Okay. Well, good morning. Almost good afternoon, everybody. It's my pleasre to introduce Michael O'Grady, President and CEO of Northern Trust, and Dave Fox, the firm's recently appointed CFO. With about $14 trillion in custody assets and $1.6 trillion in asset management, Northern Trust is one of the largest global custodians with unique capabilities and ultra-high net worth wealth management channel among many otiers. Over the course of 2024, Northern has seen accelerating organic growth in the institutional wealth business, took a few strategic steps to reposition the balance sheet and improve NII, and accelerated share repurchases. So all things welcome by this community. Looking forward to getting your perspectives on your progress and how you're thinking about 2025. Welcome back, Mike. Welcome, Dave, your first conference with us. Looking forward to many more.
First question I wanted to start with is some of this kind of strategic pivot, and that also weaves in some of the management changes you guys have made over the last 12 months. You talked about focusing more on profitable growth in the institutional business, being a little bit more proactive with balance sheet management. As I said, you mentioned leadership changes as well, including creation of COO role for the first time, which we didn't really have before. What are the primary financial objectives, I guess, behind all these moves? And can you talk about some key metrics you'd like to be measured by in determining Northern Trust's progress over the next 12 months?
Sure. So, Alex, good to see you, and thank you for having us. Appreciate it. Great to be at the conference. And it's been a busy year for us because it was about 12 months ago where we launched our One Northern Trust strategy. And it's focused on the goal of being a consistently high-performing company with three primary performance objectives. The first being optimizing growth, the second being strengthening resiliency, and the third being driving productivity. And very straightforward as to why those are important, it's more about what's beneath that and how are we going to do that. So a number of the changes that we've had this year all align with that. You mentioned some of the organizational changes there. So first of all, in the last 18 months, we've seen the placement of three new presidents for three businesses.
Each of them very well run before that, very well positioned, but with this new strategy, trying to think about who are the leaders to take that forward. So you saw, first of all, for wealth management, Jason Tyler, who last year was sitting in the seat to the right of me. And as I mentioned, about 18 months ago, Daniel Gamba, who joined us from BlackRock to head up our asset management business. And then Teresa Parker took over for Pete Cherecwich, leading the asset servicing business. So we'll talk more, I'm sure, about what exactly it means to optimize growth for Northern Trust. The second big change was, as you mentioned, the Chief Operating Officer role. And that's really driven to this idea of resiliency and productivity for the company.
Underneath the leadership of the Chief Operating Officer, Pete Cherecwich, who has previously run the asset servicing business for us and was the COO of that business, it's really the opportunity for us to centralize more of our business services, more of our operations, more of our controls, so that we can look to strengthen those in the most efficient way, and then also drive productivity going forward and make that business more scalable overall for us and make the company more scalable. Those are some of the big changes that drove it. Then the third being certainly with Dave as CFO, and I'll let him speak in a little bit just as to what his primary objectives are. As far as how we're going to measure it, it's going to be through the financial returns.
And so think about it as continuing to drive positive fee operating leverage, positive operating leverage, and working our way towards what we call our Target Financial Model, which in addition to the operating leverage is focused on expenses to trust fees, 105-110, pre-tax margin above 30%, return on equity 10%-15%. So we're outside of that range right now on some of those metrics, and we want to drive through operating leverage into the range.
Okay. We'll talk a lot about that, as you can imagine. Dave, I want to turn it over to you and just really zone in on CFO priorities. Given you're new to the role, what are you going to be most focused on for the next year?
Yeah. So prior to becoming CFO a couple of months ago, I ran two big businesses within Northern: the asset servicing business in the Americas region and also the Global Family Office business. And what I'm hoping to do, and Global Family Office in particular, touches every part of the firm. And what I'm hoping to do is take a lot of those best practices that we had in GFO, a high-growth business, a very controlled expense business, and then put those into the other businesses in a way that they can replicate some of the things we were doing. And one of the examples I would use there would be our client profitability.
