A little bit, Dave, that way.
We both can.
Alrighty. Thanks everybody for joining us this afternoon. We are thrilled to have with us today Teresa Parker, President of Asset Servicing at Northern Trust, and David Fox, Chief Financial Officer at Northern Trust. Thanks so much for joining us.
Thank you, Betsy.
Great to be here.
Teresa, let's kick it off with you. You've held numerous leadership roles at Northern Trust during your 40+ year tenure at Northern Trust and most recently as President of the EMEA region. In September, you decided to defer your previously announced retirement to become President of Asset Servicing. Could you help us understand why you made that decision? That's a very bold decision and very excited to hear why you made it.
Thanks, Betsy. Actually I made it because we were going through an organizational change and I was offered the role in charge of Asset Servicing. It was really great opportunity to be able to help shape the company going forward with all the knowledge that I picked up over the years, having worked at the bank in many different regions and function. Terrific opportunity, really.
Okay, and then when we think about what you are looking to accomplish, given everything that you've been involved in and the new technologies that we have in front of us, what strategic priorities do you have for your position here?
I think first then is the successful implementation of the change that we're making in the organization and making sure that we keep what I think is one of the most important differentiators for us, which is around client service. That is number one. After that, really focusing on driving profitable growth with new clients that are coming on with making sure that new business is positive in terms of our operating leverage, but also focusing on retaining our existing clients and helping to make them more profitable by broadening the services they take from Northern. Driving profitable growth would be the first thing. I would say focusing on resiliency and productivity, ensuring that we have really consistent, really strong client service delivery. I think we have excellent client service delivery now, but the bar keeps going up.
The last thing I'd say is focusing on resiliency and productivity, ensuring the reliability of the services we have, but also helping to make it more productive over time.
Okay, as we're thinking about profitable growth, you're thinking about a difference in that that I'm not close enough to. I'd like you to help us understand where are there opportunities to improve the profitability of the growth that Northern Trust generates in Asset Servicing.
I think it does start with focusing on the new business we're bringing on, making sure that it works for both us and the prospect, that it's accretive to our profitability, that we have positive operating leverage. I think it's also on focusing on the kinds of things that we combine with the business that we have. We have good examples of where we are starting to make very, very significant inroads on banking and capital markets with our existing clients and clients coming in through that channel. Our asset management business, those are very high margin products that help us with the overall profitability. I think it's the underlying base and focusing on the opportunities that the new technology, data, digital AI bring with us to help make the underlying operating models more efficient.
Okay, so seems like all of the above and one of the areas I did want to dive into a little bit there was with the wealth management, asset servicing and the synergies that there are with wealth management. Could you help us understand where there's opportunities for synergies there?
Yeah, I mean we are focused on trying to be more holistic in the way we're solutioning for all of our clients. I would just pull out an example on one of the areas of focus, which is on alternative markets. We are in asset servicing, a strong provider of solutions to hedge funds and to private capital funds and have been for some time. Now taking that with the wealth business, focusing on the principles of those companies and helping them with their wealth management needs and capabilities, but also some of the liquidity they may need for the funds that they are actually overseeing. Create that whole ecosystem and thinking about it as to how Northern can help the system from all the different dimensions.
Could you speak a little bit to what it is that you have in your service and product set that differentiates you in the private markets?
Private markets, one, I would say, let me just give the three different ways we think about private markets. One is private capital administration. That is the administration of funds that have private debt or private equity or real estate in them. The second would be hedge funds. The third would be a capability that I'm really excited about that we use for asset owners, which helps asset owners like pension funds, sovereign wealth, insurance companies be able to look at their private and their public markets together, called Front Office Solutions.
I'd say those capabilities and I think the differentiation, besides the length of time we've been working with the clients in this space, but it's now grown as an asset class, is the ability to solution with the clients because each one is slightly different and being able to put the building blocks together to create the solutions that actually help to ensure we're supporting the investment process of a fund of an asset owner I think is a differentiator. Then actually focusing on the client service that goes with that to ensure that it's not just technology, it's an operating model and a servicing model that actually helps them accomplish their goals.
