Northern Trust Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 20, 2022

There are 11 speakers on the call.

Operator

Good day, and welcome to the Northern Trust Fourth Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Director of Investor Relations, Mark Betti. Please go ahead.

Speaker 1

Thank you, Ali. Hello, everyone, and welcome to Northern Trust Corporation's Q4 2021 earnings conference call. Joining me on our call this morning are Michael Grady, our Chairman and CEO Jason Tyler, our Chief Financial Officer and Lauren Alma, our Controller. Our 4th quarter earnings press release and financial trends report are both available on our website at northentrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call.

Speaker 1

This January 20th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through February 17th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our Safe Harbor statement regarding forward looking statements on page 13 of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up.

Speaker 1

This will allow us to move through the queue Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Speaker 2

Thank you, Mark. Let me join in welcoming you to our Q4 2021 earnings I hope you and your families are healthy and well. Our performance in the 4th quarter generated a 9% increase in revenue compared to the prior year and a return on average common equity of 14.5%. Revenue growth reflected strong organic growth across each of our businesses, which also contributed to full year earnings growth and a return on average common equity of 13.9%. Throughout 2021, we In our Wealth Management business, we have driven growth across each of our regions and our global family office business.

Speaker 2

We continue to see improved levels of engagement and new business activities with both existing and new clients. And we ended the year with a continuation of the strong growth in loans and deposits that we have seen throughout 2021. During the quarter, we began executing on our plans to expand our Florida footprint into Jacksonville, One of the fastest growing Northeast regions within Florida. We were honored to be recognized by the Financial Times Group as the best private bank in the U. S.

Speaker 2

For the 11th time in the past 13 years. We were also named the best private bank in the U. S. For family offices, Recognizing our Global Family Office Group for its commitment to families of significant wealth, their private foundations and the family offices that serve them. Within Asset Management, we continued to see strong organic growth across key strategic areas of focus, highlighted by our money funds surpassing 330,000,000,000 and AUM during the quarter.

Speaker 2

Our FlexShares ETFs reaching $20,000,000,000 in assets and ESG strategies growing to more than $165,000,000,000 in assets. During the year, we also benefited from growth in our multi manager strategies and our outsourced Chief Investment Officer Services. Our Asset Servicing business continues to experience growth that is well diversified across regions, products and client segments. A highlight of our new business success is the recent announcement of the expansion of our relationship with Pendal Group across Australia, the UK, Ireland and the U. S.

Speaker 2

Northern Trust has provided fund administration, global custody and transfer agency services to Pendal since establishing its 1st mutual fund offering in the U. S. In 2,009. This mandate will now be extended to include fund accounting, regulatory reporting, Collateral management, foreign exchange and middle office services across all of Pendal's businesses. This is an excellent example of how we grow our asset servicing business By targeting a premier asset management firm, developing a relationship, providing exceptional service, Growing along with their success in increasing their assets under management and then expanding the relationship by consolidating their activities and providing a broader set of capabilities.

Speaker 2

I want to commend the efforts of our employees around the world whose commitment, expertise and professionalism is serving our clients and communities and continues to be extraordinary. As we enter 2022, we remain focused on our long term priorities and investing wisely for future profitable growth to deliver long term value to our various stakeholders. Now, let me turn the call to Jason to review our financial results in greater detail.

Speaker 3

Thank you, Mike. Let me join Mark and Mike in welcoming you to our Q4 2021 earnings call. Let's dive into the financial results of the quarter starting on Page 2. This morning, we reported 4th quarter net income of $406,400,000 Earnings per share were $1.91 and Return on average common equity was 14.5%. Results for the quarter included a severance charge of $6,100,000 A pension settlement charge of $3,400,000 a $13,000,000 gain within other operating income relating to property sales And net one time tax benefits of $13,900,000 primarily relating to a lower net tax impact from international operations.

Speaker 3

Let's move to Page 3 and review the financial highlights of the quarter. Year over year revenue was up 9% and expenses increased 2%. Net income was up 69%. In the sequential comparison, revenue was up 2% and expenses were up 4%, While net income was up 3%. The provision for credit losses reflected a release of $11,500,000 in reserves in the current quarter compared to a release of $13,000,000 in the prior quarter and $2,500,000 in the prior year.

Speaker 3

Return on average common equity was 14.5% for the quarter, up from 8.8% a year ago and up from 13.7% in the prior quarter. Let's look at the results in greater detail starting with revenue on Page 4. Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1,100,000,000 And were up 8% from last year and flat sequentially. Foreign exchange trading income was $77,000,000 in the quarter, up 12% year over year and up 16% sequentially. The year over year growth was driven by higher volumes, partially offset by lower volatility, while the sequential increase was due to higher volumes as well as higher volatility.

Speaker 3

The remaining components of non interest income totaled $119,000,000 in the quarter, up 28% from 1 year ago and up 8% sequentially. Within this, security commissions and trading income was up 11% from the prior year and down 1% sequentially. The year over year growth was driven by higher core brokerage revenue. Other operating income totaled $72,000,000 And was up 46% from 1 year ago and up 16% sequentially. The increase compared to the Prior year was primarily driven by the previously referenced $13,000,000 in gains from property sales, distributions from investments in community development projects And higher banking and credit related service charges, partially offset by lower miscellaneous income.

