Next, fireside chat. We're very pleased to have the folks, the guys from Northern Trust, which many of you know is the 18th largest commercial bank in the U.S. It has about $151 billion in assets. More importantly, it has $11.9 trillion of assets under custody. And similar to its peers, it has 71% of its revenues coming from fees, which is a real distinguishing factor between traditional commercial banks. Also, their CET1 ratio is just over 11% at 11.3%. And prior to this fireside chat, we had M&T talking, and I always like to tell investors that during the financial crisis, out of the top 20 banks, there was only two banks that didn't cut their dividends. Northern Trust was one, and M&T was the other. But they're just Northern is a real high-quality company, as we all know.
But with me on my far right is Jason Tyler, which many of you know is the Executive Vice President and Chief Financial Officer. He became the CFO at the end of 2019 and has been with the company since 2011 and has held positions in other financial companies prior to joining Northern Trust. To my immediate right is Pete Cherecwich, if I said that right, Pete.
Close enough.
Close enough. He's President of Asset Servicing, and he's been with the company since 2007. So, gentlemen, thank you for joining me today here in New York.
Great.
I greatly appreciate it.
Great. Absolutely.
Maybe, Pete, we could start off with you with some questions about asset servicing. I think it was on the January call Mike noted that Northern is focused on scalable growth. Can you provide more information on the strategy that you're using to achieve scalable growth and what that might mean for organic growth in the upcoming year?
Sure. I'll start off by saying, how do we define scalable? And scalable is a code word for, "Let's get profitability right away and not have it take two or three years." Right? So that's the first thing. And if I look back at how we've built the business over the last 10, 15 years, we have grown horizontally. And what I mean by that is we've gone into different markets, we've done different acquisitions, we've done different product launches, and all of those have been investments that then get amortized, etc. You need new clients to come on. So when we talk about scalable growth, we're saying, instead of keep going horizontally and focusing on all new things, let's add clients on to the infrastructure we already have.
If they go on to the standard infrastructure and let's do it vertically, that really is where we're focused. So ultimately, that means we're gonna be more disciplined around going horizontal and really get the sales force to be focused on scaling vertically.
And when you scale vertically, besides core custody, are there other areas that are scalable?
Yeah. So two things, really. First is, as a company, we have an asset management arm.
Mm-hmm.
Right? We have capital markets. Adding those two capabilities to whatever we're selling absolutely is scalable. If someone buys custody from us and we can get them to buy index products or we can get them to do all of the FX with us, that drops to the bottom line. That's part of our relationship pricing that we'll do.
Scalable growth has been a term used by other institutions as well, where they're not all things to all people. It sounds that way here. Is there a chance you could lose some customers if you're not all things to all of them?
Yeah. So the short answer is no. The longer answer is if someone says to me they want to have an RFP and they're going into every country in the world, I'm sorry, we're not in every country in the world. So we're not gonna bid. So there may be sort of out cases that we are saying, "You know what? That's too much for us right now. Let's focus on what is in our core and let's get profit up.
Yeah. It's always been somewhat for us outsiders to really dig down to some of the factors that drive growth. But can you share with us the, you know, in the way you guys are looking at, what are the biggest underlying factors that drive new business growth, and where are you winning, and, and why are you winning?
Yeah. So I'll start with it's a little bit of segments and products, so and, and regions. So asset managers in Europe, we continue to win more and more business there. But it's not just getting the client on. It's they buy more and more products from us. So they will buy custody. They'll buy admin. They'll buy TA. They do FX. They'll outsource their trading to us. So that ability to bring the client on and continue to sell them more and more products is key. But it's also where the trends are. So private markets. Private markets is a big business for us, both on the asset manager side and the asset owner. So we have great momentum. Again, in Europe, we bought, UBS business, their admin business, a number of years ago. That bumped up our capabilities in Luxembourg.
Now we're winning more and more private markets in Lux, in the asset owner community. We have the ability to take private assets and the public's, put them together. So you do have a total portfolio view for a sophisticated asset allocator. We won Abu Dhabi Pension Fund recently, and that ability to show all their assets. So as an allocator, they can understand their risk regardless if they're invested in a private market or a public market. That's, that's differentiating. And we're seeing a lot of growth there.