Having those customized solutions for clients, how are you able to do that in an efficient way?
Yeah, and I think it's not as much about customization as it's about really understanding the business and having the flexible building blocks to be able to put them together to solve the client's needs, and that solutions orientation and having those flexible building blocks and an ecosystem that allows for that to work efficiently and scalable. We really do hear from clients they don't want non strategic solutions. They do want solutions that help to deliver every day, but they want flexibility. And sometimes customized solutions can be one offs but then actually don't last the test of time in terms of service quality.
Okay, what would you say it is about Northern Trust that differentiates your service and product set versus the competitive stack?
Yeah, I do think it starts with that client service ethos. That client service ethos, that is one starts with the clients. The products and solutions that we put together, we're doing it because of clients, not because of what we think. The clients we want, we start with them. I think it's on the retention of the clients. We do think about clients as part of partners and we're looking to help support their business. We know we're signing up for that when we focus and win new business. I think it's how we invest in the business to make sure that we are servicing the clients. I think that's one.
I think that point I made earlier about the flexibility of the tech stack and how we can be solutions oriented, and we do spend a good amount of time on each time we've got clients coming in or prospects coming in on their operating model and how they do it. I think that's a differentiator because we're helping them to be better, but we're also helping us to make sure that we get it right for them. It's all about this partnership and mutual situation. I think it's that combination that makes us different.
Is there any investing to do to keep that tech stack at the level you want and need it to be at?
I think there always is. I mean the world is changing. There is legacy tech to get off of. We take the opportunity when we are doing that to make sure that we are moving into the new technology, that we are actually revenue imagining the tech, and that we keep the client in mind. It is not about us, it is about the client. Very important. This organizational change we are making is about that consistency of the underlying tech stack to make sure that we can get the data, the digital sort of opportunities that we think should come with that.
I know that Northern Trust has the One Northern Trust efficiency initiative. How is asset servicing contributing to that?
Yeah, and I think One Northern Trust is one of the elements or one of the pillars is about efficiency. It is really about thinking holistically about Northern and how we can serve clients and come up with solutions that help those clients and in doing that also become more efficient for clients and for us. Creating that value proposition across the board. I'd give an example. We talked a little bit earlier about the wealth management and the asset management servicing linkage. In terms of the asset management and asset servicing linkage, we are working on increasing times where we can create solutions for clients where we can help them both with their asset servicing needs and their asset management needs.
One recent example I'm thinking about is a multinational client that we've had as a client for decades who actually had a need for a private capital fund for their pension fund and we were able to help co-create that with them. $1 billion fund. Good thing for both us and for them. It's again that coming up with the solutions that help us both.
Great. Sounds like a fun place to be. A couple of other questions here just on the product set, and one thing that we've been getting questions from investors on is how are you thinking about digital digital assets? Maybe we could talk a little bit about that. More recently the SEC rescinded SAB 121, which effectively removed the barrier to custody crypto, and wanted to understand how you're thinking about crypto broadly as an asset class. Maybe let's just start with products, and are there any products that you're looking to lean into more or acquire?
If I just go to that change with the data and the digital. We do think that the recent regulatory changes will accelerate digitalization of assets and tokenization of assets. We have since 2017 been investing in this space to come up with use cases that actually we think may be used in the future to make sure as our clients then start to use these, more or regulatory restrictions come off that we're able to do that. Very important space for us that we keep moving with our clients and where they're driving us. We do have an investment in a firm that can hold crypto for clients outside of the states. We're now exploring what that would mean in terms of clients who may wish to do that.
We haven't had a huge surge in that, but we think the bigger opportunity may be in data and digital. I think then the other thing in that space is around cash and how cash may change. If that tokenization of cash takes friction out of the settlement systems, does that actually then help to shorten settlement cycles? We're prepared for that if that happens as well. We are very much forward looking on this, but investing to make sure that to the extent things change, we can help our investors and our clients.
How do you prepare for a change in cash?