We would spend a ton of time going through client by client, not just new clients coming in, but existing clients as well, and having finance try to provide us with the data that we needed to be able to go back to clients and be smart about talking about the overall relationship, and so I want to take that business acumen of running that best-in-class business, drive it through the finance function. That would be my number one priority right now.
Great. Okay. Well, let's turn to some of the businesses. I want to maybe start with the institutional servicing dynamics you guys are seeing in the space right now. Over the last 12-18 months, you talked about a pivot in the strategy by focusing more on profitable growth, and that came through even through your earlier comments and just priorities for the firm as a whole. What does it mean specifically in terms of maybe some of the financial metrics in terms of both kind of fee growth algorithm or organic fee growth in the business, if you're going to just choose not to take on certain mandates? And what does it mean in terms of incremental margins on those mandates that you are going to take on?
So it is all about scalable growth in that business. And if you look at the business over, say, the last 10 to 15 years, we really have been investing in building out the global platform for our asset servicing business. And what that has really translated into is, if you look 15 years ago, the asset servicing that we provide to asset owners represented about 75% of the asset servicing revenues. And those services we provided to asset managers, so think Global Fund Services, was 25%. When you look at that now, it's about 50/50. And the point is that we invested in building out the Global Fund Services business over that time period. And it grew as a result at a much higher rate. So both businesses, if you will, or segments grew, but at about twice the rate for Global Fund Services.
And so now, though, we have the platform that we need. We have it from a geographic perspective, from a capability perspective. But it required investments. And that's why there was a higher expense growth rate as you hired people with the expertise to do that, and you opened up in certain geographies so that you could service clients in those geographies. And then we did some acquisitions over that time period as well. Well, now we have the platform, and so it's all about leveraging that platform and making it as efficient as possible and being selective about the types of business that we take on. So to your point, say, we'll translate that through the asset owner business and what we do for asset is a more profitable, higher margin, more scalable business. We'll look to continue to grow that business.
We have certain capabilities on that front that make it much more than just safekeeping, if you will, so Front Office Solutions, which gives an asset owner the ability to see their entire portfolio on the same screen, if you will, so kind of one pane of glass for them to be able to see both private markets and public markets all together, and then all of the data solutions that they're looking for as well, so many opportunities you've seen where we've been successful, most recently with Nest in the U.K. being a perfect example of that. In addition, we want to do more for the asset owner clients that we have.
And so Capital Markets is an area that we've been doing more, certainly in looking at secured financing, so repurchase activity that we'll do for those clients with our outsourced trading function that also we provide to asset managers. But it's a more scalable type of growth that's for us on that front. And then just the third thing I want to mention is around asset managers. So we'll still continue to look to grow that business as well. It's just off of the existing platform that we have. So you'll see either later this week or next week press releases around a new client that we've onboarded that we'll be servicing them in the U.S., in Australia, in Singapore, in the U.K., and in Luxembourg.
And so all places that were built up over that time period I talked about so that we could serve a global asset manager like that.
And if you think about the way you guys used to talk about organic fee growth in institutional business, I think it used to be kind of like an immense engagement, right? It sounds like it drifted lower because, again, you're being more selective. So two to three, two to four is kind of the neighborhood where you want to be there. And the incremental margin on that should be better now than back before?
Yeah. It should be higher because you're going to have a greater mix of asset owner business that's a part of that. You're going to have a greater proportion of revenues coming from more scalable, profitable revenue streams like capital markets that are a part of that as well. And importantly, as you have that organic growth rate in the range that you talked about, that also brings down the expense growth rate that's necessary to service that business.
Gotcha. Okay. Let's talk about wealth for a couple of minutes. On the last call, you talked about accelerating organic growth in the wealth management business, largely because of some of the key strategic initiatives you put into place dating back 18 months ago that are starting to come through. Could you expand what those were, where you're seeing accelerating growth momentum? And we could probably touch both on the wealth side and GFO side at the same time.