Yeah. Maybe, Jason, coming over to you for a minute, 'cause Mike had spoken in the past about reinvigorating organic growth. So when you look at it in the bigger picture, not just for asset servicing, of course, can you speak to some of the tactical things that you guys are implementing to get that organic growth throughout the organization?
Yes. But first, I'm gonna say congratulations.
Okay.
'Cause this conference has been great. I know we're the tail end, but I heard you got almost 1,000 people here between companies presenting and investors. It's great.
Thank you.
Congrats on that.
Appreciate it.
So, to organic growth, you're absolutely. Mike has been emphasizing that to Pete, me, everybody in the, and the moniker that we're using inside Northern Trust is One Northern. That applies to all areas of the business. Pete talked about what he's been doing to engage together. But Pete's been traveling all over the world with the new head of our asset management business. So they're not cross-selling. They're together selling and going into some of the most sophisticated asset owners literally across the world and talking about what we can do as an organization but together. It's impacting how Pete's thinking about bidding and responding to RFPs. Our asset management business is doing this exact same thing with wealth management. They're talking to clients, they're talking to intermediaries, and thinking about what we can be doing together earlier on.
It's we're already seeing meaningful impacts on that. In wealth management in particular, inside the business, it comes down to trying to bring more clients in is the best thing we can do. So there's a strong effort to recruit more salespeople there. And at the same time, we're doing a lot more marketing and advertising and also talking to clients about what they have that might be elsewhere. So it's a lot of blocking and tackling, Gerard, to make sure that we're doing the right thing. Within asset management in particular, Daniel, who Pete referenced, is emphasizing Pete talked about this, right to win. So where does that show up? It's a lot of strengthening existing relationships.
But it's also, if you think about what we can do with liquidity, what we could do with beta and equity indexing, our outsourced CIO business, there are areas across asset management where we already show a very strong right to win. And if we can get focused on that, make sure that our clients see it, feel it, know that we wanna be engaged with them in those areas, we feel like we can lift the curve.
Got it. Sticking with the broader organization, what are your top priorities for the upcoming year in 2024?
So, there's three things that Pete, and I, and others have been talking about. One is that we're how we spent the last five minutes is optimize growth. And Northern is known as a growth company. And we're not walking away from that. We are a growth company. We are gonna deliver growth. And so that has to be a top priority for us. Two is about strengthening resiliency. So much of the clients that we have, regardless of the business, our brand is about stability.
Yes.
We have to make sure that they feel confident in that and that we can deliver that with evidenceable data and metrics. When they come and walk around or we go to them, we can show the stability of the organization. We can't take that for granted. We have to constantly invest in that to make sure that we live up to that brand promise. And then the third thing is productivity. We have to be a productive company as much as we have to be a growth company. We talked last year about initiating the productivity office. We did that. You know, we can talk about it more if you want, Gerard, but we got over $100 million in savings this year. But we have to do that every single year.
Every year, we have to find, we've gotta find meaningful percentages of our business to do more effectively, more efficiently than we've done in prior years.
Got it. Maybe, Pete, coming back to you, this business has been interesting for many of us during our careers that there's always pricing pressure. And.
I don't know what you're talking about.
It's a recurring theme. And so, can you share with us, do you continue to see pricing pressure, particularly in the custody and fund administration part of the business?
Yeah. You always see pricing pressure. But the interesting about this business, it's really a combination of commodity-type services with sophisticated solutions. Clients want the commodity-type service to be as cheap as possible, but they will pay for value in a sophisticated solution. You've gotta be smart enough to sell them that we're actually providing a solution and not fall into the bucket of, "Everything's the same, and it's commodity." We do a decent job at that, and we gotta continue to work on it.
Yeah. Jason just talked about the $100 million in savings. If we turn to the cost side within Asset Servicing, what are you guys doing to manage, you know, expenses and to achieve your targeted productivity gains for 2024 and beyond?