Speaker 3

The sequential increase was primarily due to the gains on property sales, also partially offset by lower miscellaneous income. Net interest income, which I'll discuss in more detail later, was $371,000,000 and was up 7% from 1 year ago and up 4% sequentially. Let's look at the components of our trust and investment fees on Page 5. For our Corporate and Institutional Services business, fees totaled $625,000,000 and were up 5% year over year and down 1% sequentially. Custody and fund administration fees were $458,000,000 and up 9% year over year and down 1% sequentially.

Speaker 3

The year over year growth was primarily driven by favorable markets in new business, partially offset by lower transaction based fees. The sequential decline was driven by lower transaction based fees and unfavorable currency translation, partially offset by favorable markets in new business. Assets Under custody and administration for C and IS clients were $15,200,000,000,000 at quarter end, Up 11% year over year and up 3% sequentially. The year over year growth was primarily driven by favorable markets and new business. The sequential performance was primarily attributable to favorable markets.

Speaker 3

Investment management fees in C and IS of 100 and $15,000,000 were down 9% year over year and were flat sequentially. The year over year performance was driven by higher money market fund fee waivers, partially offset by new business and favorable markets. Fee waivers in C and IS totaled $50,900,000 in the 4th quarter compared to $49,900,000 in the prior quarter and $11,400,000 in the prior year quarter. Assets under management for C and IS clients were $1,200,000,000,000 up 13% year over year and up 3% sequentially. The growth from the prior year was driven by favorable markets and client flows.

Speaker 3

The sequential increase was primarily driven by favorable markets. Securities lending fees were $19,000,000 up 8% year over year and down 6% sequentially. Average collateral levels were up 16% year over year and down 1% sequentially. Moving to our Wealth Management business, trust investment and other servicing fees were $486,000,000 and were up 13% compared to the prior year and up 1% from the prior quarter. Fee waivers in Wealth Management totaled $30,200,000 in the current quarter compared to $26,700,000 in the prior quarter $12,200,000 in the prior year quarter.

Speaker 3

Within the regions, the year over year growth was driven by favorable markets and new business, partially offset by higher fee waivers. For the sequential performance, the growth within the regions was primarily driven by new business. Within Global Family Office, the year over year performance was driven by favorable markets And new business being more than offset by higher fee waivers. The sequential decline was mainly related to higher fee waivers. Assets under management for our wealth management clients were $416,000,000,000 at quarter end, up 20% year over year and up 12% on a sequential basis.

Speaker 3

Both the year over year and sequential increases were driven by client flows and favorable markets. Moving to Page 6, net interest income was $371,000,000 in the quarter and was up 7% from the prior year. Earning assets averaged $149,000,000,000 in the quarter, up 13% versus the prior year. Average deposits were $136,000,000,000 and were up 18% versus the prior year, while loan balances averaged $40,000,000,000 and were up 20% compared to the prior year. On a sequential quarter basis, net interest income grew 4%.

Speaker 3

Average earning assets grew 3% and average deposits grew 5%, while average loan balances were up 4%. The net interest margin increased 1 basis point sequentially. Turning to Page 7, expenses were As mentioned earlier, the current quarter included $9,500,000 in charges related to severance and a pension settlement, While the prior quarter included a $6,900,000 pension settlement charge. Also recall that last year's results Included a severance charge of $55,000,000 and an occupancy charge of $11,900,000 Excluding these items, expenses were up 7% versus the prior year and up 3% sequentially. Excluding severance charges, compensation expense was up 7% compared to the prior quarter and was up 2% sequentially.

Speaker 3

The year over year growth was primarily driven by higher cash based incentive accruals as well as higher salaries. The sequential increase is primarily due to higher salaries, partially offset by lower equity based incentives. Excluding the previously mentioned pension settlement charges, employee benefits expense Was up 3% from 1 year ago and up 10% sequentially. Both increases were impacted by higher medical costs and lower payroll withholding. Outside services expense was $224,000,000 and was up 8% from a year ago and up 6% from the prior quarter.

Speaker 3

Revenue and business volume expenses accounted for just over a third of the year over year growth. The remaining year over year growth as well as the Sequential growth within the category included higher technical services, consulting and data processing related costs, reflecting investment in the business as well as the timing of engagements. Higher legal services costs also contributed to the sequential increase, but were down compared to the prior year. Equipment software expense of $196,000,000 was up 11% from 1 year ago and up 6 Percent sequentially. Both the year over year and sequential increases reflected higher software support and amortization costs.

Speaker 3

Excluding the prior year charge, occupancy expense of $52,000,000 was down 6% from a year ago and down 4% sequentially. Other operating expense of $79,000,000 was up 9% from 1 year ago and down 3% sequentially. The year over year increase is driven by higher business promotion expense, partially offset by lower miscellaneous expenses. The sequential decline was impacted by higher costs associated with the Northern Trust sponsored PGA Golf Tournament in the prior quarter, partially offset by increases within other businesses business promotion spend and miscellaneous expenses within the category. Turning to the full year, our results in 2021 are summarized on Page 8.