Sure. So why don't I start with wealth? And I'll let Dave talk a little bit about the family office business, given he's run that for the last several years. So GFO, again, growing at a much higher rate for us and very profitably. Below that level is the ultra-high net worth business for us. And really what we're trying to do with that, and as you mentioned, have announced that this is an area that we're focused on, is making that business more like the family office business. So focusing on that segment, providing a more standardized, if you will, leverageable platform to service those clients across the country. So right now, we have a very strong business there, but it's done differently depending on the part of the country that you're working with and the team that you're working with.
So we see a lot of opportunity to grow there. The other aspect of it, I would say, is parts of our business geographically, we have very high penetration. So as you would expect in the Midwest, around Chicago where the company is headquartered, but also in Florida where we've been for over 50 years. But then there's other parts of the country where we have the opportunity to invest more resources to get higher growth, places like New York and the Northeast, and then certainly on the West Coast as well. And maybe Dave, do you want to talk about GFO?
Yeah. So in GFO, one thing to keep in mind is that two-thirds of the world's billionaires are outside the U.S. And Northern actually has a very large international footprint through its asset servicing business. So the incremental cost of adding resources to some of these large geographies where money is being concentrated is very, very low. And we've discovered by putting bigger teams of folks in some of these big financial market hubs, the message resonates. The model that we've got in the U.S. tends to be the model that everyone else wants to follow internationally. The U.S. is the most built-out, sophisticated family office environment, and they all want to benchmark against the U.S. And so as we go out and talk about that, our products and services resonate on a global scale. The second thing I would say is on alternatives.
We obviously talk about alternatives as a holistic product offering. And most of the big family office clients are very heavily invested in alts, but they all struggle with tracking the alts, administering the alts, and doing cash forecasting and things of that nature. So we've got a holistic solution set around alternatives beyond just the product itself, selling the product itself. And we're going to see ourselves basically accelerating that penetration into the family office segment even more.
You mentioned the alts, so maybe we can jump there. Private markets is a huge area of growth for financial services broadly. We've heard it for multiple years, and all the commentary over the last day and a half really does not seem to change that. How's Northern positioned, I guess, to capitalize on this across both segments? And to the point that you just made about capabilities within Global Family Office and really helping clients with complexities that revolve around having alts in your portfolio, how can you transport that perhaps to the high-net-worth channel and, I don't want to say extrapolate, but drive incremental economics there?
So why don't I start more broadly with the company and then let Dave take it for family office? So the growth of private markets is very favorable for Northern Trust. And we've seen that already, but we expect this trend to continue because it affects what we do for our clients broadly speaking and across each of those businesses. So if you just start with asset management, within asset management, we have 50 South Capital, which has a very strong record of alternatives which are serving primarily our wealth management clients, but then also other wealth providers and institutional clients as well. Right now, it's about $12 billion in assets under management, another $3 billion that they advise on as well, and growing at a very high rate. So we'll lean into that within wealth management and asset management, excuse me, within the asset servicing business.
As these private markets asset managers grow, they certainly have greater asset servicing needs. And so you saw, for example, earlier this year, we announced our relationship with Partners Group, and you'll continue to see those types of mandates as we grow that business. They need all of our services in addition to the institutional aspect of that, but also our wealth management capabilities. And so another way that we're able to take advantage of this trend that is cutting across the industry.
Yeah. One of the things I would just add for family office is, and Mike's talked in the past about Front Office Solutions, and that technology was built specifically around tracking alternative investments, and it was built inside the Asset Servicing business. So when we talk about one Northern, the family office space has actually got some of the largest users of that technology right now. That Front Office Solutions set really appeals to big families that want to have their alts tracked in a much more sophisticated way. And so we're seeing that as a definite growth area. And once you're in there, providing all that value-added data gives you a platform to talk about everything else you're doing.
Yeah, so as I think about one of some of the bigger themes out there, staying on the alts for a second, every alt you speak with wants to have more access to distribution. And I would argue Northern's client base is, to some extent, in the sweet spot of what some of the kind of client distribution networks that a lot of alts are looking for. It doesn't strike me you guys are doing a whole lot on that front, meaning letting third-party GPs raise on your platform, but also potentially benefiting economically from some of those, as we've seen with other really large wealth management firms. How are you thinking about that? I know you guys are generally very conservative when it comes to the concept of cross-selling and that perhaps not so much cross-selling, but more access.