Yeah. So it's many things, right? So I would say a combination of, we'll say, stock standard, you know, "Here's what you do." For instance, centralization of more tasks, the span of control analysis. There's also transformational programs. Cloud-native tools are being developed, which we can then put into our infrastructure that enable things to go faster, change to happen faster, and more productivity. We're leveraging things like Microsoft Dynamics. And so many of you might have Dynamics or Salesforce, right? But what we've been able to do is kind of wean ourselves off of a lot of emails from clients. And we have one team that actually has saved a third of time that they have on email traffic, and got better service. So we're getting productivity and service is improving. And then traditional automation. So we have something called the Northern Trust Digitizer.
And so, in the last year, we've automated 500,000 instructions where previously, we had someone typing them in. The clients were sending them. We had to type them in. Fully automated now. And that type of thing, we can go. And I'll finish off. If you think about our business, what's exciting is, you know, I have 14,000 people in the group. A huge amount of what we do is actually processing stuff and checking it to make sure it was done right. All of it can be automated. We just need to have the technology in place. We need standards in the ecosystem, the buy side, the sell side, right? Everybody has to agree on those standards. But it's happening faster. The tech is moving at such pace where you can see how things can be automated more and more quickly versus huge projects.
So I'm pretty excited about meeting Jason's goal.
Yep. And.
I wish it's lower. That's all right.
Not to put the cart before the horse, and I won't hold you to it, but when is it a 10-year project? Fine, I mean, when what you just described is incredible. So are we looking out 5 years from now, 10? Yeah. I know it's a long journey. It's gonna take a while, but.
Yep. So, you know, our goal for this year, we're trying to in my business, trying to hold headcount as flat as possible.
Right.
All right? Did it over last year. I think we'll do it this year. The issue we have is every time we automate something, someone in an investment bank gets very creative and creates a new product.
Yes.
Which is not automated. So then you have to raise and do that. Someone creates Bitcoin, and you realize that takes 18 decimal points. Well, wait a minute. The system only handles 12. So you always have to keep up with everything that's being innovated in this industry. So it never ends.
Yeah.
I'm hoping that we can pick, you know, pick up the pace and catch up more over the next few years.
Gerard, sticking with this topic, how does AI play into this, and where do you see the greatest opportunities for you folks using AI?
Yeah. So, I mean, AI is a huge unlock for this industry. There's no question about it, all right? And it comes in different folds. So if we sit down and think about, you know, reconciliations, you know, we use, you know, deep learning right now. We've automated 2 million touches in REC. So people have to touch something 2 million times, gone. That's automated. You have chatbots. So a traditional chatbot, how you're dealing with your clients, that can be automated. The Microsoft's earnings announcement this year, their conference, they mentioned Northern Trust as an early adopter of Microsoft Copilot, working with them on how queries come in, we can actually use all the tools that we've bought from Microsoft to really automate that, look into our internal infrastructure and data, and serve up the answers to the clients directly.
So I just think it's gonna be a fun few years as this gets implemented.
Another question for you. We heard a lot about blockchain like 5, 6, 7 years ago. It was gonna revolutionize. You don't hear much about it today. Any thoughts on why it's not front of the table anymore?
Yeah. I do. So.
Oh, good.
Simply put, blockchain, right, takes you, Jason, matches or you match. If you guys agree on something, it then says, "Okay. We have a deal, and it's immutable onto the distributed ledger." The problem is the two of you don't agree on standards. So the reason blockchain isn't effective in our industry is that you have the buy side, the sell side, the depository, and the custodian. All four players have to agree on a standard, then it would work. I'm like, that's a lot of work. So where we're seeing uptake is on bilateral stuff. With bilateral agreements, all right, that would work. We can get rid of the contract, and we can go. So I still think there'll be a place for it in our market.
Right.
It's just not gonna be the panacea, that people thought.