Speaker 3

Net income was $1,500,000,000 up 28% compared to 2020 and earnings per share were $7.14 up 31% from the prior year. On the right margin of this page, we outlined the non recurring impact that we've called out for both years. We achieved a return on equity for the year of 13.9 Compared to 11.2% in 2020. The full year revenue and expense trends are outlined on Page 9. Trust investment and other servicing fees grew 9% in 2021.

Speaker 3

The growth during the year Was primarily driven by new business and favorable markets, partially offset by the impact of money market fee waivers. Net interest income declined 4%. Average earning assets during the year increased by 16%, While the net interest margin declined 20 basis points driven by lower average interest rates. The net result was revenue growth of 6% in 2021 compared to 2020. On a reported basis, expenses were up 4% from the prior year.

Speaker 3

Adjusting for the expense items noted in both years, expenses were up 6% from 2020. Turning to Page 10, our capital ratios remain strong with our common equity Tier 1 ratio of 12.1% under the standardized approach, up slightly from the prior quarter. Our Tier 1 leverage ratio was 6.9%, down slightly from the prior quarter. We declared cash dividends of $0.70 per share totaling $146,800,000 to common stockholders. The current environment continues to demonstrate the importance of a strong capital base and liquid balance sheet profile to support our clients' needs.

Speaker 3

And we continue to provide our clients with the exceptional service and solution expertise they've come to expect. As we begin 2022, Our focus is on balancing a variety of factor in the months ahead, with the prospect of higher interest rates benefiting our revenue, but conversely Thank you again for participating in Northern Trust's 4th quarter earnings conference call today. Mike, Mark, Lauren and I would be happy to answer your questions. Ali, will you please open the line?

Operator

Of course. Thank you. One question and one follow-up question. And we'll go ahead and take our first question from Edward Silvercore. Please go ahead.

Speaker 3

Good morning, Glenn.

Speaker 4

Hi. Hi, Glenn.

Speaker 5

Good morning. How are you? So quick question for you on that last comment you made about focusing all those things. You are not alone there. And so you had nice fee operating leverage for the year.

Speaker 5

The Fee and expense ratio came up a little bit, obviously, because it was a super low number in the Q3. So As you balance all those things as we look out into 2022, is that can that be the same key focus that it's been in the past as you balance all those meaning you'll get the benefit of rates over time, but the cost inflation is here now. So should we be prepared for 22 being a tougher year for that metric?

Speaker 3

Yes, we should, Glenn. I mean, and you're hitting on an important point, which is that We all are seeing the prospects of rates and we are extremely leveraged at the front end of the rate curve, both So in waivers obviously, but the inflation is that's hitting faster and we saw it Well, we saw it in Q3 as we were looking at incentive comp accruals. We saw it in Q4 as we made some off cycle adjustments, which we can talk About in salaries, but that inflationary component, and by the way, it's not just in compensation, it shows up in other areas of the income statement, It's going to hit 1st. And but at the same time, the leverage we have to the front end of the yield curve means that when rates Do go up, it's extremely beneficial to us and we've been talking about that for 2 years obviously, how much Net interest margin and also waivers in the money market products have been impacted.

Speaker 5

I appreciate all that. I'll let one of my peers ask on the NII stuff. The question I did want to ask a quick question on Organic growth as a follow-up. You mentioned it, you spoke to it. It's clearly there because you can see it in your asset growth.

Speaker 5

But can you talk about Whether it be new business wins in asset servicing and asset management or a one but not yet funded pipeline? Thank you.

Speaker 3

Sure. Thanks, Glenn. Both of the businesses and as you know, when we talk about the organic growth, we tend to talk about year over year, not on a length Quarter basis and that's a really important distinction. That said and you touched on it both Asset Servicing and Wealth Management had good lift From an organic perspective, year over year and frankly in the quarter as well. And so you saw we've been talking about Increased momentum in the Wealth Management business, you're starting to see that come through with higher fees on a quarter over quarter basis That's driven by new business and we get the same effect coming in Asset Servicing.

Speaker 3

The pipeline in both of the businesses, in the short run, It looks strong. The pipeline for the businesses has different timing, but in both instances, they're reflecting good And I think in the C and IS in particular, they see good activity overall. In the front end, it might be a little bit different. The back end is a little bit harder to tell.

Speaker 5

Okay. Thanks.

Speaker 3

Sure. Thanks, Glenn.

Operator

And we'll move on to our next question from Steven Chubak, Richard, please go ahead.

Speaker 3

Steve?

Speaker 6

Thanks, good morning, everyone. So wanted to start with just On capital management, as you noted, capital ratios continue to be quite strong. I believe, Jason, on the last call, you had talked to or spoken to the fact that the RWA inflation, the loan growth was consuming a lot of the capital build that you guys were generating. This quarter that wasn't the case. We didn't really see any RWA growth and yet you tempered the buyback.

Speaker 6

I wonder if you can give some perspective as to what informed that decision And how should we be thinking about the pace of buyback from here, especially if the pace of RWA growth does begin to moderate?

Speaker 3

Sure. Well, a couple of thoughts there. 1, just for the quarter, what the RWA growth is one dynamic, but of course, AOCI hits capital and that's another dynamic we have to manage as well, which is why we were flattish quarter over quarter. That said, as we think about the overall, I know a lot of people are wondering what we're what our game plan is from a buyback perspective. And If you just take it's a good time to just take a look back at the year and we generated $1,500,000,000 in capital last year From earnings.

