Northern Trust Earnings Call INSIGHTS: 2013 From a Pretax Margin POV, Institutional Asset Management

On Wednesday, Northern Trust Corporation (NASDAQ:NTRS) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

2013 From a Pretax Margin POV

Alex Blostein – Goldman Sachs: So, why don’t you start with I guess your commentary on the cost savings and the progress you made so far, so if you strip out, just a couple of one-offs, I mean it looks like the pretax margin this quarter was around 29% maybe a little over 29%. Mike, how should we think I guess about that as we progress through the next year and a half, and where do you guys see yourself kind of finishing 2013 from a pretax margin perspective?

A Closer Look: Northern Trust Earnings Cheat Sheet>>

Michael G. O’Grady – EVP and CFO: So, clearly you’ve seen Alex that we have had a focus on managing our costs and have had success in doing so for a couple of quarters here. We will continue to do that, continue to focus on that, you also saw the driving performance initiatives delivering the savings that we’d hoped for. The breakdown there for this period was 40% revenue 60% expense. So, beginning to see more of it coming from the expense side of the equation, so that helped on the margin side. The other thing I would point out though is, each quarter does have certain items that are either seasonal or did impact particular quarter. So in the first quarter as you know we have Northern Trust Open, we have certain equity awards that get expensed in the quarter. So it’s never going to be just a complete smooth trend, across all quarters, but certainly our objective is to stay on the path that we’ve been on, and trying to manage those costs closely.

Alex Blostein – Goldman Sachs: Then I guess second part of the initiatives and I am not sure if that’s coming through already maybe there’s little bit more to go, but from the revenue perspective it looks like your fee rates increased almost across every sort of category whether you look C&IS, custody fees, investment management fees or on PFS side. Can you help us understand I guess how much of that is a reflection of the new fee schedule, how much of that is a roll off from the fee waivers, and is there anything else going on with the type of business that you’re winning, that just comes in with a slightly higher fee rate versus what you’ve seen before?

Michael G. O’Grady – EVP and CFO: I think you’ve hit on the key categories. So for PFS no question and we talked about it there. We’re seeing the benefits from the new fee structure that was implemented on January 1. I would say importantly there Alex is the fact that it’s been executed in a way that has essentially worked the way that we had planned it out. So from a client retention standpoint and from being able to maintain that fee level it’s gone well. I think on the C&IS front you’re beginning to see the positive impacts of a similar program on that front, albeit structured very differently. So, that process as we’ve talked about very much client by client but we’ve put a very organized program around that such that we make sure that we’re measuring not only how we roll that out but our progress on that front. So, you saw in this quarter some benefit on the fee side from situations where we’ve been able to have those discussions with the clients and be able to what I call realign the value proposition with them. So those were the primary drivers. As far as the mix of business I would say on the PFS front, if you look at the asset mix for that client base in the quarter it was for the most part in line with where it was in the previous quarter so not much of a shift if you will in the asset allocation. So it’s largely consistent and similarly on the C&IS said I wouldn’t say that there is any particular trends in the type of business because we are winning across all the sectors, I would say that we’ve had particular success with hedge fund services and so we expect that we’ll have higher growth there which will affect that mix.

Alex Blostein – Goldman Sachs: Then just a last of me, NII I guess obviously tends to being just a little bit volatile with the rates and the size of the balance sheet. But it seems like you guys exited the quarter with earning assets a little bit higher than the average, how should we think about the progression I guess of NII from here between I guess you trying to manage the NIM and as well as the growth trends in the balance sheet overall?

Michael G. O’Grady – EVP and CFO: Well as you saw in the quarter, we saw the impact of when the assets do go down, the earning assets during the time period. So, essentially what happens there is a number of factors always, but if you boil it down on the funding side, we had lower interest-bearing deposits and those were coming off on average about 24, 25 basis points for those. Those were largely being deposited at the Fed, so you saw likewise a similar decrease in the average balance of our Fed deposits and those as you know are at 25 basis points as well. So, essentially, that part of the earning asset mix that’s coming off as a lower yielding portion of your spread for it. So that’s what benefited primarily I would say that’s what benefited the net interest margin during the period. Going forward, as you correctly pointed out Alex, we actually entered the quarter with a higher level, having said that it continues to move around as it moved around in the first quarter. As our clients both personal and institutional certainly deal with the situations in the marketplace both in U.S. but certainly what we’re seeing more of recently is in Europe with the euro those balances can move around. So as I’ve said before it’s difficult to give you a particular trend that we are seeing and just we will continue to manage each component of both the funding side and the asset side to try to maintain the NIM.

Institutional Asset Management

Kenneth Usdin – Jefferies: Mike I just wanted to ask you for a little more color in the institutional asset management business I know there was some help from fee waivers, but they had a really good revenue result on down average assets. So can you talk a little bit about product mix in that business mandated flows et cetera.

Michael G. O’Grady – EVP and CFO: As you pointed out there were a couple of items there on the fee waiver front that helped in the market, helped a little bit, but we did see the impact of net new business on that and if you recall last quarter we talked a little bit about just the timing of when new clients come on, and so we did have the benefit of some of that activity happening earlier in the time period. So, nice wins as far as the mix as I mentioned we had a couple of large wins in the index area, but if you look at our asset mix in the institutional business as well as the personal business, very diversified which is something that has been a contentious strategy to move that directionally. I think you are seeing a benefit of that as the markets move around.

Kenneth Usdin – Jefferies: Second question just on capital you mentioned 12.9 on the Basel III under the MPR if I am recalling that’s not much of a delta, so if you just confirm that. But secondly of the 13% still growing each quarter there wasn’t really that much buyback this quarter, when do we start to see the share count start to really come down and how do you, do you think any differently about future CCAR submission and capital usage.

Michael G. O’Grady – EVP and CFO: Let me try to take those in a couple of pieces. First of all as far as the change quarter-over-quarter in that Basel III Tier 1 common ratio, the primary driver for the change is that during the period we did obviously have a profitable quarter and if you recall we had two dividends declared in the prior quarter in the first quarter so, all of that net income or virtually all of it essentially went to equity, saw an equity increase from that. As I mentioned in selling the auction rate securities that also reduced our risk weighted assets. So, those were the two biggest drivers of the increase in the ratio itself. As far as the new NPRs that are out there, for us as a advanced approaches bank, the NPR is generally aligned with prior guidance from the Basel committee, there certainly changes, so the simplified supervisory formula approach definitely impacts part of our risk weighted assets. But on balance the increases and decreases from that particular approach essentially have a neutral impact for us on a risk weighted assets perspective. So that’s how it’s affected. To your next point on the share repurchase, we so far have been repurchasing the shares consistent with the capital plan that we submitted and was approved by the Fed and we’ll continue to do that. If you recall we had the authorization to repurchase $240 million up to the end of the first quarter, so there is still $190 million remaining on that and we will continue to look to repurchase according to the plan.

Kenneth Usdin – Jefferies: Just on little thing just on other fees, you mentioned there’s some miscellaneous stuff, was that a bit of an anomaly this quarter or could you just give a little color on that?

Michael G. O’Grady – EVP and CFO: That category as you know does include a number of miscellaneous items, so it is difficult to forecast whether it’s internally or externally, as I mentioned we did have a reduction in the commercial banking fees and really what that is, is just there was less pure refinancing activity in the time period and that one of the drivers of fees for the commercial banking area. So, frankly that component in and of itself can change just depending on the level of activity. Beyond that the year-over-year comparison as I mentioned included a again that we had on a lease residual in the prior year period, so you have items like that, that just cause the numbers to move up and down, but I would say no particular fundamental change in what’s in that category.