It's actually having the actual infrastructure to be able to do that. Be able to also understand how it would change the ecosystem in terms of settlements because we do think it might accelerate it and be able to have the accounting systems that could help to support those changes.
It's a question I've had because I understand stablecoin a little bit. And then we also have in The Clearing House offering real-time payments, which is real-time payments as far as I understand. I guess I'm trying to get it. Yeah, what's the difference there? How does stablecoin potentially do?
I think it's yet to be seen. We need to be prepared for both of those scenarios. Real-time cash may be the solution and maybe you don't need stablecoin, but we don't know yet. That's actually why we need to prepare for both situations.
Now, real-time payments from Clearing House have been available for many, many, many years already. Have you had clients interested in real-time payments?
Actually, I'm probably not super expert on that particular topic. Not that I'm aware of, but I wouldn't want to lead you too far there.
Right. But basically it hasn't been a request that surfaced at your level.
No
Okay, fine. All right, thank you so much. Teresa. Let's switch gears. You, David, and dig into the financials a little bit, if you don't mind.
Sure.
Yep. Okay, so first let's touch on deposits. Now in 1Q, you know, there's a nice positive bump in deposits and driven. At least tell me if this is wrong, but I thought it was driven by tariff volatility that then led clients to hold more liquidity in the form of deposits with you. It seemed like at the time you were reasonably confident that this dynamic would support elevated deposit levels. As we roll into 2Q and now that some of this tariff volatility has ebbed a bit, never know what tomorrow will bring. As of right now, it's settled a bit since the beginning of April. I'm wondering, how are deposits going in the quarter? Is what you expected what you're seeing?
Yeah, it is. You know, deposits definitely did spike after Liberation Day and we've seen some lessening of that obviously as the situation's gotten a bit more clarified, but they've still remained elevated. I think part of that reason is folks don't have complete certainty in terms of what's going to happen, number one. Number two, they started to think a little bit about the dollar as a reserve currency. A lot of noise about that with the budget and everything coming down. We've seen some very big, particularly on the institutional side, reallocations around transitions of big portfolios. When folks do that, they will also keep a lot of cash, making sure they understand sort of when they want to deploy it.
The combination of both of those things, I think, has kept the deposit levels pretty much where I thought they would be.
Okay.
Yeah.
Any difference between wealth versus the asset servicing clients?
Yeah, I mean, you know, the really high end wealth clients like Family Office always view market disruption as an opportunity. They've got plenty of liquidity and they have the ability to invest at all parts of the market. Our core wealth clients, frankly, you know, we tend to have them build a cash reserve and they tend to be, wait and see, longer term investors. I do not. We have not seen a huge change in the allocations around wealth management. I would say it is mostly an institutional phenomenon more than anything else.
Okay, great. All right, very good. Now with that as a backdrop for 2025 net interest income outlook, I think recently you guided to plus or minus. Well, plus. No, I shouldn't say minus. Plus. Low to mid single digits year on year.
Correct.
Is that right?
Okay.
With the deposit trends coming through, that's still a comfortable guide.
Yeah. It is not just the deposit trends. It is, you know, we are higher for longer a little bit here too. Right. I mean the anticipated cuts did not happen. We have some exposure to foreign currencies and the euro obviously has cut, but at the end of the day, it is a combination of both. I would, you know, if I would say anything about that guide, it is not changing, but I would probably have a bias towards the higher end of the guide at this point in time.
Okay. With no cuts in the U.S. and then the curve steepening?
No, we're still thinking there will be one cut in the U.S. but even if there was just one cut, the second cut originally was going to be in December. It wouldn't have had a material impact anyway. It wouldn't be there long enough. It really hasn't changed much in terms of that perspective. I think the higher for longer combined with the higher deposit level would be right where I thought it was going to be.
Okay. Does the curve steepening help you?
Yeah. As I've said to you folks before, we've got about $1 billion of securities that rolls every quarter. When it rolls, we're able to reinvest. I mean, 2025 is, from my perspective, is pretty locked in at. We're thinking about 2026 in terms of making sure that we've got some protection if there's more rate cutting in the future. We definitely are. You're going to see our fixed versus floating go up a little bit more as a result of that as we start thinking about protecting 2026.
