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spk14: Please stand by, we are about to begin. Good day and welcome to the Northern Trust Corporation second quarter 2024 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Child, Director of Investor Relations. Please go ahead, ma'am.
spk00: Thank you, operator. Good morning, everyone. Welcome to Northern Trust Corporation second quarter 2024 earnings conference call. Joining me on our call this morning is Mike O'Grady, our chairman and CEO, Jason Tyler, our chief financial officer, John Landers, our controller, and Grace Higgins from our investor relations team. Our second 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 July 17th 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 August 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 12 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.
spk01: Thank you, Jennifer. Let me join in welcoming you to our second quarter 2024 earnings call. Our results for the quarter reflect continued progress executing against our strategic priorities, boosted by strong underlying equity markets and favorable client activity levels. Trust fees were up a solid 6% over the prior year. Deposit levels proved resilient, and our capital levels reached a multi-year high. In the quarter, we participated in the Visa Class B common stock exchange offer, positioning us to monetize 50% of our long-held stake in Visa. As a result, we recognized a pre-tax gain of nearly $900 million with another 50% of shares still to be monetized. We intend to use the visa proceeds to fund additional share repurchases, contribute to our charitable foundation, and make investments in the resiliency of our business. Reported results also included approximately $200 million in restructuring charges and other notable items, reflecting our continued efforts to optimize our cost base, drive efficiencies, and effect change within the organization. Jason will discuss the details in a few minutes. Turning to the performance of the business units, wealth management generated 9% year-over-year trust fee growth and our new business momentum remains strong. We're continuing to generate interest from our Secrets of Enterprising Families national book tour, and we're seeing solid success from digital marketing initiatives. In May, we hosted our annual Northern Trust Institute Symposium, attracting more than 1,500 influential estate planning attorneys, trust practitioners, and other wealth industry specialists who serve as key referral sources. We also celebrated the opening of our new office in New York City. Asset management generated positive liquidity flows for the sixth consecutive quarter and delivered strong performance within active fixed income. We raised assets in the private equity space in the quarter, although index flows have otherwise been soft. NTAM continued to leverage our One Northern Trust strategy. delivering clients the solutions and capabilities of the entire firm. Joint meetings between our asset management and asset servicing businesses accelerated in the second quarter, leading to more than 100 new business opportunities and 15 wins year to date. NTAM also launched seven new funds in the second quarter, expanding our global liquidity business and adding to our fixed income solutions. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, Capital markets activities were up 16%, and new business growth continues to be booked at attractive margins. As we discussed, our goal is to generate new business that is scalable. We've shifted our sales focus to opportunities that require lower levels of incremental costs, while emphasizing approaches with multiple points of connectivity. In addition to the bundled sales generated with NTAM, more than 140 existing asset servicing clients have expanded their relationships with us by adding services such as capital markets and data analytics. We're being disciplined on pricing and bidding on fewer opportunities. In spite of our new focused approach, asset servicing continues to realize momentum, particularly among asset owners. In the second quarter, Northern Trust was appointed as the new custodian and asset servicing provider for Nest Invest, the United Kingdom's largest workplace pension scheme. Initially an NTAM client, NEST supports 13 million members and has AUM of approximately $45 billion. Our ability to manage sophisticated strategies and the flexibility of our open architecture approach were the key factors that helped secure this highly competitive win. In North America, we've achieved more than 30 new wins year-to-date among asset owners. We enter the second half of the year with strong market tailwinds and good new business momentum. well positioned to navigate the current macroeconomic environment, and generate value for our stakeholders. With that, I'll turn it over to Jason to review our financial performance for the quarter. Jason?
