-minute conversation and me introducing him to a couple of subject matter experts in the company. He calls me 2 days later and says, this is the expertise that I want and also the discretion that I want to have. And I didn't want to tell this to investment banks, but because I know they'd be following up aggressively to try and get me to do a transaction, this is exactly what I was looking for. And I have those conversations a lot. It's been really pleasantly -- I shouldn't say surprising, but it's just every week, I have something like that, that gives me appreciation for the strength of the brand. And then even from a talent perspective, I spend a lot of time talking to people that are thinking about coming to Northern. And I was talking to 2 people last week, and they're saying we thought about a lot of places that we want to work together, but we both came to the conclusion that there's one firm in the industry that we want to work for, and it's Northern. And so that's just -- when you're not competing against 10 firms, but you're competing against 2 or 1 or in some instances, 0, that's -- I just think that's really powerful. And then secondly, if I think about it more quantitatively, some of the things that we do that have given me more confidence. One is FOS, which Jason, I know you're going to want to talk about more, but it has been -- it is a real differentiator for us in the market. And that gives -- the acceleration of that and how we're utilizing it and the way we're training, it just gives me really strong optimism about what we're going to be able to do. And then even from a training perspective. And then secondly, just the partnership. I mean, Dave -- it's one of the advantages of having somebody like Dave in the CFO role. He's run businesses and everybody on our management team is committed to growing wealth. And so I think we're at the point now where we've worked on the strategy. We feel like we've aligned around a handful of really important initiatives, early results from some of those and now is the time for us to be investing much more aggressively in them.

I guess at the start of the year, Mike highlighted 4 growth priorities for Wealth Management. And maybe just quickly, run through each. And the first one you touched on, leveraging leading capabilities in the upper tier wealth market. And you have this new FOS initiative. If those not familiar with it, it's Family Office Solutions, which basically extends what you're doing at the ultra, ultra-high net worth gamut here. Just maybe talk through how you're scaling this model and the opportunity you see.

Yes. And thanks for doing an accurate short depiction of it. I'll double-click just a little bit because I should have explained it more. So at the upper, upper end of the market, a lot of times the family say, okay, I'm ready to have a family office. I don't want to do bill pay. I need to do sleeve accounting. I have to have investment reporting that's more customized. I need to think about security for my family. I need to think about how we're investing in alternatives. And so I have to have a family office to do all those things. Well, we -- that's our -- that's basically the core of what our business is in the Family Office business is capturing those assets, but helping clients do all those things. And we realize we can take that and we can help others that don't want a family office still get those services. And so a lot of times, families will say, well, I don't want to do all of those things. I don't want to have another 10 employees, but I want to save time in my life and be more accurate with how I'm doing those things. And so FOS is all about taking that breadth of services and being able to allocate it to clients. And so it's effectively a -- it's an outsourced family office. It's a multifamily office. That's the way you should think about it. Our clients then say, well, some say, yes, I do have a family office, it's Northern Trust, or some say, I don't have a family office, but I outsource all the services I want to Northern Trust. Either way, it's the same thing. They're selecting among the 50, 60 services that a family office will traditionally do, and they're saying, we're going to have Northern do that for us and it's been very successful. We've started at the very top end of our client base, frankly, clients that have $100 million, $200 million, $500 million to a client. I'm very close to that's got $700 million in assets, and he says, I absolutely don't want a family office. Well, this service is perfect for somebody like that. And so we've been taking it and also a key component of it is we're training the advisers that are in that group on all of those different 50, 60 services and on everything that's happening in the market. And so they're able to go to their clients and act not as a subject matter expert for investing or banking or trust and fiduciary, but they're able to effectively be a CEO of multiple family offices using all the services that Northern has to bear. And it's -- when we're bringing that approach to clients, prospects, we're winning at an incredibly high rate in pitches. And it's gotten to the point where now we're converting a lot of our existing clients into that. And so the big thing, Jason, at this point is how do we scale it fast enough and make sure we maintain the quality of the training, the quality of the advisers. But at the same time, the need there is obviously very, very heavy.

Got it. And then the second priority was investing in high-performing talent and last year unified the sales across Global Family Office and the regional markets. It also like you stepped up hiring, kind of, reading about more hiring last month in New York were a couple. So maybe just talk to what's changed there, the competitive dynamic and kind of what differentiates Northern?

