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F500-2021-443-Northern Trust

The wealth and investment management company offers a broad catalogue of financial services for wealthy institutions, individuals, and families.

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Chicago-based Northern Trust focuses on financial services for corporations, institutional investors, and ultra-high-net-worth individuals. It grew revenue by 3.5% in 2019.

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Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Northern Trust was founded in 1889 by Byron Laflin Smith. Disturbed by the excess and corruption that marked the Gilded Age, he vowed to create a financial institution Chicago’s growing class of investors and businesspeople could trust. On day one the company opened six accounts with $137,981 in deposits; by the end of 2024 Northern Trust had more than $1.6 trillion under management. Over the years Northern Trust was a pioneer in many areas, including being one of the first U.S. corporations to offer employees free life insurance and a pension plan, operating the first air-conditioned office building in Chicago, and being one of the first banks in the country to process checks electronically. Today it provides asset servicing, investment management, and wealth management services for institutions and high-net-worth individuals and families, and employs more than 23,000 employees around the world.

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Northern Trust (NTRS): Company Profile, Stock Price, News, Rankings

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Northern Trust

northern trust

Today, and welcome to the Northern Trust Corporation Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Mike O’Grady, our Chairman and CEO, Dave Fox, our Chief Financial Officer, John Landers, our Controller, and Trace Stegemann from our investor relations Team. Our Third Quarter Earnings Press Release and Financial Trends Report are both available on our website at northerntrust.com. Also on our website, you will find our Quarterly Earnings Review Presentation, which we will use to guide today's conference call. This October 22nd call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 22nd. 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 in the back 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. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O’Grady.

Thank you, Jennifer. Let me join in welcoming you to our Third Quarter 2025 Earnings Call. Our Third Quarter results underscore the momentum and disciplined execution of our One Northern Trust strategy. For the fifth consecutive quarter, we delivered positive organic growth and operating leverage, demonstrating our ability to capitalize on a constructive market environment while advancing our transformation agenda. Supported by favorable equity markets and well-managed expense growth, Third Quarter revenue increased 6%. Our pre-tax margin expanded by nearly 200 basis points, and our earnings per share grew 14%. Each is compared to the prior year and excluding notable items. Return on equity reached 14.8%, and year to date, we've returned 110% of earnings to shareholders, contributing to a 5% decrease in shares outstanding. Our strategy is firmly rooted in our mission to be our client's most trusted financial partner, powered by a culture of high performance.

Our Enterprise Growth Program is driving steady improvement in organic growth, particularly within private markets, where our integrated solutions are gaining traction across all business lines. The transition to a client-centric, capability-driven operating model is already yielding measurable productivity gains. For example, in our Enterprise COO organization, we've created approximately 40 capability teams, moving thousands of people from regional reporting structures to global capability reporting lines. This has enabled us to create a baseline for improving resiliency, process efficiency, and quality. AI is rapidly becoming a catalyst for innovation and efficiency. Our early investments, inclusive of providing all employees with access to Copilot, are already generating measurable results.

Across the organization, AI is embedded in more than 150 use cases, enabling teams to more efficiently service client requests, automate workflows, analyze data, and digitize documents, saving our partners tens of thousands of hours and allowing them to focus on higher-value initiatives. As we continue to deploy AI across the company, we expect it to accelerate these improvements, driving greater efficiency, further bending the cost curve, and unlocking additional capacity for reinvestment and growth initiatives. Let me turn to our businesses, starting with Wealth Management. We advanced key strategic priorities in the third quarter, adding experienced leadership and strengthening our geographic strategy. Our value proposition continues to resonate most with the highest wealth tiers, driving elevated win rates and client retention.

Our deep expertise, institutional-grade capabilities, and high-touch service culture position us to offer services across the entire continuum of family office structures, from the largest standalone single-family offices supported by our GFO business to virtual and outsourced solutions offered by our new Family Office Solutions Group. This offering for ultra-high-net-worth families is most mature in the Central Region, where robust demand has translated into several high-profile wins this quarter. Building on this momentum, we see significant runway for future growth as we replicate our playbook across other regions. Client appetite for alternative investments within Wealth Management is accelerating, fueling both innovation and adoption. We continue to expand the number of third-party fund offerings in the quarter and are on pace to more than double the number of funds we've had in market within a calendar year.