spk07: Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our second quarter 2024 earnings call. Let's dive into the financial results of the quarter, starting on page four. This morning, we reported second quarter net income of $896 million. earnings per share of $4.34, and our return on average common equity was 31.2%. Our reported results included an $878 million net pre-tax gain related to Visa and $196 million of restructuring charges and other notable items, which I'll discuss in more detail shortly. Our assets under custody and administration and assets under management were up modestly on a sequential basis and up sharply on a year-over-year basis. Strong equity markets drove the year-over-year improvement. Excluding notable items in all periods, revenue was up 5% on a year-over-year basis and 1% sequentially. Expenses were up 6.6% over the prior year and essentially flat sequentially. Trust, investment, and other servicing fees totaled $1.2 billion, a 2% sequential increase and a 6% increase compared to last year. Excluding notables in both periods, all other non-interest income on an FTE basis was down 2% sequentially and up 9% over the prior year. We experienced good momentum in our FX trading business where we saw another strong quarter of client volume. Net interest income on an FTE basis was $530 million, down 1% sequentially and up 1% from a year ago. Our credit quality remains very strong, with no net charge-offs and non-performing loans representing nine basis points of total loans. Turning to our asset servicing results on page 5. Assets under custody and administration for asset servicing clients were $15.5 trillion at quarter end, with asset servicing fees totaling $651 million. Custody and fund administration fees were $446 million, up 4% year-over-year, driven by both strong underlying equity markets and new business activities. Assets under management for asset servicing clients were $1.1 trillion. Investment management fees within asset servicing were $146 million, up 9% year-over-year due to favorable markets and strong flows into our institutional liquidity funds. Moving to our wealth management business on page 6. Assets under management for our wealth management clients were $419 billion at quarter end. trust, investment, and other servicing fees for wealth management clients of $516 million, up 8% year-over-year due primarily to strong equity markets and asset inflows within global family office. Turning to page seven in our balance sheet and net interest income trends. Average deposits were $113 billion, up $1 billion or 1% from the first quarter, modestly better than our expectations. Deposit costs increased slightly due to a handful of large, thinly priced deposits. Shifting to the asset side of the balance sheet, our average earning assets increased 1% on a linked quarter basis, primarily due to higher deposit levels and the proceeds from the partial sale of our Visa shares. Our average liquidity levels remain very strong. with highly liquid assets equal to 60% of our deposits and more than 50% of total earning assets on average. The duration of our securities portfolio is 1.7 years, and the total balance sheet duration continues to be less than one year. Net interest income was $530 million, and our net interest margin was 1.57%. Turning to page 8, as reported, non-interest expense was $1.5 billion in the second quarter, up 12% sequentially and up 15% as compared to the prior year. Excluding notable items in both periods, as listed on the slide, expenses in the second quarter were flat sequentially. Now let's take a step back and discuss how we're approaching the visa stake. This is an asset we held on a balance sheet at zero value since Visa went public over 15 years ago. Entering the quarter, the position was approximately $1.8 billion in value on a pre-tax basis. With the ability in the second quarter to liquidate half of our position at full value, the Visa transaction provides an opportunity to return more capital to shareholders while accelerating certain strategic priorities. With this first conversion of shares, we're taking the following steps, as Mike highlighted. First, a meaningful portion of the proceeds will be used to increase pacing in our share repurchases. We began that process within the second quarter and will continue elevated levels over the next several quarters. Second, approximately 10% of the after-tax proceeds being contributed to our foundation. This pre-funds some of our community giving. That contribution is fully accounted for in the second quarter. Third, the Visa share conversion enables us to accelerate strategic investments over the next several quarters to modernize our technology infrastructure and enhance our resiliencies. This includes investments in refreshing our tech infrastructure, automating manual processes, enhancing risk management systems, reducing end-of-life platforms, strengthening our cyber defenses, and accelerating cloud migration. These investments will further strengthen service levels and enhance the client experience while reducing risk and generating efficiencies. This incremental modernization and resiliency spend is visible this quarter in the outside services line. We'll continue to update you on our progress. Separately, we also announced nearly $200 million in restructuring charges and notable expenses. The larger items included severance expense of $85 million associated with a significant reduction in force split between both compensation and outside services expense, various software write downs and accelerations, and the $70 million contribution to our foundation I mentioned earlier. Now let's go back and review our core expenses from the quarter, which exclude all notable items. Compensation expense was up a little less than 3% versus the prior year, moderately better than we anticipated. as some anticipated hiring was shifted into third-party consulting work in conjunction with the incremental modernization and resiliency spend visible within the outside services line. Full-time equivalent headcount was down 500 or 2% over the prior year and essentially flat sequentially. Outside services expense increased by 12% relative to the prior period, the bulk of which reflects the incremental modernization and resiliency spend. Equipment and software expense increased by 3% sequentially, slightly better than anticipated, reflecting higher software consumption and amortization from projects coming online. Excluding notables, our expense-to-trust fee ratio improved 200 basis points on a sequential quarter basis to 116%. As we look out to the third quarter, we expect our sequential expense growth, adjusted for notable items, to be up approximately 1%. Equipment software expenses are expected to range between $270 to $275 million, largely reflecting investments in technology and systems upgrades associated with the modernization and resiliency initiatives. We do not expect a material increase in outside services in the third quarter from the current elevated level. Turning to page nine, our capital levels and regulatory ratios remain strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Based on the 2024 CCAR results, our stress capital buffer will remain at the 2.5 percent minimum requirement. Our common equity Tier 1 ratio under the standardized approach increased 120 basis points to 12.6 percent. A decrease in RWA levels, the Visa transaction, and capital accretion drove the improvement. This reflects the 560 basis point buffer above our regulatory requirements. Our Tier 1 leverage ratio was 8% of 20 basis points from the prior quarter. At quarter end, our unrealized pre-tax loss on available for sale securities was $667 million. We generated $607 million in the quarter from the sale of Visa shares and expect to generate another $300 million in proceeds in early August. We returned $405 million to common shareholders in the quarter through cash dividends of $154 million and common stock repurchases of $251 million. With that, Jessica, please open the line for questions.