Yes. It's -- it's a talent battle. I don't want to use the word war because it's not fair to service members, but the battle is just brutal. I mean -- and everybody wants to hire somebody from Northern Trust. I feel like it's a nice story to tell inside any organization to say that you hired somebody. So we have to play defense really well. And at the same time, we also -- we've got to play offense. We can't win by keeping our retention or turnover very low and recruiting just a little bit above that. We've got to be able to win by also aggressively hiring, again, highest quality talent in the marketplace. And so one of the things we did to help illustrate our strategy for organic growth was to separate our initiatives to categorize them into 3 different buckets. The first is retain. We've got to retain clients. And frankly, we don't have a retention problem. But the first thing is you know our culture well enough to know we've got to maintain our clients. It's got to be primary focused. Two is we've got to acquire. We've got acquiring clients at a higher -- so many of our initiatives are around finding clients at the high level. And then the third is expanding what we're doing with those clients. That comes to things like alternatives. It comes to things like what we're doing in FOS for our existing client base. And you can take that same framework of retain, acquire, expand and you can do the same thing with partners and with talent. And that's what we've done. We've taken our -- we've said we want to have aggressive initiatives in how we retain talent, how we acquire it and what we're doing to develop it. And so in each one of those effectively 6 categories, clients, partners, retain, acquire, expand, there's a list of initiatives. And in talent, some of the big ones from an acquisition perspective, we're being much more aggressive initiating conversations with folks externally that you mentioned. Historically, we haven't looked to go get teams of individuals to come to Northern. We said it's probably just not going to -- it's probably not -- it's riskier from a culture perspective. But we feel like we're at a point now, our culture is strong enough. We can do that. We can bring on small groups of people and certainly individuals. And we also created a new role because we realized a lot of the market is contained of individuals that they want to stay close to their clients. And we frankly did not have a role where somebody could come to Northern and be part of our overall infrastructure, our company, our culture and hang on to those clients. We would tend to say, if you bring them in, that's great, but we're going to transition them to a team. We've created this role of a director role. There's a level in FOS and a level in the rest of private wealth. And so you tell there's a lot of different initiatives across those 6 different categories, all geared toward helping the wealth business grow faster.

And I guess the third priority was expand the investment solutions suite. You touched on alternatives. Obviously, a big focus across the industry. Maybe just describe some of the products and distribution enhancements you made, just how you're competing in that space.

Yes. So I mean, channels is important. And frankly, it's where we don't have as many client acquisition channels as our peers. We do not have an investment bank. We do not have a mortgage company. We don't have employee benefits management. We don't have a commercial bank. There are so many different channels that our peers are now. And you hear them in their earnings calls talking about how they're successfully moving clients there. So we do have -- we've got the ability, again, to be very good from a digital perspective. But to match our brand, it really comes down to what the industry refers to as centers of influence. These are -- for us, they're trust and estate attorneys. They're the very highest quality tax consultants. And as they're dealing with their clients, even if they're going through a liquidity -- if their client is going through a liquidity event, we often get a phone call late in the process saying, our clients being pitched by this other group, but we've told them they should really meet with you. And so we're focusing a lot on that effort around those centers of influence. We should be best at that. Given our model, we should be better than everyone else in the industry. So -- and we can't just hope. We hired someone to run that effort who's former CEO of a company that operates in the upper-end wealth space and she's built that -- she's building out a team. She's building out an effort. We're having a large conference in Chicago for our top COIs, not in 2028, it's tomorrow, and it's Wednesday. These are the things -- so we're going much faster, much more aggressively on things like this to make sure that those COIs realize that we appreciate what they're doing. We want to make sure that we're also, in turn, giving back to them. And so we're not going to have 15 channels, but the handful that we do have, we're going to be very aggressive about it. And even events, that's a way for clients are a channel for us to get new clients. That's where one of our biggest referral networks is our clients. And so we've got to treat them and show our appreciation of them and what they're doing. We've had very high-quality new events all over the country in the last 2 years. And we're investing in those from a quality perspective and bring clients together so they can hear about what's happening in the industry and also feel the appreciation that we have for them and what they're doing.