This builds upon the substantial amount of alternative assets raised by 50 South Capital this year, with Wealth and GFO clients making meaningful commitments. Notably, 50 South Capital introduced a feeder fund structure in the third quarter, giving Wealth clients direct and exclusive access to top-tier alternatives managers. Overall, new business activity remains brisk, contributing to healthy growth and core advisory fees. However, this positive momentum has been tempered by ongoing challenges at the investment product level. Moving to Asset Management. In September, we announced a transition in leadership, appointing Mike Hunstead, a 25-year industry veteran and proven leader within Northern Trust, as President of NTAM. Under his leadership, NTAM will continue its focus on strengthening foundational core capabilities, including liquidity, indexing, and quant equity, while accelerating growth across alternatives, custom SMAs, and our ETF platform.

The third quarter was marked by product innovation, including the launch of 11 new ETF strategies, eight of which are industry-first fixed-income distributing ladder ETFs, developed in collaboration with Wealth Management investment leaders to address the needs of taxable clients seeking more tax and cost-efficient cash flow management. Liquidity continues to be a standout area, with NTAM reporting its 11th consecutive quarter of positive flows. We expanded our Global Money Market Fund platform in the quarter with the launch of a U.S. Dollar Treasury liquidity strategy for European clients, building on the success of our onshore U.S. Treasury instrument strategy, which has already amassed more than USD 6 billion since its launch in June of 2024. Beyond liquidity, we saw positive flows in ETFs and custom SMAs, both key areas of focus, and fixed income, including two large high-yield mandates.

Finally, moving to Asset Servicing, our Asset Servicing business delivered strong results this quarter, executing on a disciplined strategy centered on scalable growth across key focus areas, including large asset owners, capital markets, and alternatives. Success with large asset owner clients continued, with year-to-date revenue from front office solutions increasing materially relative to the prior year period. This growth was driven by the strategic appeal of our integrated product offering, differentiated service model, and ability to deliver meaningful efficiencies for clients. Notable third quarter custody and fund administration wins included the USD 14 billion Sacramento County Employees Retirement System, a USD 16 billion Atlanta-based private foundation, and the USD 19 billion New Mexico Educational Retirement Board. Not-for-profit healthcare was another highlight, with strong third quarter wins bringing our coverage to 75% of the nation's top 50 not-for-profit healthcare systems, a clear testament to our competitive positioning and deep commitment to the space.

Capital markets activity remains strong, with more than 100 new clients added year to date, primarily through cross-sell, driving significant growth in core brokerage and FX trading, capital-like businesses that carry highly attractive margins. Momentum in the alternative space also remained robust, with our hedge fund services and private capital practices generating double-digit year-over-year increases in both reported revenue and one but not funded business. This included continued success in the LTAF/LTIF space, highlighted by a marquee win in the UK, extending our market-leading position in this attractive high-growth area. Our commitment to exceptional client service was recognized with the Best Administrator Overall Service Award at the U.S. Hedge Fund Management Service Awards. We were also honored as Custodian of the Year by the European Pensions Awards, our third win in six years, further validating our leadership and reputation in the industry.

Our disciplined strategy to drive scalable, profitable growth continues to yield tangible results. While recent wins may be smaller in scale compared to some of our prior asset manager mandates, they remain meaningfully accretive to pre-tax margins. We're also selectively allowing non-core and underperforming business to roll off as contracts expire. Therefore, we expect to see a continued gradual trajectory of margin improvement and overall growth. To wrap up, as we enter the fourth quarter, our foundation is strong and our momentum is unmistakable. Nearly two years into our One Northern Trust strategic journey, I'm deeply encouraged by the progress we've made and grateful to my Northern Trust partners for their hard work and dedication. This decisive, collaborative spirit that defines our organization is unlocking new opportunities to accelerate execution and fully capitalize on our core strengths.