Thought it. Okay. Got it. Jason, coming back to you, it seems like higher for longer on interest rates may be in the cards now versus what we all heard in January with the forward curve suggesting maybe 5, 6, 7 rate cuts. So when you think about higher for longer, maybe they cut rates in the summer and all in, excuse me, 50-75 basis points. How does that change or does it change your expectation on deposit levels, deposit pricing, NIM, all those interactions?
Yeah. Well, first of all, we've been the whole time, we're not price makers in this space. We're more price takers. And so the way I think about it, we are gonna play aggressive defense, and we wanna make sure that when clients have deposits, they're at Northern Trust.
Right.
In terms of rate positioning, the portfolio repositioning that we've done for various reasons, we had an opportunity. We've had 3 opportunities now over the last year and a half to say, "Where do we wanna if we are gonna reposition the balance sheet, where should it be?" And we've gone shorter. We had a view that rates were gonna be higher for a little bit longer. It wasn't an aggressive position that we made, but it played out well. And one of the big benefits of the repositioning we did is that this also creates a lot more flexibility for us. And so now, as we sit back and say, you know, "What does the landscape look like in 2024 and beyond? What do we wanna do with that flexibility?
Where do we see opportunities?" And so we don't make, as you know, you followed us for so long, Gerard, we're not making aggressive market calls on the balance sheet. But around the edges, we can have those opinions. And so at this point, we're really happy about the flexibility that we have, given what's happened with the yield curve and reflective of the repositioning we did, which has enabled us to be able to stay at the short end of the curve and benefit for maybe a higher for longer scenario.
This is tough for all banks. It's hard to kinda measure what quantitative tightening, we know from the industry, it's taken deposits out. But have you guys been able to link any of your deposit activity to QT? It's tough, and most banks have not, so.
No.
I'm just curious.
Yeah. I've, you know, got my own, you know, views about what drove deposits in the industry more.
Yeah.
Our client base tends to react differently. It's a lot of very large asset owners and a lot of Pete's clients. They're literally calling and depositing potentially $hundreds of millions and, in some instances, $billions of dollars.
Right.
And so they're impacted less by QT.
Yep.
As a follower of the industry, I followed really closely the impact on QT, what was happening with the size of the Fed's balance sheet, what was happening with particularly the Fed's reverse repo facility and the pricing there and how that had an impact on potentially money market mutual funds and the high percentage of assets in funds that were in the reverse repo facility.
Yes.
I think that had a big impact on deposits in general. But for us, you know, we went from $90 billion. We peaked at something like $135-$140 billion and have come back down somewhat. And I think that's much more our clients looking at what options they have given the rate environment than it is QT.
Got it. Yep. And speaking of deposits, how is the outlook shaping up on deposits or, from a, you know, net interest income standpoint or and also client repricing? What are you seeing there on the deposits?
Yeah. Well, I'm commenting on both. On deposit levels, we're seeing in February, we saw deposits mostly in the $100 billion-$110 billion level.
Right.
Which is good. And then from a NIM perspective, you know, pricing has its calmed down relative to what we anticipated. And so NIM has been roughly flat. And so we feel good about where the balance sheet is at this point.
Got it. You're one of the few banks that isn't or in the good position of owning the Visa stock.
Yes.
We saw it when Visa decided. So maybe can you give us some insights into maybe monetizing it or, you know, what you could do with it and so on and so forth?
Yeah.
How big, and just remind us, please, just how big the position is and so on?
Happily. Yeah. It's we're yeah.
Happily.
You know, overall, we own a little bit over 4 million B shares.
Yeah.
It translates, you know, to once we have half of that position translate to somewhere $800-$900 million. That's half of the aggregate position 'cause that's what we're able to be able to monetize.
Right. Right.
So it's very nice for us. And we're feeling like we've benefited from exhibiting patience and so finally coming to fruition. And it's really a real positive for us. And so from our perspective, there are a few things that are on our radar screen. We'll probably use a combination of them as we think about what to do with the proceeds. And, you know, Visa has been great, but it's not a strategic asset for us. And so, you know, once we'd be able to sell a position at par, we'll start to lean into that. And, you know, obviously, for us, some combination of share repurchase, but then also it provides a lot of benefit to the securities portfolio.