Fixed. Rising.
Rising, yes.
Okay. You are taking some actions to lock that in.
Yeah.
Is basically what you're telling us.
We're taking some actions to make sure that we protect ourselves there. Yeah.
Okay. On expenses, you've been clear that you're confident in the ability to have expense growth in 2025 of 5% or better, 5% or less, right. I just wanted to understand where the confidence for that is, given the fact that you are investing in the business. What is, what are the areas that are yielding its ability to drive positive operating leverage.
Yeah. So, you know, listen, we did not obviously anticipate some of the headwinds we had at the beginning of the year with currency and things of that nature. The confidence at the end of the day really comes from a couple of things. One, Teresa talked a bit about this, the change in our business model where we are focused on asset servicing. If you think a little bit about some of the IOO deals we were doing, they came with a lot of upfront cost and they were interesting deals in the longer term. In the short term, you have to swallow quite a bit of expense. We are not doing those anymore, really. We are doing some selectively, but at the end of the day, we are not going to be doing them to the same extent as we did before.
We also have a productivity office that is fully up and running. I'm very integrated with my finance team with that productivity office. From that perspective, we've gone through and identified every single save that we think we can make along the way. For every dollar we invest, we're thinking a bit about what our productivity is going to be to offset that dollar that we're investing. We're very conscious that if we want to keep investing, we have to drive the productivity. I would say at this point, our productivity metrics are really holding up. That gives me a ton of confidence as well.
Excellent.
Yeah.
How much does AI factor into that productivity improvement?
Yeah, you know, so everyone wants to talk about AI. You know, it's interesting. I was checking my ChatGPT this morning for personal reasons, and it was down. Yeah, there was a big outage apparently today in OpenAI. I think it's one of those applications where we are using it internally, we are experimenting with it and we're starting to push it out. It's providing a ton of productivity in terms of just hours spent on things that would require a lot of manual processes that are not required anymore. I think it's a little bit of, you got to learn to sort of drive the new car a little bit. I can't give you, attach an actual number to it, but I can tell you the potential is absolutely enormous.
On the AI side, when you think about process control, you think about manual transactions, you think about digitizing information across a wide variety of things. We're a data house, right. If you're in the custody business, you're consuming a ton of data. If you've got an AI tool that has the ability to go in there and churn this data out and be able to push out whether it's scenarios or planning or make you more efficient because of that, that's just going to be a fantastic productivity driver longer term.
What kind of time frame are you thinking about when you say longer term?
I think it's early days in AI. I really do. I mean, it's not early days in terms of adopting it and using it. It's just early days in terms of how much cost is it really going to drive out of the system? Because as I said to you before, it has to be reliable, it has to be secure. It has to be something that if you're going to release a lot of resources and rely heavily on it. The analogy I tend to use is everyone uses a new GPS tool to navigate inside their car, but if it goes down, no one knows how to get anywhere anymore. Right. I think you got to make sure you still know how to drive the car to where you want to go. Our view is it's still early enough.
We want to have redundant systems in place so that if it doesn't quite do what it's supposed to do, that we can still get things done for our clients.
Just a couple questions on the tech budget that you have. What is that for 2025 and is it mostly run the bank or change the bank?
Yeah, so we do not actually disclose it entirely because I think people, it depends whether you include the capitalized expenses and people and all the rest. I do know. Was reminded that two years ago our Chief Technology Officer came here and did a presentation and he categorized, I think, our tech spend into three different categories. The core infrastructure and modernization and then risk and infosecurity. And then what we call business driven tech. And it is roughly 50/50 between business tech and infrastructure modernization, infosecurity. I would say that within infrastructure modernization, that is roughly 35% and then the cyber and risk is about 15%. And you know, I think at the time two years ago, we told you it was roughly $1.3 billion.