Looking ahead, we remain laser-focused on the disciplined execution of our strategy, which is positioning us to deliver consistently strong financial performance and create enduring value for our stakeholders, regardless of the broader economic environment. With that, I'll turn it over to Dave to review the financials.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our Third Quarter 2025 Earnings Call. Let's discuss the financial results of the quarter, starting on page five. This morning, we reported third quarter net income of USD 458 million, earnings per share of USD 2.29, and our return on average common equity was 14.8%. Our third quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense-to-trust fee ratio, which was down to 112% in the third quarter, and returned nearly 100% of our earnings. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 30 basis points.

Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment, and other servicing fees totaled USD 1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Net interest income on an FTE basis was USD 596 million, down 3% compared to the prior period and up 9% year to date from a year ago. Excluding notables in the prior year, other non-interest income was up 10% year over year, largely reflecting stronger capital markets activities, particularly securities commissions and trading, and FX trading income, reflecting our focus on driving growth in these areas. Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year. Our assets under management were up 4% sequentially and up 9% year over year.

Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded a USD 17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged. Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. We expect the full year's effective tax rate to be in line with the year-to-date effective rate. Relative to the prior year period and excluding notable items, revenue was up 6%, expenses were up 4.7%, our pre-tax margin was up 200 basis points, earnings per share increased 14%, and our average shares outstanding decreased by 5%. Turning to our Wealth Management business on page six.

Wealth Management had a healthy quarter with particular strength in the regions. Assets under management for our Wealth Management clients were USD 493 billion at quarter end, up 11% year over year. Trust investment and other servicing fees for Wealth Management clients were USD 559 million, up 5% year over year, primarily due to strong equity markets. Trust fees within the regions were up 7% year over year and are up 6% year to date, with strength mostly attributable to favorable equity markets. Within GFO, trust fees were up 1% year over year and are up 5% year to date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of USD 2 billion in September alone, and new business is on pace to break last year's record levels.

Average Wealth Management deposits were flat, and average loans were up 2%, both relative to the second quarter. Wealth Management's pre-tax profit increased 11% over the prior year period, and the pre-tax margin expanded 250 basis points to 40.5%. Moving to Asset Servicing results on page seven. Our Asset Servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remain robust, on pace to beat 2024's record levels, and new business generation continues to be healthy and margin accretive. Assets under custody and administration for Asset Servicing clients were USD 17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset Servicing fees totaled USD 707 million, reflecting a 6% increase over the prior year.

Custody and fund administration fees were USD 483 million, up 7% year over year, largely reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for Asset Servicing clients were USD 1.3 trillion, up 9% over the prior year. Investment management fees with Asset Servicing were USD 160 million, up 5% year over year, due mostly to favorable markets. Average deposits within Asset Servicing declined 6% sequentially, while loan volume decreased by 7%, albeit off a small base. Asset Servicing pre-tax profit grew 14% over the prior year period, and the Asset Servicing pre-tax margin was up 150 basis points year over year to 24.7%. This reflected the benefit from favorable markets that pivoted our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline operations.

Moving to page eight and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked quarter basis as softer deposit levels drove a decline in cash held at the Fed and central banks. At the same time, we opportunistically added fixed-price securities to the portfolio to provide downside protection. The fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years, and the duration of our total balance sheet continued to be under one year. Net interest income on an FTE basis was USD 596 million, down 3% sequentially, but up 5% as compared to the prior year. Sequentially, NII was unfavorably impacted by the lower deposit levels, but this was partially offset by favorable deposit pricing actions we've taken outside of rate cuts.

The quarterly contribution from transactional and other one-time items normalized in the third quarter following elevated second quarter levels. Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix. Deposits performed largely as we expected. Average deposits were USD 116.7 billion, down 5% compared to second quarter levels, reflecting typical seasonal patterns coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5%, and non-interest-bearing deposits decreased by 3%, but remained at 14% of the overall mix. Turning to our expenses on page nine. Expenses increased 4.7% year over year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%. Turning to page ten.

Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity tier one ratio, under the standardized approach, increased by 20 basis points on a linked quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 8%, up 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available for sale securities was USD 437 million, and we returned USD 431 million to common shareholders in the quarter through cash dividends of USD 154 million and common stock repurchases of USD 277 million, reflecting a payout ratio of 98%. Year to date, we returned over USD 1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year.

Turning to our guidance, we continue to expect our operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. We now expect full-year NII to grow by mid to high single digits over the prior year. With that, Operator, please open the line for questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Ibrahim Punawala with Bank of America.

I guess maybe just, first, Dave, where you ended on the NII outlook, the mid to high, maybe address it two ways if you could. One, on the deposit trends, it felt like just the runoff was more than we expected. What are you seeing in terms of growth outlook and the mix shift in deposits going forward? How should we think about the asset sensitivity of the balance sheet if the Fed were to cut three or four times in quick succession? Does that put negative pressure on the NII as we think about the first half of next year? Thanks.

Yeah, sure. I'm happy to answer that. Deposits actually did perform pretty much in line with what we had previewed, and they're actually up from last year at this time. From that perspective, maybe less than you had anticipated, but I think it's generally in the area we had anticipated. We've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at USD 135 billion. We think that Q4 deposits are going to be, I think, a little bit higher on average during the quarter. Since we've already posted a 9% year-to-date, year-over-year NII growth, that's why we feel comfortable tweaking our guidance a bit to mid to high single digits in NII, which would imply, frankly, that would be about flat to marginally 1 to 2% up in the fourth quarter.

As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have rate cuts built into our projections. We're not anticipating more than two rate cuts in the U.S. next year, for example. We have carry-in that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are going to be rolling off in that quarter, in the various quarters in 2026. When you do the puts and takes, we feel that NII in 2026 should be flat to up 1-2%.

Got it. That's helpful. I'm not sure if I caught this when you were in your prepared remarks. We've been talking about, when you're going through sort of wealth management, and you talked about some of the challenges at the investment product level. I was wondering if you could just kind of elaborate on what the issues were when you on that front and what sort of actions you're taking to kind of get that back on track?

Sure, Ibrahim, it's Mike. I'll take that. As you know, through NTAM, we offer a number of different investment solutions and products to our wealth management clients. We're also open architecture, so that we're offering the products of other asset managers as well. We tend to focus on those core foundational areas. Think about liquidity, index, quant, other areas like that. The areas where we've seen pressure, some of it on the index, where it can be a combination of just asset allocation, but also pricing pressure, fee pressure, and that then causes flows to lower fee products. The second is asset allocation when it comes to areas of whether it's growth versus value. On that front, we offer a multi-manager platform solution, and it tends to lean more towards the value side of the equation.

There, where we've seen a very narrow market, as you well know, it's difficult for those active managers to outperform. We've seen some flows out of that multi-manager platform, and that's been a drag as well. Now, as to what we're doing to address that, in addition to just focusing on those areas and making sure that the products are not only performing but pricing at the right level, also, as we've talked about, focus on ETFs, SMAs for the wealth management clients, but also alternatives. That's an area, as you heard, where we've increased the number of offerings for our clients on the alternatives platform for our wealth clients.

We will take our next question from Ken Houston with Autonomous Research.

Thanks. Good morning. Just wanted to ask you to talk a little bit about just some of the moving pieces of this quarter. I know it might just be temporary, but AUCA up 1%. I know you're talking about new business wins. You saw also in the press release some outflows. Is that just kind of the normal state of kind of getting some wins and some losses every quarter? Just an odd dynamic for this quarter that you saw just relative to the market strength that we saw? Thanks, guys.

Yeah. Yeah, I would say that if you take a look at the AUCA growth, there were a number of individual clients that drove those AUCA numbers. Had they not done that, we would have probably been on par with our peer group. These are asset management clients, and there was one client in particular that represented two-thirds, I think, of the degradation in the AUC. You have to remember that not all AUC is created equal. Not all AUC creates the same level of fees. In this particular case, the vast majority was a restructuring that an asset manager made, moving from mutual funds through a like-kind conversion into a CIT structure that's less expensive to the participants. We still didn't lose clients. We lost assets. That happens, as you mentioned, the sort of puts and takes of the asset manager space.

