Release Date: April 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Northern Trust Corp (NTRS, Financial) reported a solid start to the year with strength in underlying equity markets and progress on strategic priorities.
- Wealth Management saw solid growth in client advisory fees and product level fees increased due to favorable markets.
- Asset Servicing generated solid new business growth at attractive margins, with notable wins such as the appointment by true potential and Sanlam Asset Management.
- Asset Management generated positive liquidity flows for the fifth consecutive quarter and saw strong momentum within active fixed income and alternatives.
- Northern Trust Corp (NTRS) entered the second quarter with strong market tailwinds and positive new business momentum, well-positioned to navigate macroeconomic and market uncertainty.
Negative Points
- Reported results included a $189 million loss on the sale of securities related to a portfolio repositioning completed in January.
- Net interest income was down 2% from a year ago, with the company expecting a 3% to 5% sequential decline in NII.
- Nonperforming loans, while at the lowest level since 2008, included a $10 million charge-off during the quarter due to a large commercial loan.
- Noninterest expenses were up 6% compared to the prior year, with the expense to trust fee ratio remaining elevated at 118%.
- Deposit levels are highly unpredictable, making it difficult to forecast net interest income and overall financial results.
Q & A Highlights
Q: So I wanted to start maybe with NII guidance down 3% to 5% for the second quarter. Sounds like the biggest driver there is your assumptions around deposits. So maybe give us a sense of kind of where deposits stand today, perhaps what was the source of upside that you saw over the course of the quarter? And then just curious on -- within that guide, do you guys assume any benefits from the Visa proceeds that I'm guessing is going to be at least temporarily parked in cash?
A: Yes. So, I'll go through a couple of dynamics there. One, just going back to first quarter and what happened that we saw really nice improvement in deposit levels, and it was across both asset servicing and wealth management. And the overall base increased nicely, but that end of quarter level of $124 billion there's some very chunky large clients that we always have in place and that sometimes can have -- lead to significant increases. That was definitely the case at the end. So we have seen deposits come down, and in the first couple of weeks of the quarter.
And -- but that said, the run-up we had at the end of the quarter that wasn't really the driver of the average. It happened very late in the quarter. So the end of first quarter in general was good. As we look out into second quarter, we've got to remember that things like the buildup that we have in April for tax payments. which, frankly, was part of the dynamic of where we ended the quarter, that starts to go away as tax payments get made and so deposits come down. That's one of the factors. And so we could even at this point, be at a peak for the quarter.
And then you asked about Visa no significant lift from that in the quarter. You're right, it's going to be parked at least in the short run. We've got ideas on what to do there. But in the very short run, would be parked in cash but not a significant lift. The impact is more from a capital and leverage perspective more than NII in the short run.
And just in general, you got to remember, this has just been -- it has been very hard to predict deposit levels. And it's not us driving it. We're we did a lot of work with clients to make sure they know that we want deposits and feel like we did a really good job on that. But this has been the most difficult area of the income statement to predict.
Q: So does that imply relatively flat expenses in 2Q? And I guess the question is, just give us some visibility around you've talked previously about the focus in terms of flexing expenses lower, bringing the expense growth below last year's 4.8%. Just give us a sense of the work that's being done your level of confidence in terms of hitting some of those targets around the expense to trust fee asset ratio?
A: Yes. So first of all, that goal of 5% or below, that is still the goal. And secondly, it's early in the year. And we got through first quarter and a little bit above that. But at the same time, we're still working very hard to get expenses down. And the numbers that we gave in the opening give a sense of some of the bigger line items. But there are other areas where we're continuing to push and even on those items. We're continuing to push hard. We're constantly trying to find opportunities to get expenses down, enormous focus inside the company.
And you're right to to confirm the numbers that we had there in things like outside services where we've got tech services and even cloud migration and consulting, those are all areas where we've seen some elevation all for strategic reasons, but we've got to find productivity and make sure we're finding efficiencies to get expenses where we want them to be early in the year, and we're still pushing for that 5% or better.
Q: So I guess maybe moving on expenses. I just want to make sure we heard you right, comp expense is down about 35% to 40% sequentially. And then I think you counted services and equipment and software both up 10% to 15% quarter-over-quarter.
A: That's right.
Q: Could you just talk about your servicing pipeline and just your wealth management growth. Just some more color on that would be fantastic.
A: Sure. I'll start off with wealth management. So we did see nice organic growth in the first quarter, and we expect that to continue as we go forward. As was mentioned in the commentary there, I continue to see it on the advisory fee side of the equation. And also, we've gone through a number of quarters where the product level fees in wealth management have been more of a headwind just related to in some of the specific asset categories, and we saw that subside in the first quarter. So we expect that to also be a positive going forward.
And you heard our family office business growing at a higher rate in the first quarter, also seeing strength in ultra-high net worth, which those are the 2 segments that we're primarily focused on. And I would say in asset servicing, the growth has been relatively broad-based, certainly seeing strength with asset owners in North America, but also in Europe as well. So that has been a positive. And we're seeing it outside of, I'll say, core asset servicing with the capital markets area being an area where with integrated trading solutions, we're seeing that as a, I'll say, an increasingly is increasingly utilized area for us to generate new relationships and then broaden them out from there. So I feel good about the breadth of the organic growth in that business as well.
Q: So I guess 2 questions. One on capital. And I realize that your business model is one that is capital rich. And just wanted to understand how you think about capital levels of capital accretion and when is the right time to start leaning in more to buybacks given the excess capital that you have.
A: So the -- you're right that the capital levels are strong. And even with where we are right now at [114] and CET1, I'd argue that that's a little artificially low right now. We talked about the fact that loans were elevated because of the operational dynamics at the end of the quarter. And so we expect -- RWA is already down as a result of loan volumes, which we mentioned earlier coming back more to normal levels. Plus, we've got $700 million in AOCI, pulling the par, plus we've got Visa, and plus we're still returning on an operating basis at a good level. And so those are all good.
They're also -- and you're right to note that we like having strong capital levels and still able to develop good returns at these levels. And we also