Got it. I guess as we approach the halfway point, Dave, we are going to get you involved in some of the financial stuff. Maybe start with deposits, obviously, have a lot of attention lately. For Northern in both 1Q and 2Q, you talked about higher-than-expected institutional deposits. I know 3Q has been historically seasonally the weakest quarter. Just maybe against that backdrop, how is the current quarter shaping up in terms of balance mix, cost?

Yes. So it's interesting. We do these conferences and we reported earnings not that long ago. So not that much has really changed in terms of the outlook. and S&P has barely moved. And the outlook has, kind of, tracked exactly where we thought it would track. And our jumping off point was artificially high at $128 million, I think $1 billion was the average. And so we expect a seasonal downturn during this quarter, and that's tracked exactly the way we thought it would track, and we'll see how it bounces back towards the remainder of the year. But I would just say that it's generally in line with what I thought it was going to do.

Got it. And that's balances, I guess anything in terms of mix or cost or anything you'd flag? I know the rates are going to change maybe tomorrow, maybe...

Yes. And that certainly wouldn't affect us the next quarter as much as it depends when and how much, right? So if you think about our -- the rate environment and the rule of thumb for us is every 25 basis point increase in the U.S. translates into about $3 million to $4 million a quarter of NII benefit for us. So think of it that way, if it's 25 basis points of all currencies, it's more like $5 million to $6 million. So think about it that way, but it needs to be in place, right? So it isn't in place yet. So we haven't felt any of that.

Got it. I guess on NII, you increased your net interest income outlook to 9% to 10% year-over-year in the July call. It was mid-single digits prior. And that outlook assumes a relatively stable interest rate environment. I guess you talked about, kind of, what current rate moves will be. But I guess as you think about the trajectory into next year, maybe talk to some of the puts and takes around NII.

Yes. Well, we obviously did the securities repositioning, which will obviously have an impact, and you guys can do the math around that. We still have a fair amount of repricing to do on our back book. So that's going to come out again. We have lapped some of our deposit pricing, although we still continue to be very disciplined around that. And then the deposits tend to grow with the business, right? And we're not seeing any pressure on institutional deposits, and we're getting a lot of questions around as rates go up, is that going to change, et cetera. A lot of our clients are very sticky operational deposits. And so from that perspective, when we have these, sort of, jumps in a given quarter, that's usually episodic. It's one particular large institutional client putting money with us. So we think that's going to continue to be the case in the sense that our clients are going to need to have those operational deposits there and our business pipeline is good. So I think the year-over-year comparisons get tougher as you get into next year because we had such an amazing first half of this year. But ultimately, there should still be growth in the portfolio on NII. Just at this point, it's really difficult to say -- the extent to which it will be there.

So you still feel good about up to 9% to 10% this year and then additional growth into '27?

Yes. Yes.

For sure. I know you guys don't manage the net interest margin, but I do get asked about it all the time. Yours kind of been bouncing around like up 11 basis points in the fourth quarter last year, then down 6 in the first quarter, and up 9 in the second quarter. Maybe just talk to how we should think about it from here, particularly in the context of an ever-changing forward curve.

Yes. Well, there was a -- it went down in that quarter because we had an extremely large institutional deposit that was very aggressively priced. And I say large, I mean large. And so we had another one come in, too. But I think generally speaking, somewhere between the 2 quarters would probably be the way to think about it. So I think we've gotten close to a normalized level. But 175 to 180 kind of range, depending again on NIB, right? That's, sort of, the big swing factor as well, and that popped up a bit. So -- but generally speaking, it's those idiosyncratic large deposits from the institutional side that come for like 2, 3 weeks that you can't really budget for, they definitely impact the NIM during that period of time.

I guess maybe looking out against the backdrop of the Fed potentially tightening, just how do you think about deposit betas? I think a lot of the institutional even wealth stuff is indexed. But just is it -- should it be similar to what we saw on the down cycle? And just how are you thinking about that?

Higher rates are good, generally speaking. And then I think if you do a blended beta for us, it's going to be around 80%, right? Wealth is obviously lower than institutional. Institutional tends to go up pretty quickly. Assets are going to reprice faster than liabilities. So I think on the whole, that's a good environment for us. So -- and I'm not too worried about a down rate environment right now and maybe you are, but I don't think we're going to be doing that anytime soon.