One other loss was really just a redemption by one large client as part of a fund. That fund is actually starting to fill back up again. When you add it all up in terms of impact, the total AUC that we're talking about is the fee realization on that AUC is going to be less than 10% of what we would normally see on a normalized AUC. You have to just take into consideration the type of business that is. If you want to translate that into dollars, all combined, all the degradation that we saw won't amount to more than USD 300,000-USD 400,000 a month of fee changes, fee decreases. Some of that could be earned back by the next quarter. Yeah, I think it's a lot of ebb and flow in the asset manager space is the way I would put it.

Great. That's really great, helpful, Dave. Second point, you're obviously firmly committed to that sub five. We saw it again this quarter. As you're starting to think about looking forward, I know you've said that you're strongly committed to it, inclusive of FX translation. Any incremental thing we should think about as we go forward? I know you're going to be thinking about positive operating leverage. We don't know what the markets will do from here. They've obviously been a big helper. As you continue to hone that messaging around the expense space, any new thoughts about where you can try to hold that level on expense growth overall? Thank you.

Yeah. For the fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to flex if necessary. I'm sticking very strongly to the below 5% growth number for Q4 and for the full year. I think we feel very good about that. Nothing in particular that I would really cite. We're just starting to think about 2026. We're just getting into the planning of that. One thing I would say is that we continue to bend the cost curve down on expenses. If you look at where I started, I think we were coming off a 6% growth down to 5% or 5.5%. It's been grinding down every quarter. Without currency, we would have been closer to 4% than we are to 5%, right? We're not done.

I think the message there is we're not done bending that cost curve down. The productivity that we are going to realize in 2025 is great, but 2026 will probably be greater. I think that we're just still seeing some opportunity there to keep grinding that expense curve down going forward.

We will take our next question from Brennan Hawkin with BMO.

Good morning. Thanks for taking my questions. Mike, I'd love to drill into a comment that you made in your prepared remarks where you talked about allowing more marginal business to roll off. It seemed, and you spoke to that aiding growth. Is that growth comment like an indication that it's going to be more about profit growth than top-line growth? Do you expect that some of these efforts might result in more of a top-line headwind, but you're going to be able to make it up for it in the better unit economics on each of the new businesses that you're focused on? Can you help me maybe think through some of that? Sure. It is definitely a focus on profitability. We have a great asset servicing business, but right now the margins are below the level that we think the business should be performing at.

We're seeing nice improvement in that. We were at one point kind of like 22%. We moved up to 23%. We saw this quarter moving it up closer to 25%. That's a combination of a number of factors. First is the new business that comes in. We're making sure that it's coming in at very accretive margins, and to your point, that can have an impact on the gross top-line growth that you're going to get. In our view at this point, we want to see greater profitability and growth in profitability. Second, I would say, is in the business that we do have and the activities that we do have, just trying to look very carefully at those areas and see if we can improve on the situation, either the activity or the economics with the client.

To the extent that we're not achieving that, then it is something where we'll have to look over time to transition that business out. That's the second piece of it, which again will aid profitability. The third, Dave touched on it a little bit just with his comments around expenses, but really focusing on the efficiency of our operations. I talked in my comments as well, Brennan, about our client-centric, capability-driven operating model. Everything around that is trying to be organized in such a way that we can deliver our services in a way that is both resilient but also efficient.

That's where a year ago, we reorganized in a way that brought a lot of those activities together and centralized them under a COO organization so that we could be more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement in profitability.

Great. Thanks for that, Mike. There's a lot of movement in the markets. You already spoke a bit to GFO and some of the changes that happened within some portfolios. We did see fee rates, at least the way we're able to calculate them. I know that's sort of flawed given how you guys bill, because we don't have intra-quarter visibility. Did you guys see fee rate pressure in some of the other businesses this quarter as well, or was it just around the math in how you bill and how much the market's moved? If you could help maybe disentangle that a bit. Thank you.