You should assume it's at least $1.3 billion, and somewhere between $1 billion and $2 billion would be the way to think about it. Yeah.
Looking forward to seeing that roll through and driving the productivity and enhancements going forward as you've been already generating. Let's turn to capital and capital return priorities. You have a significant amount of excess capital now. You have had that for many, many, many decades. We all know Northern carries a significant amount of capital. A port in the storm and a confidence booster for your client side. Is that fair to say?
That's fair, yeah.
Okay. At the same time, we have regulations under review and I wanted to understand, are there any potential regulatory changes that you're watching that might impact how much excess you believe you have and how you would allocate that capital?
Yeah. I always get asked the question on excess capital. I do not think we view it as excess. I mean, there are some people that have no problem driving their car when it is below a quarter of a tank. Right. We like to stay near a full tank because you kind of never know what is going to happen. Right. We have to make sure that our clients know that our balance sheet is open. We are a very liability driven institution and we need to get from point A to point B regardless of the weather or the circumstances. Right. From our perspective, it is what our clients expect and that is our comfort area. I would not call it super excess. I would say that we ended up the quarter at 12.9% on a CET1. That is obviously higher than the range we give people.
We usually give 11%-12%, which would tell you that we've got some room there. You never know where you're going to land on the head of a pin at the end of every quarter. We do have very large clients that come to us and ask us to do a lot for them. Want to be in that position where we can respond to that accordingly. On the regulatory front, honestly, they're not that onerous. For Northern , we don't really. We operate so far above our minimum that at the end of the day, we're going to watch very carefully what it does to some of the G-SIBs and some of our peer competitors in terms of how they react. At the end of the day, the changes that are being contemplated really shouldn't affect our business model one way or the other.
To the extent that our peers are able to do some loosening up or whatever, then we can take a look at where we are on a relative basis and an absolute basis as well.
Okay, just wanted to lean on that for a minute because you mentioned capital CET1 10%-11% as you.
11%-12%.
I'm sorry, 11%-12% is your normalized or I don't know what.
Yeah, that's sort of the range we try to manage to, you know, when you're thinking a little bit about it. We don't necessarily have to land there, but we're obviously in excess of that now. That kind of leads into, we paid 116% of earnings last quarter. The next question is always about what are you going to do next quarter, things like that. We signaled 100%, so I think it just allows us a bit more flexibility to do certain capital action that we might be contemplating.
Okay, okay. Maybe you could help us understand where the dividend falls into those capital actions.
Yeah. So same. We have a range for dividends as well, 30%-50%, and. Right. You know, last quarter we were sort of in the Goldilocks zone of around, I think, 39%. You know, we think about the dividend and we try to stay within those ranges, but you're always thinking about sustainability obviously with the dividend. Do not want to get over your skis. You know, we'll look at it like we look at anything else and make a decision based on what we look and think our earnings are going to be going forward. Is there some room there? Potentially, but we'll have to take a look at it and have not reached that decision.
Would CCAR results have any bearing on dividend decisioning?
Usually banks will do some sort of messaging around CCAR, but no, I think our CCAR results we kind of know, but we're going to, I think we're pretty confident we're going to end up where we think we are. It is a combination of things. Board appetite, you know, market conditions, forward looking earnings, et cetera. It is a combination of different things.
Okay, just also wondering about how where opportunities for M&A line up.
In the capital stack hierarchy.
I'll let Teresa answer her portion of it. You know, if we were to do anything in M& A, it would be in the wealth and asset management space. To be honest with you, we are so focused on organic growth right now that it really isn't a top priority for us. You know, if something were to come to us that was actionable, that we thought was interesting, we'd certainly take a look at it. At the end of the day, the organic stuff that we're working on should be able to drive the growth we're looking for. It really isn't top of the stack, if you will, in terms of what we're trying to do and.
From asset servicing, there's not a major gap we're looking to fill at this point. We've spent time with filling out the geographies and the products and services we wanted, but we don't actually see any major gaps at this point. We're not looking for anything.
Okay, very good. And then on the other businesses, David, where does international fall?