spk14: Certainly. Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Betsy Gracek with Morgan Stanley. Your line is open. Please go ahead.
spk11: Hi, good morning.
spk13: Excellent. Thanks so much. Okay, yeah, sure. Two-part question. First is just on the remaining... embedded gains in the visa that you still have. I know you mentioned that there's still some realization to come. Are you talking about the piece, the one-third piece that's coming in the third quarter? Is that what you're referencing? Or are you referencing the broader point that you still have more visa shares and the next time this is able to get done, you'll have access there?
spk07: Yeah, it's both. So if you just, you're close to it, but for people that may not be This first tranche, the first enable us to monetize half, but enable us to convert half, but that's split into actually selling it in three pieces, as you're referencing. Two of those pieces are done. One is still yet to come in August. When that's done, we'll still have half of the entire pool left at some point in the future to convert and monetize.
spk13: Right. And that's a function of the Visa side and the BeSure is being opened up to monetize. It's not only your decision to do that.
spk07: Yeah, correct. Not at all. And we've said all along, Visa is not a strategic asset for us. And so we haven't wanted to monetize more at a meaningful discount in the private markets. And so We've waited to be able to do it in the public markets. This enabled us to do it with no discount, and we'll likely pursue a similar path when the remaining shares are opened up for conversion.
spk13: Okay, perfect. And then just a separate part is on the resiliency investments that you're making. What's your sense of the timeframe for the investments? I would think it's a multi-year timeframe, but it would be helpful to understand. your point of view on that. Thank you.
spk07: Sure. So I think about it in two pieces. One is that there's elevated spending right now as we get the project accelerated. That's why it's showing up more in outside services and as we get some of the technology spend there and some third party outside help on getting some things executed. that will that should last in that line item at about this current level for the next few quarters eventually that's going to decline as some of that that initial project work is done but at the same time we'll over time see an increase in compensation as some of the work continues in more of a persistent environment by by actual FTE, but not likely at the same elevated level of where we are today. That's the overall view of how it should work.
spk11: Super. Okay, thank you so much. Sure.
spk14: We'll go next to Ken Houston with Jefferies. Your line is open. Please go ahead.
spk02: Good morning, Ken. Hey, it's Moksha. Hey, it's Moksha. I'm on for Ken. Just wanted to ask about just NII cadence for the rest of the year. What are you assuming on deposit levels, deposit rates, and where we can see that going forward? I just wanted some color on that. Thanks.
spk07: Sure. Yeah, so balances are much more stable than they were last year, obviously, and our client engagements worked well. At this point, the bigger factor definitely appears to be rates. So there's no estimate for us to share for third quarter. But in that period, we do tend to see a slight seasonal decline in balances. And so there's a couple of puts and takes to keep in mind. One, the seasonal decline in balances, but then that could be offset by the fact that we still have positive impact of reinvestment spread, day count improvement, and then some other factors.
spk02: Okay, fantastic. Just more on just servicing. What are you seeing out there in terms of pipelines and anything on wealth management, how the flows are there of client assets?
spk07: Sure, I'll start and Mike may jump in. So on asset servicing, Mike and I both referenced it briefly. The overall activity in the business from a net new business perspective is, I think, very positive. The impact in this quarter comes from the fact that we've got one client exit that we've known about for a long time. The big exits we have longer line of sight on, and that finally took place within the quarter, which reduced our trust fees by a few million dollars in the quarter. I should also note, we also have line of sight to another similar dollar amount impact in third quarter that'll come in. overall, the volume of activity is good and pipeline is strong within the business. Mike?