Speaker 3

And so you take a step back and just say where did just the math you're doing, where did the $1,500,000,000 go? Well, we did Turned $600,000,000 to shareholders in the form of dividends over the course of the year, but we very intentionally grew the loan book. We saw high quality opportunities on the horizon and we wanted to be there for clients. And so you look year over year and loans are up $7,000,000,000 and even within this quarter, they are up $1,000,000,000 or $2,000,000,000 And so and if you think about where The ratios are that $7,000,000,000 increase in loans, that drives that takes another $900,000,000 And the capital that we generated. And so you look at dividends and what happened with loans, that's Right there, that's 100 percent of the capital we generated.

Speaker 3

Now even so, we did buybacks In the year, about $250,000,000 and so that's why you saw CET1 drift down a little bit. But The next important question is, is the loan growth good? And it was very good. It's good strategically for us because we supported Clients, but it's also good economically. If you think about the ROE of loans, it's very attractive, particularly in a low interest rate environment.

Speaker 3

And so We feel really good with what we did in 2021. In 2020, the door was closed. Last year, we think we did the right thing clients and shareholders by growing relationships and earnings. But as you're trying to predict what we're going to do in 2022, it's very different. We don't see the same loan growth on the horizon.

Speaker 3

And we've even talked about the fact that some of the loan growth we've had is in Some of the areas of our business where it can be very spiky and just as our clients put on they can put on $1,000,000,000 or $2,000,000,000 or $3,000,000,000 In a deposit, they can do the same thing in lending. And so we could see lending be spiky both up and down, but don't see that Same type of $7,000,000,000 growth year over year.

Speaker 6

Thanks for that color, Jason. And just for my follow-up, I wanted to ask sorry about that. On the expense side, you did give that perspective noting that On an adjusted basis, the expenses grew 6% to 7% this past year. Obviously, we had some nice market tailwinds, which drive some impact on the variable expense lines. But as we think about some of the inflationary pressures that started to manifest late last year And are going to continue into this year versus that up 6% to 7% that you had talked about in 2021, should we expect the expense growth to be Similar or even above that given the inflationary pressures that you spoke to?

Speaker 3

Let me hit The big three. Maybe I'll hit comp and then I'll hit technology, which Get sit outside services and equipment and software expense. If you look at the comp line, We've already seen some inflation hit that line this year and you see it was just the increase in comp this Quarter linked quarter, dollars 13,000,000 of that alone came from salaries. And The impact of what we've done in these off cycle adjustments, not done yet. And so we're just from the actions we've already taken, We're going to see another $3,000,000 lift in the comp line just from those salary adjustments.

Speaker 3

Now secondly, there's what are we going to do with our normal base pay adjustments, Which as you know that starts in 2nd quarter, but that's going to be higher and it's reflective of inflation. It's usually we see That be an $8,000,000 to $10,000,000 a quarter impact. This year, it's going to be more like $20,000,000 a quarter. And so Those salary actions combined are going to give just in and of itself that will lift the total comp line 5 percent year over year for the year. And on top of it, we then have to think about what hiring are we going to do and what other adjustments might we We'd have to take, but that at least gives you a lens of what we can see at this point.

Speaker 3

Now let me switch to tech And that's the other area where all financial services companies are spending a lot of time and a lot of investment. That hits us All across the P and L, but mostly in outside services and equipment and software. And you saw big Sequential increases of about 6% in both of those categories this quarter, but as we look forward, very different impacts Of what we think is going to be existing in 2022. In outside services, there's tech Services within that category, a lot of project work that we're doing, we got a lot of that done in 4th quarter. We do not see significant impact and significant lift in 2022 in outside services.

Speaker 3

In fact, The number you see now for Q4, that's a good starting point for all for 2022 And any motion from there is going to be driven more by business activity. And obviously, there's a lot of Business related activity in that line item that could drive it, but the tech component largely done in from an increase perspective. Equipment and software, very different. We are on a ramp there against 6% increase there. We ended that year well with the category was up 9% Year over year over 2020, we're going to see that same type of lift in that category in 2022, maybe slightly higher.

Speaker 3

So what are we doing there? It's really 4 factors. 1, depreciation and that alone is we know we can see As we sit today, that's going to be up $45,000,000 or $50,000,000 So just depreciation, which is kind of in the bank at this point, We know it's going to grow equipment and software by about 7% alone and we know that there's some other increases coming. 2, inflation of the underlying costs and that hits in different ways. 3, we're continuing to invest In technology to get stronger and maintain a very strong foundation.

Speaker 3

And then lastly, business growth, including digital. So A lot of investment going on there in a handful of different categories, but that's those are the 3 big Categories of expenses to give you a sense of what we know at this point.

Speaker 6

No, very helpful breakdown. Thanks so much for taking my questions.

Speaker 3

Thanks.

Operator

We'll take our next question from Ken Usdin from Jefferies. Please go ahead.

Speaker 7

Hey, thanks. Good morning. Jason, you mentioned earlier that the company is meaningfully asset sensitive. And I wanted to ask you, your disclosures in the 10 Q and K give you an expected change over a base forecast. But I wonder if you could give us a Simple way of thinking about this cycle, what each 25 basis points of rates would give you in terms of NII dollars?