The international business is largely in Teresa's bailiwick. Let's talk about that. Do you want to talk about your international growth GFO? My former business that I used to run, obviously big international push there because, you know, in the past our wealth business has been primarily domestic, but the GFO business travels really well internationally. And as Mike mentioned, I think on our first earnings call or one of these conferences, we had some very significant wins overseas as we've been trying to push that business out on the asset servicing end.
Yeah, it's a very robust growth in our pipeline and with our existing clients. Actually, I think that's how GFO is able to expand as well because using some of the same locations and services and regulatory approvals that we have in those locations. It's a nice synergy for us between the wealth business and the asset servicing business.
Excellent. Thank you so much.
I'd just also like to add one other thing that Teresa talked about earlier on alternatives and wealth management. When you think a little bit about the unlock for wealth management going forward, it's, you know, to a large extent we've been a little bit slower in terms of allowing alternative third party investments onto our wealth platform. If you were to, if Jason Tyler was here, he would say in his new role that he's probably spending 75% of his time focusing on alternatives. When you think about the growth side of the wealth business going forward and the asset management business and the asset servicing business, we have a very large strategic growth objective right now in that space across the entire continuum of alternatives. Right.
I think you're going to see us, you know, expand our own fundraising capabilities within 50 South Capital and you're also going to see us onboarding some more frequently, some third party managers through open architecture.
When you're talking about alts, could you just—I could fill out from my perspective, but I'd love to hear from your perspective
P rivate equity, private credit, maybe hedge funds, you know, liquid, more liquid investments.
I can go to forests and bridges and infrastructure and all those.
Yeah, everything. Real estate, infrastructure.
Okay.
Yeah. I mean, you know, our family office clients have about 40% allocation generally in that space. Our push into the ultra high net worth space for family office services, even that cohort group, which is roughly $100 million- $750 million, has a tremendous amount of interest in that asset class. Up to now we've been a bit more conservative around that. I think you're going to see us opening up a little bit more there.
Okay. As we move through adding, well, increasing the volume of vaults that you're working with, et cetera, how do you think about the pre-tax margin in asset servicing? Teresa, where do you.
That is a good amount of our new business is coming from alternatives. We have a good history and legacy around it, very strong DNA in terms of being able to service it. We are seeing because of the growth of the allocation to private assets and alternatives that is part of our new business and it is chinning the bar, it is meeting our financial targets. I think again, not only the solutions orientation, but the client service and the ability to create what is needed in the situation has been a real winner for us.
Is this a sleeve that will move the pre-tax margin in a positive way?
I think it will as we add new business and then continue to work on our operating models as we get more scale. Absolutely.
Super. David, just lastly, I want to make sure we touch on the guidance and we talked a bit before about NII, right, being in the low-to-mid single digits year on year for the full year and expenses and the payout ratio above 100%, is that right?
Yep.
Okay. All right. And then on the medium term targets with the expense to trust fee ratio of 105%-110%, how should we be thinking about that and the time frame for that targeted outcome?
Yeah, I mean if you think a little bit about the wealth business is already there and what we've done is we've, we call it our target financial model. We've pushed it down into each individual business. Every individual business creates the aggregate scorecard that we're looking at for performance. What Teresa was talking about earlier is really important. When you think about the asset owner focus she has going forward, most if not all of those transactions that she's onboarding already meet those targets. Over time you're going to see her pre-tax margin go up. Right. With the additional focus on asset management and wealth for future investments, they're way above the target. Right.
From that perspective, you're going to see as that business becomes a greater percentage of what we're doing as a company, you're going to see that drift up as well. You know, we're hoping that it doesn't take long, but I'm not going to give you an exact time frame, but we're very confident we're going to get there.
Okay. That drives up your ROE over time as well then.
Absolutely. Yeah.
Maybe we'll get some help from the regulators too in the coming quarters.
You never know.
Okay, great. Thank you very much, Teresa and David, for joining us this afternoon.
You bet.
Thank you, Betsy.
Thank you, Betsy.
Thank you everybody.