Northern Trust Corporation

Ladies and gentlemen, good day and welcome to the Northern Trust Corporation Second Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Child, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Good morning, everyone, and welcome to Northern Trust Corporation's Second 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 Stegman 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'll find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 23rd 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 23rd. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding the 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 second quarter 2025 earnings call. We reported another quarter of improving results reflecting a consistent execution of our One Northern Trust strategy, which we introduced at the beginning of 2024. We delivered our fourth consecutive quarter of generating positive organic growth and operating leverage. Revenue grew 8% and earnings per share increased 20%, excluding notables in the prior year period. And we returned more than 100% of our earnings to our shareholders through dividends and record share repurchases. As we pass the midpoint in the year, I'd like to share our progress on our multi-year transformational strategy, which is producing clear proof points that it's gaining traction. Turning to slide two, our One Northern Trust strategy is centered on our mission to be our client's most trusted financial partner and commitment to leverage the full breadth of the firm's capabilities to deliver seamless, high-impact solutions. We deliver a holistic client experience through the collaboration of our three businesses to serve the full spectrum of individual and institutional clients. A great example in the second quarter is our work with timelines. one of the UK's fastest-growing discretionary fund managers. As Timeline evolved its business model to launch a proprietary fund-to-funds range, Northern Trust Asset Management and Asset Servicing partnered to deliver a fully integrated solution. Together, we provided investment management, fund infrastructure, and operational support, enabling Timeline to scale its offering with speed and confidence. This win reflects how Northern Trust brings together capabilities across the firm to support the growth of high-potential clients in dynamic markets. Turning to slide three. While we continue to deliver exceptional outcomes for clients, we're equally focused on delivering long-term value for all of our stakeholders. Our One Northern Trust strategy is anchored in three pillars, optimizing growth, driving productivity, and strengthening resiliency and managing risk. These overlapping pillars operate as a flywheel, each one amplifying the others. Our organic growth is gaining momentum, fueled by numerous strategic initiatives launched over the past 12 to 18 months that are now delivering results and are well-positioned to drive greater performance in the months and years ahead. In parallel, we're driving meaningful gains in productivity across the organization through a client-centric, capability-driven operating model We're aligning resources more effectively to deliver value where it matters most. We're also accelerating the deployment of AI tools to streamline processes, reduce manual effort, enhance decision-making, and manage risk. Together, these efforts are bending the cost curve and freeing up resources to enable reinvestment in growth and innovation, all while delivering higher margins and a better experience for our clients and employees. Finally, the investments we've been making in resiliency are paying off through an enhanced control environment. Over the past year, we've added new roles across our three lines of defense and built greater stability, security, and scalability into our technology infrastructure. These capabilities are increasingly embedded into how we operate, influencing decision-making, and enabling us to manage risk proactively and stay ahead of a rapidly evolving industry. Turning to slide four, as we execute on our One Northern Trust strategy, we're advancing several enterprise growth initiatives that are aligned with both evolving client needs and represent opportunities where we have differentiated capabilities across our businesses. One of these is Clearly Alternatives, which I'll spotlight today. The rapid expansion of global private markets is undeniable and projected to continue at twice the pace of public markets over the next decade. with total assets expected to exceed $60 trillion. Our integrated model and expanding capabilities position us well to capitalize on this growth and deliver long-term value for clients and shareholders. We're leveraging this vast opportunity in several ways. First, 50South Capital, the alternatives investment platform within our asset management business, which specializes in fund-to-funds, primarily targeting emerging managers, is having a record fundraising year. They recently closed their largest secondaries fund with investors across wealth, family offices, intermediaries, and institutions. Second, in wealth management, we continue to build out our platform for third-party funds. Several year-to-date raises have already exceeded initial targets, underscoring the strength of our offerings and the trust clients place in our platform. We're also unlocking incremental value for clients through collaboration with 50 South Capital's research team. which has cultivated relationships with over 270 managers to offer access to highly curated, hard-to-reach alternative investment funds. As a result, our fund launch pipeline has tripled compared to prior years, reflecting strong client demand. Third, for clients with significant alternatives portfolios, we also offer our Alternatives Advisory Services, which provide consulting and customized solutions. assets under advisement are up 66% year-over-year, reflecting demand from both institutional and wealth clients for differentiated high-conviction strategies. Recent examples, such as a $1.25 billion private credit mandate for a multinational corporate pension and one for a family office from the Middle East, highlight our ability to deliver bespoke solutions at scale. And fourth, in asset servicing, we continue to expand our leadership position in particular in the semi-liquid fund market, where we now support six of the 12 long-term asset funds in the UK, with seven more in the pipeline. We also support five European long-term investment funds. We're building real momentum and alternatives, and we're only just beginning to unlock the full potential. In parallel with these firm-wide priorities, each of our businesses is executing targeted growth strategies that reflect their unique client bases and market opportunities. Turning to slide five, starting with wealth management, our wealth management business continues to deliver on its unique value proposition and is making solid progress on the three core strategic priorities I outlined at the beginning of the year. First, our global family office franchise is a powerful example of our strategy in action. By integrating asset servicing industry-leading custody platform and technology capabilities, Wealth Management's deep fiduciary and banking expertise, and Asset Management's innovative investment solutions, GFO delivers a seamless end-to-end platform tailored to the world's most sophisticated family offices. GFO continues to deliver strong organic growth, with revenue growing 8% in the first half of 2025, including international revenue growing at over 20%, and now accounting for nearly 15% of total GFO revenue. With the launch of family office solutions earlier this year, we're building on the proven success of our GFO playbook to bring a new offering to ultra high net worth clients that do not have a dedicated family office structure, but can