Speaker 3

Sure. Well, first of all, and you know this really well, it's not linear. And so let me give you the first one. I wish that the 4th and 5th were the same, but the first alone is at a high level if you think about We've got about $70,000,000,000 in floating rate earning assets and We think we'll get about a $40,000,000 lift on a quarterly basis alone on the asset side. We'll give up maybe $5,000,000 of that In higher borrowing costs, so that's net 35 before we really talk about Significant beta, but we think that first lift is probably in that $35,000,000 a quarter range.

Speaker 3

Now that the first lift, It also gets to waivers, Ken. And so and we've talked about the fact that our money market mutual fund family It's priced much more institutionally. And so it only takes one lift to work fully through the duration of the portfolio to get the vast, if not all of the waivers off the table as well. And as you know, this past quarter, we waived $80,000,000 and Run rate on that is lower now, but so I think it's important to think about both of those. Go back to NII, as we get those 2nd, 3rd, 4th rate hikes, then that's when we start to give up some of the gain coming The from deposit cost.

Speaker 7

Yes, perfect. And then just second one quickly on C and IS. You mentioned lower transaction activity. That line was flattish. Can you just kind of give us a help on magnitude on what type of holdback that might have been and maybe just talk through FX translation headwinds as well?

Speaker 3

Sure. And it's interesting as we talk about transaction Cost and transaction volume, I think people look to FX and they look to securities commissions trading even within the custody and fund administration fees, There are transaction related fees that feed into that line. And so that's what we're referencing when we're saying that some of those That those costs were lower in the quarter. And so and you'll note in FX, for example, good quarter. And so Just transaction volumes in FX and other areas were high, but within as we really dug into why What happened within the custody and fund admin lines within C and S, it was more the transaction component, the non asset, The AUC non AUM based fees that were light, that were light in the quarter.

Speaker 7

Okay. And was I guess, was that meaningful and was FX translation a meaningful headwind this quarter too sequentially?

Speaker 3

Yes. Mark, go ahead Mark.

Speaker 1

Yes. Ken, it's Mark. Combined, you're looking at about 2% there, with the transaction based fees being more than half of that. So, The 2 were a, I'd say, a fairly significant drag when you look at custody and fund administration on a Sequential basis.

Speaker 7

Okay, got it. Thank you.

Speaker 3

Thanks, Kim.

Operator

We'll take our next question from Alex Wolfson from Goldman Sachs. Please go ahead.

Speaker 8

Great. Hey guys, good morning everybody. So a couple of questions around the rate dynamics. I guess, as we think about your deposit betas and I appreciate nobody has Crystal Ball. But as you think about the current cycle versus the prior cycle, has the nature of the deposit base changed much For us to sort of contemplate as we think about the positive betas over the next several quarters, right?

Speaker 8

So or do you think the experience you guys saw And the last cycle is a pretty good one, as a sort of benchmark for the possibility of this turnaround.

Speaker 3

Yes. It's We talk about it a lot and I've thrown out to our team, is it similar to last time and it's just it's hard to tell. What I can give you some facts that and it's less to the deposit beta, but more to just the overall Asset sensitivity of the securities portfolio on the balance sheet, the duration in The duration has come down from last quarter was 2.7 and now it's at 2.6. And Ironically though, if you look at the duration of the overall asset side of the balance sheet cumulatively, It's much higher than what it was in the prior cycle. And so I can actually tell you this as it sits right now, it's about 1 0.16.

Speaker 3

And if you go back to the last tightening cycle 2015, it was 0.7. And so that's meaningfully different. Now we have to see how the deposits specifically react, but That at least gives you a sense of what the exposure of the overall balance sheet is like. But Mark, I don't know if you have anything to add.

Speaker 1

The other thing that we've heard as well from our team To keep in mind, Alex, is the trajectory of the rates. I think last time the rate hike started much slower Right. Then what it appears is it might happen this time. So you might go through those rising betas in a Quicker way because of that. So we'll have to see how that plays out as well.

Speaker 8

Got it. Thanks for that. And then my follow-up is around, I I guess expenses again. Jason, I appreciate you guys giving different pieces and that's helpful and obviously acknowledging that you guys don't give flat out guidance In terms of expense growth, I do like the way you talk about expenses to fees as a ratio and that got to some of the Gladys points as well. But If you guys are at around 104 by our math in terms of expense to fees in 2021, You talked about inflationary pressures, but also you're getting money market fees back likely in 2022, which I would have thought would come in at a really high kind of incremental market.

Speaker 8

So

Speaker 5

When you blend it all together, net

Speaker 8

net, we're staying kind of in this $103,000,000 $104,000,000 $105,000,000 range for $22,000,000 and beyond as we kind of think about that ratio The guidepost sort of thing between the revenues and expenses.

Speaker 2

Alex, it's Mike. I think your framework is correct or at least I would say aligned with the way that we're looking at it as well. Of course, we don't know what the market levels are going to be and how quickly the fee waivers come back. And obviously, we're managing through the expense side of that. But to your point of kind of being in a range of, I'll call it, efficiency there, we're in that range.