Yeah. Think about GFO in particular as resembling a little bit more of the asset servicing side of the business than the wealth management side of the business. They've got an extremely strong pipeline, and they're going to produce a record year of new business, off another previous record year. What you do see in GFO is large shifts in portfolio composition, and a higher sensitivity to cash. Q2 is pretty volatile, and there's a lot of movement going in there. The other thing I'd say about GFO is they're less exposed, at least at Northern Trust, to fixed income and equity movements. They are very cash-focused. Unlike the regions, they're not as influenced as much by the overall equity markets. A better way to look at the business, like a GFO business, would be to look at their year-to-date fees.

Year-to-date fees are up 5% and revenues are up 9%. You know, GFO had.

I'm sorry. I probably worded my question poorly. I was looking at the businesses aside from GFO. I get that GFO had some of those movements. I mean, in the servicing business and the investment management business, we saw a little fee rate pressure there too. I was just curious about whether that was just the math in markets or whether you guys experienced some fee rate pressure.

What I would say, Brennan, is on the asset management side, there's consistently persistent pressure on fees overall. Nothing that I would note in the quarter. I did mention in a previous question just about making sure that our pricing is competitive for all of our clients, but particularly within wealth management. From time to time, yes, we will bring down the fees on an investment management product to make it more competitive.

On the servicing side, I would say once again, it's a competitive marketplace, but there's nothing that transpired in the quarter that necessarily resulted in a reduction in fee levels. In fact, if anything, Brennan, to your first question, we're trying to be very disciplined around pricing and economics to make sure that the business we're bringing on is at those accretive margins.

Makes a lot of sense. Thanks for taking my questions.

We will take our next question from Mike Mayo with Wells Fargo Securities.

Hi. I just want to make sure I understand the big picture correctly. I think you're running, you know, asset management and wealth, especially GFO, for growth, and you're running asset servicing relatively more for profitability. To get there, you're letting some low margin business run off. Did I get that correctly?

Okay. So I guess the question is, you know, under what circumstances would you say, you know what, the custody business, you know, maybe you should downsize even more or disinvest? I know this is an old question, and I think you usually said, look, you might not have scale in absolute terms, but you have scale where you want to compete. I think that's kind of where you've been. Does that still hold, and under what circumstances would that change?

Yeah. It absolutely still holds. If anything, Mike, I would say, you know, both the market, if you will, and what we're doing, takes it even more that direction, i.e., that we have the necessary scale to be able to deliver these services efficiently.

What I mean by the market part, first of all, is just everything that's happening around both digital assets and AI make these activities more scalable. When we talk about our operating model, it's just trying to make sure that we're then organized in such a way to take advantage of those things. First of all, when you think about digital assets, tokenization, and even stable coins, the whole idea there is around greater efficiency in the marketplace. As that happens, again, that leads to more straight-through activities, more liquidity in those markets and those products, etc. We're certainly making sure that we have the capabilities to do that. With AI, it's about automating processes and taking things that right now maybe not be so straight through.

If you take an example like private capital and the processing of private capital for our clients, so thinking where they're LPs and they're invested in literally hundreds of funds, a lot of that activity is still paper-based. I would say we could estimate that right now only maybe a quarter of that activity that we do for our clients on that front is straight through. What we're focused on is how do we turn that into 50%-75% automated. That's where we're utilizing AI to be able to do that. All of those things take us to a model that I think gives us the necessary scale, meaning that as you grow, the unit economics improve.

To your point, these are all measurable things, both from an internal perspective, but also from a financial performance perspective that if it's not proving to be the case there, you certainly have to look at it differently.

If the one-liner why someone of your size can compete with the Goliaths of the industry, I mean, it's always skill versus scale, the argument. Why can you win in tech and AI, but you don't spend as much money?

Yeah. First of all, it's differentiation, right? Our strategy is focused on delivering a unique value proposition to our clients, and in doing so, that requires greater focus for us. As I think you pointed out in one of your earlier comments, we're not looking to compete in every segment across the globe. We're picking areas like asset owners in the United States, like pension funds in the UK, like global family office, like hedge fund services where we believe that value proposition, that differentiation resonates because it's still about the overall package. What do they get when it comes to not only the technology, but the service that goes with that and who that financial partner is? Can we deliver it in an efficient way such that the value they're getting overall is more attractive relative to other alternatives?