That's really where if you think about our balance sheet, as deposits come in, we've gotta leave some in cash at central banks around the world. The second thing we do is fulfill very high-quality loan demand, and then the remainder goes to the securities portfolio, which is big for us. So this would fit into the latter category. And it's not just adding that amount to the securities portfolio, but the fact that equity will be higher provides higher market value of equity and higher overall capacity from a Tier 1 leverage perspective. So it gives us even more flexibility from a balance sheet perspective. Then I do believe, lastly, that you'll see some banks that are in the same position where we haven't needed this capital. Even think about some things that are helpful culturally but also economically.
Something like, you know, funding, a foundation that we have.
Yep.
It's helpful in a lot of different ways.
Yep.
And so we'll be able to show more of a consistent capability to be able to fund some of the things that are important to us. And so, combination of those things. But as Pete says, the last one is the smaller, more likely a combination of the first two.
Right. Could you consider, you know, repositioning the bond portfolio possibly and then?
Yep.
You know, offsetting, you know, obviously, then you don't have to pay taxes on the gain if, you know, everything's done above the pre-tax line?
Yeah. That's, and you know, it's good for you to push on that. First of all, I with another thing that the Visa proceeds do, and first of all, the numbers I gave were pre-tax.
Sure.
Thanks for encouraging me to clarify that too. But because even market value of equity will be, we've got more equity, it provides more flexibility there as well. And so it, it enables us to do more with the balance sheet, more with the securities portfolio, not just necessarily layer it on.
Right.
The way it is today. We can do more things even with the existing base.
Right.
Within the securities portfolio because the equity position will be higher. And so it really is a nice opportunity, a good opportunity for us.
If I recall, this is a classic buy low, sell high 'cause your cost basis is basically zero?
It's not basically. It is.
Okay.
Yeah. Yeah. Yeah. It is so, but that it also is a good reminder of the tax implication as well.
Right. Right. Maybe turning to expenses.
Yeah.
You know, all around, can you talk to us about how you managed expenses, you know, in 2023, what you're thinking for expectations for 2024, for, for the expense outlook? You talked about the $100 million in savings already, but maybe elaborate a little more.
Yeah. Sure. So, first of all, you know, 2022 was a really tough year for us from an expense perspective, high inflation year. We had to get a lot done. We got a lot done, and it worked, but high year. So that's why we came into 2023, and we took a much more aggressive approach. Every quarter, we did better and better.
Right.
It came down to, you know, tackling the expense base in three different categories. You know, our biggest cost first is people.
Mm-hmm.
So we had good success in making sure that we didn't have the historical increase in headcount. And, you know, for the first time in a long time, we actually saw a decline in headcount from the beginning of the year to the end of the year. And that reflected a lot of hard work, a lot of tough decisions. And, you know, I've gotta give Pete credit, you know, because he's got over 14,000 of our 23,000 people. A lot of hard work took place in his business. We couldn't have done that without the success, the diligence, the rigor that he personally took in addressing the expense dynamic. The second component is technology. That's in the middle, and it's another big cost.
We did a lot there as well, adding more governance, more discipline, more rigor, and tracking and analysis to how we think about technology. And then we the bottom stack of the expenses is occupancy and everything else. And you, Gerard, you would have seen we did a lot there too, to rationalize our real estate footprint. We took charges there to commit to getting to lower amounts early. We made tough decisions to ensure that we were maximizing that portfolio. Those were all reflective of what we were doing in the productivity office and led to a lot of those savings. And so as we come into the 2024, we've gotta do the same thing. And we said last year, we were coming off of a almost 9% growth year. We were looking at 7% at the beginning of the year.
We got to below 5%, and we've gotta do that again this year. We've gotta be below 5% this year. And we're still chewing on a big component of the base pay increase we did.
Yep.
This is the last quarter. We're lapping a big pay increase when we were in that heavy inflation year. But once we do that, we feel like we'll be able to continue to grind down more. So it is a super high priority for us.
Yep. Now, speaking about the inflation and the base in employee compensation, are you seeing less? Is it the rate of increased decelerating in compensation, or is it still as tough as ever?