Speaker 2

And Particularly in an inflationary environment, that can be challenging to try to get that ratio to go down. And as Jason alluded to earlier, where you really see the other side of the coin, if you will, is on Interest rates and therefore NII that then drops down to operating leverage. And so in the same way, we're saying, okay, stay in that Expense to trust fee ratio as far as efficiency, but then look to pick up through NII so that you have Positive operating leverage and that your pretax margin is in that range that you want to get the right returns.

Speaker 8

Yes. That makes sense. That's consistent with kind of how we think. Okay, awesome. Thank you.

Speaker 3

Yes. Thanks, Alex.

Operator

We'll go ahead and take our next question from Brennan Hawken from UBS. Please go ahead.

Speaker 3

Hi, Brennan.

Speaker 9

Hey, thanks for taking my questions.

Speaker 4

I just

Speaker 9

wanted to follow-up, circle back a little bit on capital and pull together a couple of the Comments that you made on that, Jason. It seemed like what you said was that in the current quarter, there was some AOCI Consumption of capital and while you had $1,500,000,000 some odd base of loan growth, the outlook for the loan growth Is swelling and not really there. So number 1, does that mean that Your further consumption of capital on the loan growth side may slow. Of course, there could be a handoff to AOCI. And then number 2, when you talked about the $7,000,000,000 versus the $900,000,000 it seemed like that suggested a pretty high risk weight density in the loan book.

Speaker 9

Can you talk about the risk weight that you have in that loan book and what kind of loans are driving that growth? Thanks.

Speaker 3

Sure. Well, let me start with the end, but don't let me forget the first part of it. The loans that we have are and you can see it in our reporting, it's First of all, the first cut is it's weighted more heavily toward wealth management, obviously. And within that, it's a blend of Personal, commercial real estate, corporate, commercial and the risk rates on those Don't vary dramatically from a risk weight allocation perspective. And so at a really high level, you can just you look at what our outstandings are and it's not going to vary within Those categories significantly.

Speaker 3

Now then there's also some off balance sheet commitments that aren't reflected there, But that gives you a general sense and we've talked about and I could now if you'd like, if it's helpful to give you more of a breakdown of the loans and what they look like by category. But and the growth has actually been relatively consistent. If you think about the increase, just for example, if you're trying to do the math there, If I look at increase in loans from Q3 to Q4, commercial has been about it was up about $1,500,000,000 Commercial about $650,000,000 and personal loans about $350,000,000 commercial real estate $250,000,000 And then some other stuff with the remainder. And so you can tell it's relatively consistent to our overall volumes In the $40,000,000,000 portfolio. If I come back to your first

Speaker 9

Yes, thank you. That's what I was going to I was just going to remind you about the first part. That's all. You're on it. Thanks, Jason.

Speaker 3

I am

Speaker 8

notoriously bad at multiple

Speaker 3

part questions, you got to remind me. Horritionally bad at multiple part questions, you got to remind me. We just don't see The same outlook on loan growth. And I think you couple that with again, we had We generated $1,500,000,000 in capital and we're starting and if we do get What we walked through earlier, if we get multiple rate hikes and we start to have improvement from a net interest margin We start waivers start to go away, then the math becomes different and we can think about different ways to return that capital generated to shareholders. And we obviously we go through the same framework We always have.

Speaker 3

We think about the dividend first to make sure that it's something we're comfortable with and it's within the range we've talked about. And then we start to look at the outlook for the size of the balance sheet to stay where within a range that we feel is appropriate given all the dynamics we've talked about

Speaker 9

Excellent. That was very thorough and helpful. And you touched on The size of the balance sheet there. So maybe I'd like to ask for the follow-up. When you think about deposit Run off, because you typically with the business model, you tend to see deposit growth when the Fed is expanding its balance sheet and run off when it's shrinking.

Speaker 9

Last cycle, the runoff for Northern for you guys was less than it was for some of the other custody bank peers. So when you think about what's driven the deposit growth at different types of businesses that have driven the deposit growth the past 2 years, is it largely Does it look similar to how it looked last cycle? Or has the composition of deposit growth shifted, which might suggest we should think about Deposit runoff in a different way.

Speaker 3

I look at it a little bit Differently, one is, I think we have to look at just what's happened with the asset values. And If you go back to the end of 2019 pre health crisis and you look at what's happened with the S S and P 500 from then to the end to now, the S and P is up something like it's something like 48%. And if you look at our deposits on average, we went from averaging $85,000,000,000 to $90,000,000,000 up to 100 and $35,000,000,000 to $150,000,000,000 It's a very similar increase. And then the second thing to look at is What's operational versus non operational? And did we have similar growth did all of the growth come in non operational deposits?

Speaker 3

And the answer is absolutely not. A lot of more of our growth has come in operational deposits. And then the 3rd dynamic, which you got at is, there is just this overwhelming dynamic of The Fed having put 1,000,000,000,000 of dollars of liquidity into the market and whatever our little tiny $150,000,000,000 balance sheet looks like, There's it's still going to be impacted by what the Fed does. And so you put all those things together and you just I don't think there's reason to believe At this point, from what we see, just from that data, that there's some massive unwinding coming. Now it could come, But those data points tell you that not necessarily.

Speaker 9

Got it. That's helpful. Thanks, Jason.

Speaker 3

Sure.