spk01: Yeah, the only thing I would add is, as I mentioned, we've really focused our strategy on the opportunities that we think are most attractive for our value proposition. So those opportunities where we can be compensated for what we believe to be is a higher service level for the clients, that has meant being more disciplined around pricing, As I mentioned, in certain cases, it means not bidding on it if we believe it's going to be something that's, you know, low-cost driven. And so far, you know, that hasn't really, I would say, reduced the overall momentum in the business and what we're seeing and the opportunities. And, you know, frankly, it's resulting in higher margins for the business that we are winning. So it's a more selective approach to it, but one so far I would say is going well.
spk07: And then I'll offer two headlines on wealth, and then if Mike may add more. One is the regions, the net new businesses was relatively soft, but GFO in general continues to do well, bringing on new business from existing clients, and then also some nice external names there. the connectivity they have with the largest asset owners is outstanding. So that business continues to do well, and a lot of initiatives inside the more wealth advisory space, the regions. The second dynamic I'll mention within the business, a different view, is what are clients utilizing us for. The advisory fee, the advisory component of what our clients are doing with us is doing well. It's positive both in the regions and in GFO. but that's being offset by lower product utilization. That tends to ebb and flow, and we look more closely at the advisory component. It's more of an indication of the base of business, and that's trending positively in both businesses.
spk11: Thanks for the color, guys. Appreciate it.
spk14: Just a reminder, it was star one if you had a question. We will move next to Brennan Hawken with UBS. Your line is open. Please go ahead.
spk07: Good morning, Brennan.
spk04: Hey, how are you? Good morning, Jason. I'm curious to know, and I couldn't find a specific disclosure on this, so apologies if you have disclosed it separately, but could you tell me what percentage of your wealth management client assets are in advisory accounts, and if you know, what are the deposit costs for those accounts?
spk07: I got most of that. I just want to clarify the last sentence. How much of it is what?
spk04: What the deposit costs on those accounts would be?
spk07: Got it. I'm glad I asked because I did not hear that well. So on the first component, we actually have not historically disclosed the breakdown of our fees that come from product versus from advisory, but almost just at a high level, virtually all of our wealth, particularly in the regions, virtually all of those relationships have an advisory fee associated with them, and the vast majority have product fees associated with them. And then in terms of deposit costs, we haven't talked about deposit costs for that group specifically, but I think where you're going with it is accurate. The deposit costs in that client base are significantly lower than on the institutional side in general. Now, the GFO business, family office, has some clients that are equal in size to some of our largest asset servicing clients, but the bulk of that book is priced much more with lower deposit costs relative to the institutional side.
spk04: Okay. So I don't know if you were aware of this or saw this, but in the last week, at this point, three of the warehouses have come out and said that they are bringing up the deposit costs on advisory relationships up to equivalent to money fund levels. Wells and B of A did that in the second quarter. During the second quarter, Morgan Stanley just yesterday announced that they intend to do it in the third. Given that this is the direction some of the largest providers in the industry are going this direction, what are your thoughts and plans around making sure or aligning with this practice and And if you don't plan to, how do you intend to manage any legal or lawsuit risk on fiduciary issues?
spk01: Yeah, Brennan, it's Mike. Within the business, it's true of all of our businesses, but just to be clear, you know, within wealth management as well, it's a competitive marketplace for all of the products that we offer. And so to your point, if other competitors or service providers in the space, change their pricing on anything, frankly, but to your point on deposit levels, then we absolutely have to react to that. So that's the first point. It's dynamic. The second, I would say, is that it's also based on the holistic relationship that we have and the entirety of what we're offering for the client. And as a result, the different needs that they may have. Point being, you know, say not every deposit is created equally. You know, almost as simple as just start with, you know, a checking account is different than a savings account. And the terms and the nature and characteristics are different. And so the actual deposit cost, if you will, is going to be different based on that as well. But needless to say, if others are doing things in the market, we have to be able to respond in kind. Sure. Fair enough.
spk07: Wonderful. One other dynamic is our sweep clients within the wealth business, they already have the option to sweep onto our money market platform.
spk04: Oh, that's a feature within the system where the advisor team or whatever could just adjust the sweep default and go into the money fund rather than deposit.
spk01: Yeah, and to be clear, the client has the option to select what they would like to do.
spk04: Right. Well, in an advisory relationship, there's a little bit of a different dynamic, but I got it. Okay. Just given the focus on this, it might be helpful to consider disclosing some of these details going forward. I know you said you didn't have them today, but it might be helpful going forward.
spk11: Appreciate that. Okay.
spk14: We'll go next to Mike Mayo with Wells Fargo. Your line is open. Please go ahead.