But is that in the framework of expanding your wallet with various clients and ability to monetize the network?
As you would expect, we take a very client-centric view to that. And we want to make sure that we are providing the best investment alternatives to our client base. With the evolution of the markets, private markets is becoming an increasingly larger part of that market. We have to be able to provide attractive alternatives to them. That's the way we think about it. I mentioned 50 South Capital. That's only one way. We do work with some of the private capital firms on a platform, if you will. But to your point, if you look at just the exposure that our wealth management client base has to alternatives, it's lower than the pro rata share of the market.
So there definitely is an opportunity for us to do more with some of the firms, but in a way that produces the right outcomes for our client base and also to make sure that commercially it's attractive for the company as well.
Where are you guys in that process in terms of just getting more product on the platform?
Yeah. I would say we're midway through it in the sense of, to your point, we are going to be very careful on how we diligence the managers. And so as much as we have, I'll call it the platform itself, the number of alternatives is relatively limited at this point. We see the opportunity to do more.
Great. Okay. Let's talk about investment management a little more broadly. You highlighted leadership changes there about a year and a half ago or so. You have lots of capabilities beyond just money market funds, right? Cash management has been perhaps the pillar of what people mostly think of you guys as. But there's other lots of capabilities as well on the equity side and fixed income side as well. How are you thinking about wallet share with your institutional clients or your wealth clients when it comes to sort of Northern Trust internal asset management product?
Sure. So the first aspect of it, as I talked about, is our One Northern Trust strategy, which is we want to ensure that we are bringing the best of the firm to our client base. And as you mentioned, that's on both the wealth side, but also institutionally, and it certainly involves asset management. And I would say as much as we've been effective on that front, there's still a lot of opportunity to do it in a more concerted way. And that's what we started, I'll say, a year ago, and we'll continue to operationalize, if you will, One Northern Trust. The second part of it is we see other opportunities to grow not only with that client base and asset management, but more broadly. Two areas. One would be with ETFs. So obviously, ETFs are an area of growth for the market overall.
We do have about $20 billion in assets under management. And yet those are mostly, I would say, very tailored-focused ETFs, if you will. And we see the opportunity to expand those to more core products that would be of interest to our wealth clients, but also to other wealth providers. So think about ETFs related to munis, for example. So expect to see more launches of new ETFs from us in the coming year. And then the other area would be around custom SMAs. We actually have a large business on this front already, about $120 billion in assets under management that are focused on tax-advantaged custom SMAs. We see that continuing to grow as well, both again with our client base, but also having the capability to do it with other platforms.
Great. Okay. Why don't we turn to some of the financial items for a couple of minutes, starting with the fourth quarter? I think on the last call, you talked about Q4 and AUC being in the 550-560 range and expenses being up 2% sequentially from the third quarter results. How are you tracking against these numbers so far? And maybe what are some of the key puts and takes as you unpack both the NII and expense update?
Yeah, so the short answer is that we're still comfortable with the guidance that we gave in our third quarter earnings call. Our deposit levels are very stable, and remember our business model. Our business model is very liability-driven, and so we're set up to basically respond to our client needs. And our liquidity is created through our new business, and so it's tracking the way we thought it would be tracking, so no change.
Both in terms of on the deposit side, both in terms of the level and the mix, just no concern.
Yeah.
Great. And I know you guys don't typically guide to fees, but if you kind of look at the environment in the fourth quarter, a couple of puts and takes, right? Like on the one hand, equity markets in the U.S. are really strong, a little bit weaker outside the U.S., U.S. dollar is a little bit stronger. We've seen more currency volatility. So hopefully that's helpful to some of the trading numbers you guys have there. Any kind of commentary on fee backdrop Q4 versus Q3?