There's no doubt in my mind that in the marketplace clients want differentiated offerings, and we believe that's what we offer. We just focus on those areas where we think we can be successful with it.

We will take our next question from Betsy Graseck with Morgan Stanley.

Just one more question on this thread regarding AI. I know at the beginning you highlighted that AI is already generating measurable results with 150-plus use cases. Could you give us a sense as to where you see AI helping the, is there any differentiation within the organization about how much AI will be helping out? In other words, do you expect to see it more in the services side or wealth side, or it's equal across the organization? I'm just wondering if the efficiency improvements coming from AI are different, materially different between the different businesses that you run.

Sure. Betsy, what I would say, what's so exciting about this is it is impacting all of the areas of the company. Just to give you some idea, because how it's being utilized is different, and maybe the results, yes, they may vary in different groups, but the applicability is basically across the board. We talked about operations there. I talked a little bit about what we're doing in the private capital space, so that gives you some idea. Think about so many processes that are involved in operations. It clearly lends itself there, and arguably a very high level that you'll get. I'm going to do another easy one, which is within technology, utilizing GitHub and other types of AI. We're seeing, I'm going to call it about 20% improvement in the programming, the engineering part of technology there. I think, again, still in the earlier days of that.

As you move to the businesses, take asset management. That's an area where a lot of the activity can be automated. Think about what we're even doing here with investor calls. We're already utilizing AI in our fixed income muni area within asset management to essentially summarize and analyze all the transcripts for all of the investor calls where they have investments. This is in the hundreds of calls that normally an analyst has to listen to, summarize them, and most importantly, take away the key points. So much of that now has been automated. It saves dramatic time, but also provides better insights.

Within wealth management, this is making, at this point, our advisors much better and much more efficient because in advance, first of all, in thinking about where the opportunities might be and prospecting, AI is enabling that process to happen in such a way that it's highlighting where the best prospects are. From there, it's how to prepare for that. It can go in and it can pull the information both from our internal databases, but also what's publicly available about a particular prospect and do so much more quickly than someone could do on their own to be able to do that. When they have a question, we're working on the ability for our advisors essentially to be able to tap into proprietary databases that we have like the Northern Trust Institute to be able to immediately answer those questions.

It makes them better at serving the client on that front. When you think about risk, whether it's AML, KYC, or fraud detection, these are all things right now where we have hundreds of people who do this activity, and we'll still have plenty of them doing it, but they'll be using better tools to be able to do it better and faster. It cuts across, I would say, the entire company. I think at this point, we're still in the early days.

Okay. Just to follow up on the technology impacts on the business, could you give us an update on how you're thinking about the outlook for how you would utilize a stablecoin? Do you issue your own? Do you get involved with the industry consortium, as we move towards 24/7 trading? Having a stablecoin cash leg is going to be critical. I want to understand how you're thinking about that dynamic as we roll forward here. Thank you.

Sure. I think that what's happening in the digital asset space, there are four key drivers from my perspective: innovation, regulation, client demand, and interoperability. On the innovation front, to your point, whether it's stablecoins or tokenization, there are so many things that are coming out, and the technology is getting much better, much more scalable. Things like blockchain becoming more scalable, going from private blockchains to public blockchains. The innovation front, I think, is probably leading. What's been lagging is more on the regulation front. Obviously, now with the GENIUS Act, this is going to change. That is going to, I think, significantly facilitate further demand on the client front. You get to the idea of interoperability, which the point on that is, our clients don't want to have to operate in two worlds.

They want to be able to utilize whether it's stablecoins or a tokenized asset with their other assets. We're just making sure that our platform can do both of them. Now specifically to stablecoin, I would say stablecoin will find the areas that have the greatest friction. A lot of that, as you know, right now is probably cross-border or outside the U.S. I'll say we'll have the ability to utilize stablecoin, but we're not planning to issue a stablecoin on that front. Where we're more focused is on tokenization, because we believe that will impact multiple asset classes. A good place to start would just be around money market funds. Thinking about a tokenized money market fund, that's an area where I'd say we would look to be an issuer of a tokenized money market fund. That gives you some idea of the direction that we see.