spk09: Hi. Jason, you mentioned the $200 million restructuring charge. Part of that is severance. What were the underlying drivers for that charge? What might cause you to do that again? And what sort of future expense save do you expect from that, including for OpEx?
spk07: Sure. So drivers really comes down to productivity, Mike. And you've heard us talk about it a lot. And we've got a continually look at the activities across the business and determine, do we have the right skills? Do we have the right people? Are we in the right geographies? And importantly also, we've got to look at the span of control and the amount of layers we have in the organization. And all of those different analyses led us to the conclusion that we should take some actions here. And so Well, obviously, even with an example like spans and layers, you might do eliminations, but then you might also replace eventually with a different skill set or a different span from a leadership perspective. And so we won't get 100% savings of these salaries, but we should get at least 50%. And in general, we anticipate about half of the severance to impact a decline in the ongoing salary run rate. Obviously, we're growing in other areas of the company. We're growing headcount and wealth management to grow that business. We're obviously investing in resiliency, but for these areas that are affected here, we should see that type of impact in the salary line.
spk09: Okay, so a permanent reduction And salary equal to about half the severance with some of that reinvested back in the firm where you're hiring elsewhere. Is that correct?
spk07: Let me clarify. So it would be the total amount of impacted salary would be close to the amount of the severance line, but we would reinvest about half of it. And so we should get an improvement from these areas of about in the neighborhood of $40 million run rate on the salary line.
spk09: Okay, got it. And then just more generally, maybe Mike, you know, you're talking about productivity and the custody business. And it seems like you're committed in the custody business, but not just for growth, but for more profitable growth. You say you're bidding less, you're being more selective, you're picking your spot. So how would you describe Northern's positioning in the custody business today versus the past?
spk01: So a couple points to it, Mike. One is within, broadly speaking, asset servicing, at a high level, you have the services that we provide to asset owners and then the services we provide to asset managers. Now, there's a lot of hybrids within that as well and crossover of services, but largely speaking, those are the kind of two big groups of clients. And within the asset owner part of the space, the nature of what we're doing there is more scalable in the sense of, to your point, custody, where adding on a new client requires less in the way of headcount addition and technology spend, if you will, to customize for what they're doing. Now, you've also heard us talk about certain things like front office solutions. That's a case where with an asset owner client that we're looking to provide a higher differentiated level of capability for them, and then correspondingly have the associated fee that goes with providing that. So that's how I would say in the positioning there, we're trying to differentiate what we're doing, combination of capabilities like front office solutions, and with a higher level of service that is consistent, I would say, with with our brand, with our culture, and the way that we approach the clients across the company. And then I would say on the asset manager side, the asset manager services that we provide to them, that has been a stronger source of growth for us over the last many years, but it is more resource intensive. So when you look at the headcount growth that we've had over time, a lot of that is because it's supporting bringing on new business there that does require additional partners, meaning employees, for us to provide that. And that's an area I'd say we're trying to be much more selective about those relationships and the opportunities that we pursue there. So you heard me also talk about connectivity points. And the point on that, Mike, is that with an asset manager client, for example, if we're only going to do one thing for them, it's probably not going to be attractive for us. Whereas if we can do a number of different things across the spectrum, That's where that type of client relationship provides the level of profitability that we're looking for. So that's where I would say that the focus is, you know, when you look at the business overall, but then within the segments.
spk11: Got it. All right. Thank you. Sure. So next to Brian Bedell with Deutsche Bank.
spk14: Your line is open. Please go ahead.
spk03: Morning, Brian. Good morning. Maybe just one on the net interest revenue. Maybe, Jason, just your view on deposit betas across your franchise on the downside when the Fed cuts, and if you could just differentiate between wealth and asset servicing. And I did see the interest-bearing deposit line on the average balance sheet. It's a smaller category, but that seemed to go down a lot. I just was wondering what was driving that extent at 153 bits from 315. I want to make sure I get the last what were you on the average balance sheet I think just the interest bearing deposit with banks on the asset side what seemed to go down a lot I didn't know if that's just noise or on the rate on that might be I might that might be the sick repo okay
spk07: Oh, yeah, the due from banks. And we can come back to you. I think that's just noise in the reporting on a small denominator. But in general, on the betas, I mean, you saw the ECB reduction. We got effectively 100% beta on that. And so we've, at this point, with rates at these levels, the betas are going to be very high. And so we'd In that example, both the standard rate card and the negotiated rates both came down in conjunction with the central bank change. And even the negotiated rates tend to be on a spread to central bank rates. And so we feel like, again, in this zone of where rates are, the spread shouldn't change materially.