Yeah. And it'd be good to get Pete's thoughts on this too. It's it, first of all, I'm gonna say turnover is lower.
Mm-hmm.
And we also did reference, and you people get back into it, a lower base pay relative to the prior year that we've gone.
Yeah.
Those pressures are lower relative to what we were experiencing in 2022.
Yeah. I totally agree. The only thing I would add is talent still gets paid.
Yeah. Oh, yes.
All right. So that people can still jump, and there's plenty of opportunities out there.
I appreciate it.
For your most talented folks.
Yep.
You touched on technology a moment ago, Jason. What are you thinking on technology spend for the next three to five years? It's so critical to.
Yeah.
Your guys' businesses, Pete's business, of course. And so can you frame out what you think might be reasonable?
Yeah. So if I'll give you our framework to frame it out.
Yep.
And then go from there. The three big categories. The first is what's business unit-driven. And so, you know, Pete's talking about the successes we've had in his business. And a lot of that's 'cause he was making investments in technology over the last several years. And that's roughly 40% of the total. It's a little over 40%. The second is what we reference as foundational. And so that's where we're modernizing the applications we have, more moving to the cloud, ensuring that there's good stability there. That's another roughly 40% and a little bit over. And then the last, it's about 15%, is just ensuring that our cyber defenses match our brand.
Mm-hmm.
And so everybody, it's prudent for us to spend on that. And if I think about the growth rates of those, the growth rates of the business unit-driven has been lower than our target amount. And so we're ramping that up to do even more from a client perspective. The middle, the modernization, that's what has been at a higher growth rate. The best practices have changed over time. And so we're following those and making sure that we're doing everything we can, migrating quickly to the cloud. We've got a good percentage there now, but we wanna accelerate that more. And then we've made great progress, we feel, in cyber.
And so we think the growth rate there should be able to, well, we'll still have that base, but the growth rate should be a little bit less than it has been.
Got it.
Yep.
When you look at your organization, margins are very important, operating margins. What do you think it would take to get back to that 30%+ operating margin? Or has the business structurally changed so much that maybe it's just, you know, it's not there anymore?
Yeah. No, it's there.
Okay.
You know, we've, it's gonna take time, you know.
Right.
'Cause we, you know, inflation layered in some expenses that we just weren't able to match with revenue growth. The revenue growth came from an increase in NII, which is great.
Mm-hmm.
But that, you know, that didn't grow. And we can't rely on that to stay there. And so we've gotta have growth in the foundation of the business coupled with significant reduction in that growth rate and getting more to that below 5% that we talked about.
And I'll add back to scalable products. In our capital markets group, they added 181 new clients last year. Half of them had never been a client of Northern. And so that ability to do more FX, to do more brokerage, more FICC repo, we did get that bet right on quantitative tightening.
Mm-hmm.
All right? So that's helped out. That's what we have to do more of.
Yep.
We're running out of time here, but maybe one last question. Obviously, Basel III Endgame.
Yep.
They're working on it. Then you probably saw the headlines out of Washington today with the testimony by Chairman Powell about he thinks real changes are coming to the initial proposal. Any thoughts on just how it's shaping up? I know you've got plenty of capital, so we're not worried about you guys. But any, any color on that?
Yeah. It is important for the industry. And as I could say, we've got plenty we do. We've got a lot of capital. But at the same time, we wanna make sure the industry is got the right lens and oversight from it. And so it's not just the amount of capital, but we've been spending a lot of time on where the changes are and how much more is gonna be required for operational risk and other areas. And there's puts and takes for us 'cause we'll have an increase from an operational risk perspective 'cause of the dynamic Pete talked about earlier. But then we'll benefit from other areas. So the more tailoring that's done around a loan portfolio, for example, is gonna help us.
Yeah.
Net, it'll be more. So it's the devil's in the detail on this. And everybody all of my peers were all following it super closely.
Yep. No. With that, we have run out of time. Thank you very much, both gentlemen here from Northern Trust. Thank you.