Thank you so much. Yeah, a tokenized money market fund is a type of stablecoin cash leg too.

We will take our next question from Glenn Schorr with Evercore.

Hello. Small but interesting one regarding the deposit rate paid on savings, money market, and other deposits. After going down for four quarters straight because rates have been coming down, it was actually up 6 basis points and we had a cut in the quarter, I think. That's interesting. I'm more thinking about the go-forward. What caused that savings and money market rate to go up in a quarter when there's a rate cut? I know you gave us your thoughts on next year, so I appreciate that. I'm just curious what's going on on these deposits.

Deposits are also multi-currency. They're not just U.S. dollar, right? There may be some differences there that you might want to take a look at. We could certainly get more granular with you. On the top of it, I can't say in particular. I'd have to look at each currency and each particular investment that we made to kind of give you that read.

No worries. We can move on to the bigger question. You've been talking about some of the initiatives that you've picked up pace on the private market side across wealth, asset management, and asset servicing. You dangled a little bit with your comment on the 50 South Capital feeder fund. I would love to know a little bit more about what that is, what's on it, and what's in it, if it's a fund-to-fund structure, things like that. Maybe you could also just complete the thought on what's going on in terms of the asset servicing side as well. Thanks.

Sure, Glenn. The feeder fund, basically, as you know, 50 South historically was focused on fund-of-funds. That business has performed very well and has been, I'll say, a perfect fit for our wealth clients and continues to be. They've continued to expand their offering both for our wealth clients, but then for other wealth platforms and institutionally as well. Specifically, what happened in the third quarter is they have the relationships and have done the diligence and everything on hundreds of managers. As a part of that, we're now using those relationships to be able to have specific single-fund offerings for our wealth clients. This enables us, I'll say, to pick like the best of the best funds where access is often an issue. Through our relationship and by having the diligence done, we're able to offer it to our wealth clients.

This was one of the, I'll say, high-performing venture funds that was offered to wealth clients in the quarter. You said to the broader picture there, I'll say just first of all, on the wealth front and 50 South, once again, an area of a lot of innovation. I think, you know, coming our direction when you think about evergreen funds and other things that just have greater liquidity, that only enables our clients to get more comfortable, I'll say, investing in alternatives. On the asset servicing side, not only is it the work that we're doing with, as I mentioned, hedge funds, but also private capital administration for either private equity funds, private capital funds, but then specifically around the vehicles, the LTAF and the LTIF vehicles.

I would say that is a similar trend phenomenon, if you will, in the European markets where there's the introduction of more vehicles that have greater liquidity so that it allows for greater distribution and expansion of alternatives. We think it's still kind of earlier days for those vehicles as well. Whether it's the UK vehicle or the Luxembourg vehicle, we're well positioned to be able to provide those capabilities for the asset managers.

We will take our next question from Steven Alexopoulos with TD Cowen.

I wanted to start, I know on the pre-tax margin, and I know it bounces around quite a bit, but when you look at the revenue trajectory, expense trajectory, the guidance you're given for Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium-term target moving forward, even if the Fed's cutting rates?

To your point, Steve, there's certainly the impact of markets and rates and, you know, levels of liquidity in the marketplace. There are lots of factors out there. Our view is that the financial model that we have definitely should operate in that 30+% pre-tax margin on an ongoing basis. You have a quarter like this where, you know, we got there somewhat because of the environment, but also because of the provision release. That bumped it up a little bit. All the same, the longer-term trend, longer-term meaning over the last, you know, couple of years, has been an improvement in the pre-tax margin. When you look at the year-to-date margin, it's closer to kind of 29%. Yes, we expect to move into 30%. Even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are.

Yes, the objective is to stay above that 30%.

Northern Trust (NTRS) Q3 2025 Earnings Call Transcript

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