spk03: And just differentiating between wealth and the asset servicing business in terms of those deposit betas?
spk07: Yeah, it's similar. The institutional business sometimes will have, again, very large deposits. And so that won't change. That'll have more of what we should think of as a mixed impact. more than an impact coming from the rate changes from central banks. So we gave an example even earlier in the very small number of very large deposits that can come on at tight spreads to central banks. And so that will tighten spreads, but that's not correlated to the actual central bank movements, which is really more the sphere of your question from what I'm understanding. So on the wealth, just to hammer the home, on the wealth side, across your wealth franchise, do you think... Yeah, the wealth side is even a higher percentage of deposits on standard rates, which, again, with rates at this elevated level, will be able to move in conjunction with central bank movements. Okay.
spk03: And then just on expenses... I guess you'd have to have a downtick in 4Q. Sorry, can you hear me?
spk07: No, no, no, you broke up real bad.
spk03: Sorry, can you hear me now?
spk07: That's better.
spk03: Okay, thanks. Expenses for the full year. So I know the 1% up in 3Q. Are you still targeting the 5% or better expense growth for the full year, which would imply, I guess, a downtick in 4Q? And are you still also targeting positive fee operating leverage? And might that even be possible if net interest revenue continues to hold up? Might it be possible to generate operating leverage on total
spk07: revenue for 2024 yeah so on the the expense expense year-over-year we five percent is going to be really hard I mean we're in the sixes first half of the year and we and it's largely because of two factors one the markets elevated really quickly at the beginning of the year and that drove just in the first quarter alone It drove $10 to $15 million in lift, which is over 100 basis points year over year. And then in conjunction with us deciding to accelerate the resiliency work, that adds in another layer. And so it's going to be hard this year and unlikely this year, but it does not are still our long-term goal. target is 5% or less. And there's no reason for us to change that long-term target, just two dynamics this year. One is frankly a good one because we get positive operating leverage out of the markets being higher. And another one is us positioning ourselves for lower expense growth rate in the future as a result of what we're doing on resiliency. On the operating leverage side, from a fee operating leverage side, we should get fee operating leverage in the second half of the year. And the fee rates are higher, revenue is higher, and so that puts us in a good position. From a total operating leverage perspective, a little harder in third quarter, just based on where markets are at this point, hard to tell. But fourth quarter, from what we can see at this point, would be much more likely to have total operating leverage there.
spk11: Okay. Great colors. Thank you. You bet.
spk14: We'll move next to Alex Blostein with Goldman Sachs. Your line is open.
spk08: Please go ahead. Hi, Jason. Good morning, everybody. So I wanted to follow up on the questions Brennan was asking earlier just as far as the wealth dynamics go and just, I guess, a couple of questions around that. It sounds like you're evaluating still what the competitors have done. So is it just kind of a matter of time before you guys decide to kind of go through the same process? Or I guess if you choose not to, and outside of competitive pressure and stuff, are there any other ramifications that might kind of force you and the industry to go down the same path? So, like, in other words, are you hearing anything from the regulators? Are you hearing anything from, you know, potential risk of litigation that could sort of ultimately force the industry to go in this direction? So that's the first question.
spk07: And you're talking specifically on deposits, Alex?
spk08: Yeah, so the wealth deposits with advisory relationship where the firm has a fiduciary duty.
spk07: Yeah, I just wanted to clarify. So in that space, we already have, our rates are already at market. And the clients and the advisors work together to determine what they want to select from a sweep perspective. And so they can elect to sweep into money market mutual funds or onto our balance sheet. But But the dynamics that we've read about, it's not reflective of our client base and of our platform.
spk08: Sorry, but I guess if the industry goes to five and you're saying you're at market, but the market is at five on deposits, does that mean you guys would have to go to the market rate at five?
spk07: No, we're closer to five now.
spk08: Got it. Okay. And then in terms of the sizing, I think in the past you talked about, I think about a quarter of the deposit base was wealth. The other 75% was institutional. So the quarter that is wealth, can you delineate like kind of what the U.S. deposit base is?
spk07: What the realized deposit base is? Well, the quarter is, the 25% is roughly right. It's a little bit less than that, but that's ballpark. And what else are you trying to get?
spk08: Just like what's the U.S. piece of that is? Is there a way to delineate that?