Operator

We'll go ahead and take the next question from Brian Nagel from Deutsche Bank. Please go ahead.

Speaker 4

Great. Thanks. Good morning. Jason, thanks for all that color on the expense Areas and great granularity to my question. One follow-up on just a couple more areas and that's Just the Northern Coast Open, I think, obviously, you're not doing that this year, but I think you alluded to in the past of potentially doing a marketing campaign And then maybe just any commentary around the travel, potentially higher travel expenses If we're all back to office and COVID hopefully recedes.

Speaker 3

Yes. So maybe I'll touch on Travel and business promo and then maybe Mike can talk about golf tournament. So we're seeing business promo pick up again. It was up in Q4. And so and no one's cringing at that.

Speaker 3

I mean, it means that we're in front of clients more. And so is it going to get back to the levels we saw before? Boy, that's highly, highly unlikely, but Already partially in the run rate in 4th quarter in other expenses and we do Expect that to continue to come. Now it's not that's not adding $10,000,000 a quarter in expenses, but it is adding to The expense run rate. Mike, you want to touch on golf?

Speaker 2

Sure. And the golf tournament has been a very successful Marketing effort and client entertainment effort for us, particularly around branding. And as much as we've ended that relationship at this point, we still need to continue to invest in the brand. And so some of the proceeds that are the funds that are deployed for that brand building through the golf tournament are being Redeployed in other areas. At this point, Brian, it's not going to be at the same levels as what we were spending on the golf tournament.

Speaker 4

Okay. That's helpful. And then maybe just on expenses overall. I mean, it's actually a pretty good playbook over the last 10 years In terms of your expense history, with a pretty reliable middle single digit type of expense growth In each year, which kind of I think tied

Speaker 1

I think we lost you, Brian. Maybe Brian, maybe you could re queue and we could take that.

Speaker 3

Otherwise, we've got I think one more. Ali, do you want to out? Can you hear us? You're next in queue.

Speaker 8

I can hear you guys. I don't know if I'm speaking live.

Speaker 2

We can hear you, so go for it.

Speaker 8

Great, sorry. So, thanks for taking the follow-up here. So, a lot unclear on the deposit trajectory in terms of the sizing of the balance sheet. I'm curious how that could play out with money market funds because that industry has obviously seen Tremendous amount of inflows as well. If you go to the last cycle, it's really not that clear.

Speaker 8

There was a huge amount of Client in money market fund balances as the Fed started to unwind their policies in QE. How are you guys thinking about the sustainability of all the market share gains you've seen in the money market fund space because that will obviously inform the amount of money market fee waivers that's going to come back. $80 ish million is kind of what you're waiving today per quarter. All of it is presumably going to come back with the first hike, but that obviously seems the balances stay in the same

Speaker 3

Yes. So I think the similar math that we went through earlier on the deposits, I mean, We were at something like $215,000,000,000 in AUM pre crisis and then we ended 2020 at 2.72. We ended 2021 at 3.33. And I can tell you, as we sit day before yesterday, we're at 3.20 4. So came down a little, but we have gained market share by any measure that we look at.

Speaker 3

And that's not we don't think it's accidental. We did a lot of things related to cutoff times and the investment performance has been exceptional in those funds. And so, we think we've earned And so we think we've earned higher market share there. And I think it's tough to tell. There's not just What happens is clients unwind, but there's also the prospect of regulation in the 2a7 fund industry.

Speaker 3

And as you know, in Europe, there's much more of a demand for large institutional clients to use Balance sheets as opposed to funds and we'll see what happens here if there's a shift. And it's one of the reasons why We've done other things to try to launch new products to help our clients on liquidity to be able to provide Other services and to be a 3rd party repo provider and to launch new funds that are more appealing with better cutoff times. And so We'll see what comes there, but the best defense we can have in the short run is having a good liquid balance sheet And have availability to bring on deposits if our clients want to, which is one of the reasons we always leave room to try and to bring more On to the balance sheet, that's why our leverage ratios have tended to be strong.

Speaker 8

Got it. All right. Awesome. Thanks for the follow-up.

Operator

And we'll go ahead and move back to Brian Bedell. Please go ahead.

Speaker 4

Great. Thanks. Sorry about that bad connection. Can you hear me now?

Speaker 3

You're good, Brian.

Speaker 4

Okay, great. Thank you. Sorry about that. Yes, just a follow-up was also on And I don't know if you heard me start the question. It was really, about your expense growth on an annual basis.

Speaker 4

It's been pretty reliable over

Speaker 1

the last decade annually in that mid single digit area,

Speaker 4

almost exact In that mid single digit area, almost exactly 5% over on an annualized basis, which I know you try to target to match Organic revenue growth. However, in the last tightening cycle, in 2017, 2018, it was more elevated Naturally in that 8% to 9% area, given obviously the leverage from rates. And I just wanted to get a sense of is that As we think about sort of a trajectory, is that a reliable type of indicator versus the sort of the average over the last 10 years?

Speaker 3

Couple of thoughts and then Mike may jump in as well. 1, I don't In this cycle, things are driven less by what is the Fed doing to control growth. It's what is the Fed doing to control Inflation. And inflation is correlated to our cost base. And so we're going to feel that and that's going to be different.