In some ways, that should be easier for folks to look at because we have a lagging billing model, right? We ended the third quarter with very strong AUC and AUM, right, so when you think about trying to figure out what the fourth quarter is going to look like, you've got a pretty good head start, if you will, and so from our perspective, markets are contributing the way we thought they would be. Rates are the way we thought they would be, so I think from that perspective, I think you could kind of interpolate that we're on track.
Got it. Okay. Let's maybe expand in NII discussion a little bit further. And again, acknowledging that you guys don't love giving full-year guidance this early on, but maybe we can talk a little bit about some of the building blocks. So earlier in the year, you repositioned the balance sheet. You picked up some NII, but at the same time, you made the balance sheet maybe a bit more asset-sensitive. At the same time, there have been some favorable things happening with deposits. You talked about higher-cost deposits rolling off, being replaced by lower-cost deposits that quite a bit of them will move. Given what the curve has done, which now bakes in fewer rate cuts, I think your previous comment was that you might see some pressure in NII looking further out if the curve kind of continued to do what it looked like two months ago.
Is that still the case, or is there a chance NII could be a little bit more stable from these levels given what you're seeing with deposits and given the trajectory of the forward curve?
Yeah. I guess what I would point you to is that the strategy around our balance sheet hasn't changed, right? So how we manage it hasn't changed. If the environment changes, obviously for the better, that's going to be good for us, right? And since we have a shorter duration portfolio, if rates are higher for longer, that's a good thing, right, from our perspective. So that's sort of the way I think about it going into it.
Gotcha. Any more proactive things you guys want to do with deposits?
Yeah. The deposit front, what I would say is that deposits, for me, having come out of a business, are much more about liquidity management. And again, since it's client-driven, we're talking to all the same clients. And so when you talk to a client about deposits, it should be part of a holistic discussion around their liquidity needs. And deposits are just one part of it. And our clients want to have a certain amount of money on our balance sheet for operational reasons or other reasons that may be more transactional. So if you're having those conversations with them on a more holistic level, you're not only going to get deposits, you're also going to get some other business that comes out of it.
So I think you're going to see more of a focus on that liquidity management discussion and a closer interaction between Treasury and the businesses on that front to more proactively manage that.
I mean, what you've seen over time as we go through different interest rate cycles, and particularly as rates change quickly, is it is, once again, kind of a client-centric approach. And that, as a result, doesn't always flow through the income statement in the same way. So we're dealing with the client, as Dave is saying, it's about managing their liquidity. At times, as we look back at the previous turn, it was about how do I move out of deposits and into money market funds or into Treasuries and build a short ladder, whatever it may be. Those all have financial implications from us. At the end of the day, it's all about managing liquidity, which we get compensated for, but how it manifests itself sometimes line by line is difficult to determine. I gotcha. Okay. Fair enough. Let's shift to expenses.
Again, not asking you to commit to an explicit number for 2025, but you did talk about your goal of keeping expense growth in 2025 at or below kind of 5% level. At the same time, you talked about, I guess, some of the inputs into that. Resiliency spending was something that's come up multiple times. How's that tracking? How do you think about that 5% growth in expenses for next year? Is that still likely, or whether it's due to slightly better revenue backdrop or other factors that feel more aspirational than realistic? So how are you thinking about that for next year?
Yeah. So we're trying to build a business model that's resilient, right, and resilient through cycles. And so we don't want to rely on markets as the only tailwind, right? So we're trying to make sure that our organic growth is at a level where we can continue to hit our financial goals regardless of the market sort of pressure that's out there. And that's sort of the way we think about it. And on the expense front, the 5% number was already there when I took the job. What I would say is that certainly attainable. It's something we're going to look at during the course of the year and trying to get to that 5% or below number. And we're driving towards that. So it's going to all be about execution at the end of the day.
Got it. Okay, and when you think about margins broadly, and Mike, it's back to your point and one of the first things you talked about, right? Tracking your progress is ultimately going to be, are you getting closer to financial targets? You highlighted that you're outside of your margin targets today. The goal to be is kind of back to being like low 30s. I think you guys are kind of like in the high 20s. Can you give us a sense sort of like the building blocks of getting there? How much of that is revenue-dependent versus your ability to control expenses more, and ultimately, when do you think you guys can achieve these targets?