spk07: The U.S. piece? Yeah, that's virtually all of it. Okay, great. The family office business might have some that's non-U.S., but the vast majority of deposits on the wealth side are U.S. denominated.
spk08: Gotcha. Understood. Thank you. And then just my follow-up question is around expenses. Okay. You guys are implementing incremental savings initiatives, so it kind of makes sense, and that's causing maybe incremental technology spend this year. As you sort of think about long-term, and we've talked about expenses to fee ratio for many years now, but given that it's still proven to be pretty sticky at this kind of 115-ish percent range, what's the goalpost as you kind of put this all through and maybe takes a year, two years, three years, but what are you driving towards and how long do you think it'll take you to get there?
spk01: Yeah, Mike, what do you want to say? The goalposts haven't changed, Alex. I mean, when I say the timing, not even saying like how far out it is per se, but just as you know, the components of that calculation are, are going to move at different rates for different reasons, meaning markets and organic growth on the fee side. And then likewise, you're going to have time periods where the expense growth can be a little bit higher or a little bit lower on that part of the equation. And so the goalpost is still getting that to that 105 to 110. We think that's our target operating range for that ratio. And as you've seen, we've brought that down. Would we like it to go faster? Yes. But again, it's balancing off the things that we need to do in order to drive organic growth so that you get the benefit of that on the ratio. And then as Jason's saying, you make certain investments that you absolutely are looking to get greater efficiencies as a result of those going forward. So we have a lot of manual processes, for example, that we're automating across not only the operations of our business, but also across other parts of the business that have to do with our risk and control. So a lot of opportunities there to, yes, improve the resiliency, as we've mentioned a number of times, but also get efficiency out of it.
spk11: Got it. Great. Thank you guys very much. Sure.
spk14: We'll go next to Vivek Dujaisa with J.P. Morgan. Your line is open. Please go ahead.
spk05: Hi, thanks. A couple of questions. Just want to understand, Mike and Jason, the severance charge that you're taking, it's a much larger severance charge than we've seen you take in many years. I guess the visa gain gives you that opportunity. When do you expect to start to have that show up in the compensation line and over what period?
spk07: So we mentioned that a lot of the many of the actions have already been taken. And at the same time, the program that we instituted this time is more over 18 months. And so it'll bleed in over, it'll get embedded over that timeframe.
spk10: Ah, but you've taken the charge right up front. Okay. Okay.
spk05: All right. And when you So when you talk about the under 5%, I tell Mike, you said, Jason, that it's unlikely this year. Should this make it much more likely next year? Where do you, you know, given especially the severance benefit that bleeds in over the next 18 months?
spk07: It puts us in a... It does put us in a better position next year. And the spirit of what we're doing, particularly with the resiliency spend, is to accelerate some of the spend that we've had on our roadmap over the next several years. So that helps. And also, the actions we're taking around productivity help a lot as well. And so it definitely puts us in a better position. But it's early July, and it's still early to talk about what next year looks like. But from what we see right now, of the things that are predictable at this point, there's nothing that tells us we shouldn't have that 5% or better outlook for next year. And we feel like we're well positioned for it at this point, given some of the things that we've talked about.
spk05: And again, related to the visa, pardon me if I missed anything, because there's a lot of earnings going on this morning. But buyback. You did some. Over what period should we see the rest, given that you've used about a couple hundred million? I know that's all pre-tax, but how much more should we expect to see and how soon?
spk07: So the visa situation is very helpful, and it puts several hundred million dollars, and you'd call it half of the after-tax proceeds in our minds available for buyback, particularly if you look at where our capital ratios, capital levels are right now. There's no race for us to do that. And so we can do it over time. We can do it deliberately. We also have to keep an eye on what's happening from a regulatory environment and what FASL requirements might be from a capital perspective. But we're obviously positioned very well to continue to have elevated levels of buyback. Okay, thanks.
spk14: We'll go next to Ibrahim Poonawalla with Bank of America. Your line is open. Please go ahead.
spk07: Morning, Ibrahim.
spk06: Hey, morning, and thank you. And I'm sorry, Jason, if I'm being repetitive. I just wanted to make sure we heard you correctly. The stock was down about 8% at one point, still down a lot. I just wanted to make sure that your messaging on NII is essentially saying, you expect third quarter NII to be relatively flat given the decline in balances should be offset by the investment deals. Am I hearing that correctly? And you're not really seeing any impact from these sweep deposits that have impacted some of the other banks given where you already price deposits for your customers.
spk07: Correct. We see third quarter NII at this point flat.