Speaker 3

And walking through the expenses earlier, just in the comp line having a 5% growth there and then Equipment and software having a growth atorabovethe9% we had year over year. You can tell we're in a mode where we're feeling expense growth Over time, it's just got upward pressure on it. Now the good thing is that the growth in the business is good and the benefit coming from rates, which is it's not Distinct. It's correlated to the inflation. When inflation exists, we are getting a benefit partially coming from The fact that the Fed is fighting that inflation with higher rates and luckily we have good leverage in that.

Speaker 3

And we walked through earlier on this call that the impact To NII and the impact to fees and so it's good, but I don't think that historical 5% is necessarily something we look And say is that the right target given the environment we're in today? Mike?

Speaker 2

Just to add Yes. Just to add on that, Brian, is the reality is to serve our clients, but equally important to compete and win in the marketplace, We need the best people and we need digital capabilities. And so as Jason is saying, if you're in an inflationary environment, That's something you have to deal with because you need that expertise. You need the people to develop the technology as well. You need the people who service those clients And the price or cost of that is different.

Speaker 2

And the same thing with developing the technological capabilities To be able to compete as well. So, hard to pick a number on that, but as far as the dynamics that you're going through, I think it's a combination of, what Jason said there and then just What's happening in the competitive marketplace?

Speaker 4

Right. Yes. No, I was thinking the growth would be closer to that 2017, 2018 level of the 8% to 9% rather than the Historical 5%, given everything that you've been saying, if that makes sense?

Speaker 3

Yes. Okay.

Speaker 4

Okay, great. That's helpful. Thank you.

Speaker 2

Thanks, Brian.

Operator

And we'll go ahead and move on to our next question from Gerrard Caspe from RBC. Please go ahead.

Speaker 3

Hi, Gerrard. Good afternoon.

Speaker 10

Hi, how are you, Jason and Mike? Jason, you brought up a good point about the appreciation in the markets, correlating with the Fed's balance sheet growing so dramatically. In your slides, you gave us that the total revenue for the full year, the trust investment and other services fees were up 9%. Think you also showed us that the S and P on our Q4, the Q4 was up 25% or thereabouts. How much of the 9% growth would you attribute to the markets going higher versus your customers bringing in new business?

Speaker 3

I can get you pretty close on that.

Speaker 1

Yes. You want me to Yes. Go ahead. Sure. So, Gerard, this is Mark.

Speaker 1

You're looking at the 9% Full year trust fee growth.

Speaker 4

Correct.

Speaker 1

And so I'm see if we can get there directionally for you Because we did have obviously the significant waiver drag as well. So waivers if you did the math, I think we're about a 6 to 7 point drag. So that kind of brings you up to about a 16% growth Without the waivers and more than half of that was markets with the rest of it being Organic, but fairly close. I mean, call it 9% or 10% or so of that 16% would have been from markets. And then there's other some other impacts like, currencies and things like that, but the markets that would be giving you a good proxy for the markets.

Speaker 10

No, that's very helpful. And then Jason, following up, you mentioned a couple of times about you don't expect your loan growth in 2022, Which was up I think 20% in 2021 could be that strong. Can you maybe give us some color on Where you're expecting to kind of pull it back or just not to be as aggressive in 2022 versus 2021?

Speaker 3

Yes. It's not a pullback. It's more we felt a couple of years ago, our bankers felt And maybe a good observation, which was I think we were seen as a reluctant lender with our clients. And our clients were doing things They took pride in having large assets for us to manage and advise, but they didn't they thought we might not want to be a lender to them. And we wanted to deliberately go back and explain to those clients that if they Wanted to buy a 3rd home, if they were going to buy another business, if they were involved in private equity and needed warehouse lines, We're there for them to do that and we're excellent in doing the underwriting and we're competitive on the pricing.

Speaker 3

And We didn't want to go out and do new types of lending with new types of clients. We wanted to do the same types of lending with the clients we knew. And so we've gotten through a lot of that. And we will so from here, I think our lending will be more what does the market provide, but that go back to those clients and explain to them how much we want to be supportive of them. A lot of that has played through.

Speaker 3

And then the second dynamic and I've talked about it before is in this type of volatile environment, Some of our ultra, ultra high net worth clients, they will do very large loans. And so that's driven some of The growth as well and it's just unpredictable whether that will stay on the books for a long time.

Speaker 10

And I know, Jason, you don't want to give a forecast on loan growth, but could it revert back to like Pre-twenty 19 levels in terms of that kind of growth, in term as we look forward?

Speaker 5

That's 2,000. Yes.

Speaker 3

I think that's it's less easy to predict. I do think at this point, we've The message is out that we're there for our clients. And so the answer is probably somewhere in between, but The spikiness, which could go up and could go down, is just something that our portfolio Size wise isn't as granular on a percentage basis. And so I just always try to remind people of that as they are doing calculations quarter to quarter and year to year.

Speaker 10

Great. Appreciate all the color. Thank you.

Speaker 3

Yes. Thanks Gerard.

Operator

And with that, that does conclude our question and answer session. And I would like to turn it back over to our presenters for any additional or closing remarks.

Speaker 1

Thank you. Thanks for joining us and we'll talk to you in April for our Q1 earnings.

Operator

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Northern Trust Q4 2021
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