benefit from institutional grade capabilities and the personalized service Northern Trust delivers. The new offering leverages the same elite capabilities of GFO combined with a dedicated family office solutions relationship advisor serving as a single point of contact to coordinate the client's entire financial life. In just the first two quarters, this new approach has achieved a higher than 75% win rate, with a deep pipeline heading into the second half of the year. We're also making deliberate changes in investments to increase our market share in key geographic markets. We recently reorganized our core wealth management business from three to four regions and appointed new leadership in both the West and Northeast, bringing in experienced executives with strong market connectivity and a clear mandate to accelerate growth. We're also actively investing in revenue-generating talent across these regions to strengthen client coverage and drive new business. Turning to slide six, Northern Trust Asset Management continues to execute successfully against its strategic priorities. In addition to scaling our alternatives platform through both 50 South Capital and our alternatives advisory capability, we're expanding into other key growth areas, particularly custom SMAs. As a leader in direct indexing and tax advantage equity strategies, we continue to build on strong inflows into our strategies by investing in technology and advisor tools to scale personalization, extend internationally, and deepen penetration across institutional and wealth channels. Another example of our success is a recent $1 billion equity mandate with the Public Investment Fund in Saudi Arabia, one of the largest sovereign wealth funds in the world. We expect this mandate to expand to additional quant strategies, demonstrating our ability to serve the world's most sophisticated sovereign clients. In ETFs, we're enhancing our platform with the planned upcoming launch of 11 new fixed income strategies in the third quarter. These products are designed to meet growing demand for efficient, transparent, and scalable exposures and will complement our existing index and liquidity offerings. Turning to slide seven, our asset servicing business is executing on a disciplined strategy centered on scalability and client centricity to drive profitable growth. We serve a focused set of client segments, where we have deep expertise and a differentiated value proposition, one that continues to drive strong win rates and high levels of client satisfaction and retention. I already mentioned our strong position with alternative investment managers, where our assets under administration are now approaching $1 trillion, underscoring the strength of our platform and the trust placed in us by leading institutional clients. We also have good momentum in the asset owner segment, one of our highest margin businesses, which now comprises 50% of our segment-level revenue. Our success is driven in part by our upmarket strategy to serve larger, more complex institutions with tailored solutions and global reach. Recent wins include the $89 billion University of Texas, Texas A&M Investment Management Company, a $55 billion Canadian foundation, a top 20 U.S. pension plan, Telstra, one of Australia's most significant superannuation funds, and a large sovereign wealth fund, our first front office solutions client in Saudi Arabia, where our technology was cited as a key differentiator. Our capital markets business continues to perform well. In the first half of the year, revenue was up 15%, including more than 30% growth in both outsourced trading and currency management. These results reflect the strength of our capital-efficient model and our ability to deliver scalable, high-value solutions to institutional clients. This disciplined approach is delivering tangible results. Organic growth is accelerating with new business tracking well and at above-average profitability, and overall margins improving significantly. Turning to slide 8, we've demonstrated our ability to bend the cost curve. and remain firmly committed to continuing to do so while making necessary investments in critical infrastructure and growth initiatives. Through the first half of the year, expense growth was 4.8%, and we're on track to achieve our full year goal of below 5%. Our progress is underpinned by a series of structural and operational advancements. We're modernizing our operating model and increasingly leveraging AI, such as GitHub Copilot and Document Digitization, to enhance employee productivity and increase automation across the enterprise. For example, thoughtful reorganization of our global operations under our Chief Operating Officer is unlocking efficiencies while preserving our world-class service. Headcount within asset servicing and operations has declined for nine consecutive quarters and is down 7% from its peak. Importantly, these gains are creating a margin and we've strengthened our governance and controls to ensure they are sustainable. We've also implemented centralized oversight of multi-year technology programs and introduced new tools to monitor hiring activity and workforce composition in real time. These measures give us confidence in our ability to continue driving productivity and margin expansion while maintaining the flexibility to reinvest in areas that support growth. And that reinvestment is underway focused on three levers, talent, product expertise, and technology. On the talent front, we're hiring revenue generating professionals across wealth and asset management. From a product standpoint, we're ensuring we have the expertise to create innovative solutions and support the growth across the businesses, which I described earlier. And the technology side, we're investing in capabilities that enhance the client experience and support scalable growth. These investments are enabling us to deliver more personalized, efficient, and high impact solutions. Together, These efforts reflect our disciplined approach to cost management and our commitment to sustainable margin expansion, while continuing to invest in the capabilities that will drive long-term value for clients and shareholders alike. Turning to slide 9, our financial model is designed to deliver an attractive combination of growth and returns, and we're making tangible progress against these targets. Organic growth is steadily improving and should accelerate as our initiatives further develop and expand. We have a clear and credible pathway to generate higher margins. And at the core is our rock-solid balance sheet, which provides flexibility for our clients and meaningful capital return optionality for our shareholders. Continued successful execution should translate into double-digit annual earnings per share growth, substantial capital return, including meaningful share repurchases and higher ROEs. Given our recent momentum and confidence in our trajectory, we're changing our ROE target from 10% to 15% to 13% to 15%. Turning to slide 10. To close, I want to reaffirm our commitment to remain independent. Contrary to recent speculation, during my tenure as CEO, we have never entertained discussions regarding the sale of the company with any financial institution, nor do we intend to. the board and management team remain confident that Northern Trust is well-positioned to continue driving long-term growth and value creation, as evidenced by our visibly improved performance and momentum in our One Northern Trust strategy. Our 135-year track record of stewardship of multi-generational personal and institutional wealth, unwavering fiduciary commitment, ingrained culture of integrity, and long-term perspective instill confidence in our clients that we will be here for them, not just today, but for generations to come. And with that, I'll turn it over to Dave to review our second quarter results. Dave?