spk06: And From there on, rate cuts, if we get them in September, should be a positive for the NRI or negative?
spk07: Unlikely to, less likely to be positive, but we don't see, as long as rates are at these levels and just take U.S., just take the Fed being in the fives at this high level of rates on an absolute basis, getting 25, 50 basis point reductions at this point, should not have material spread degradation.
spk06: That's helpful and clear. And on the fee revenue side, apologies if we missed this. I think you mentioned you lost a client that's going to have a few million dollar impact. I'm just trying to get a sense of what your expectations are for fee revenue, all else equal, as you think about the third quarter.
spk07: No, nothing to provide in terms of an estimate. And if you think about it, if it's a few million dollars this quarter, a few million dollars next quarter, cumulatively that's a reduction of $10 million, you know, round number on a – even within asset servicing on a quarterly basis. trustee base of over $600 million. And so we're just trying to, once we start talking about growth in the business and about, you know, overall net new business activity, that number has more of an impact, but it doesn't have as much of an impact on the overall amount of fees in the business. And so that's why we called it out. It's just in the context of thinking about new business activity and organic growth, where it has more of an impact on a percentage basis. But in general, the business is doing well. And the activity levels, the pipeline, and what we see on the horizon, still good. Just important to call out those two items.
spk06: But if I can sneak in one quick follow-up on expenses, the actions you took this quarter might take You're not guiding for this. My takeaway is it probably sets up for an even better or lower expense growth for 2025. Is that the right way to interpret that relative to whatever you do in 24?
spk07: Yeah, it is. There's no doubt that some of the expenses that we put on now, again, it's an acceleration of what we planned. Some of it we do believe will come down next year. I talked about the offset as we do some hiring in some of these spaces. But we also came into this year feeling very good about the 5%, but the markets moved early. And so it does give an indication that when markets move, it can impact the expenses. Again, we have positive operating leverage in that, but At this point of mid-July, I'm hesitant to talk in too much detail about 2025. We'll certainly give an update later in the year, but the spirit of your question is right in that some of the spending now positions us for even better expense trajectory management going into next year.
spk11: Extremely helpful. Thank you. Sure.
spk14: We'll return to Brennan Hawken with UBS. Your line is open. Please go ahead.
spk04: Hi. Thanks for taking my follow-up. I just wanted to draw a specific understanding because it was a little unclear with Alex's follow-up to the question on the wealth deposits. Did you say that the advisory wealth deposits are currently – priced at 5% or they have the option to elect for money funds that could yield 5%. I'm just trying to square all the commentary.
spk07: Sure. So it's the latter. They have the ability to sweep into our money fund complex, which already is priced in the 5s. And so our clients have the ability to elect for that deposit mechanism now to the extent that they are sweeping.
spk04: Got it. So just to further add a little color to my question, the option to move into money funds was available at most of the wire houses too, and they've They made this move, as my understanding, due to concerns about the fiduciary obligation and whether or not just basically paying out that level would be just necessary from a legal perspective. So it sounds like from your answer, you guys don't have any plans to make any change at this stage, although, as you said, depending on competitive pressures, you may seek to make adjustments going forward.
spk07: I think that's a good summary.
spk11: Excellent. Thanks very much. You bet.
spk14: And we'll return to Vivek Juneza with J.P. Morgan. Your line is open. Please go ahead.
spk05: Thanks. Just wanted to clarify, Jason, a comment you made, which was rate cut 25 to 50 basis points should not have material spread degradations. So does that mean If we do have rate cuts, that would hurt your NIM and NII?
spk10: That you are asset sensitive?
spk07: No, I'm saying that as we have rate cuts at this point, we should be able to pass along those declines in the form of lower deposit yields to clients in our standard rate cards and in our negotiated rates.
spk05: Okay, what did you see with the ECB 25 basis point rate cut that has come through? Have you cut those deposit rates by 25 basis points?
spk07: Yeah, and I did comment on that really specifically earlier. We did see aligned reductions in deposit costs on the ECB change.
spk10: Okay, that means you've passed on the full 25 basis points.
spk11: Yes.
spk05: Sorry, just as I said, there are too many on these calls today, and you are overlapping with others, so that makes it hard to keep up with all of them.
spk14: Thank you, and I will now turn the conference back to Jennifer Child for any additional or closing remarks.
spk00: We'd like to thank everyone for joining us today, and we look forward to speaking with you again soon.
spk14: Thank you. Ladies and gentlemen that does conclude today's earnings release. We thank you for your participation. You may disconnect your phone line at this time.
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