Yeah. So it's definitely both, right? So we're absolutely trying to drive revenue growth and do so in such a way that it's positive operating leverage with that. So to peel it back further, though, to your point, yes, our business model is affected by markets and rates, and everybody knows that, okay? So we look at that organic growth rate, which we talked about in the institutional business, the asset servicing business. In the same way, in the wealth business and the asset management business, we want to see that rate go up from where it has been historically, right? And so on that front, yes, driving organic growth, that organic growth rate. And then from time to time or over time, the markets obviously impact that and lift it more or bring it down more.
That not only affects the revenues, but it affects the expense side to some extent as well. But where we're focused in is on the organic expense growth. And that's why, yes, we have that 5% target that Dave has mentioned, but in a more muted revenue environment, we got to drive that lower. And there's more pressure on it, I'll call it, if it's a more robust environment. So it's ultimately about operating leverage. And then within it, you have to be able to drive one or more to get to that level. And as far as time, sorry, just as far as the time period, because of the impact of markets and rates, it's not a consistent X amount per year.
And in certain environments, we can pick up more ground and pick up one or two points of operating leverage in a year and get there very quickly, where in other environments, it just takes us longer to kind of grind to those levels. As you pointed out, we're in the high 20s now, not far off from 30% and above 30%. So we're driving towards that. So we don't look at that as being a long-term target, but something that we should be achieving here in the intermediate term.
Yeah. When you talk about pulling back on expense growth at a time when the revenue environment is not as helpful, presumably that includes NII as well, when you flip it to the other side, if you're in an environment where NII is better, does expense growth also accelerate a little bit more when you kind of try to lean into some of the investments and growth opportunities, or we really should be only thinking about the fee growth versus expense growth at this point? Because I think in the past, when NII really picked up, you guys did lean in a little more and reinvest some of that.
Yeah. To some extent on the investment front, so I would say it doesn't all drop, in other words. However, we're looking for more to drop during time periods like that. So as opposed to just saying we only have a goal of one point in a year, and anything above that, we would invest or whatever, no, we would just as soon get two points on that.
I gotcha. Okay. That's helpful. Thank you. Okay. A couple of minutes left on the clock. I want to hit on capital. Certainly a bit of a different approach this year with a little more buyback. You had the Visa gains to kind of help you along to start to return a little bit more capital to shareholders. But you guys are still incredibly well-capitalized. You always have been. You always want to run at a premium capital ratio still out of a lot of your G-SIB peers, even though you're not quite in that category. As you look at 2025, given that you've used some of the Visa gains already, can you sustain the kind of north of 100% payout, or this is more of a one-time? And given the healthy balance sheet position, why shouldn't that be more of a framework, I guess, going forward?
Yeah. So it's ultimately driven by our capital position. And as you've talked about, right now, it's very, very strong as a result of not only the ongoing profitability, but because of the monetization of the Visa position. And so that does give us more capacity. And so depending on the environment and things like that, which we'll always look at, but we have the capacity to buy back more. Not only have we, but as we go into 2025 as well. So I see that as a higher level, but not necessarily in a position where we're saying that we would be at 100% or above 100% longer term. It's all going to depend on the level of capitalization. And we want not only you, but to everybody to think about Northern Trust capitalization the way you talked about it.
Yeah. Yeah. That makes sense. Last question related to capital just around acquisitions. You guys have been acquisitive in the past. It's been a little while since you've done anything overly material, and to be fair, you have not done anything overly material in a long, long time, but as you think about the investment landscape, where you want to be, are there some things in inorganic that kind of make sense? Where does that on your priority list for the next 12-18 months?
Yeah. I would say low on the priority list. When you think about that One Northern Trust strategy and those three performance objectives, it's primarily about organic growth and driving that organic improvement in financial performance.
Great. Okay. Well, we'll leave it there. Mike, Dave, thank you guys both very much. I appreciate the time today.
Absolutely. Thanks, Alex.