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Northern Trust Corp (NTRS) Q2 2021 Earnings Call Transcript

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Northern Trust Corp (NASDAQ:NTRS)
Q2 2021 Earnings Call
Jul 21, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. And welcome to Northern Trust Second Quarter 2021 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mark Bette, Director of Investor Relations. Please go ahead.

Mark BetteSenior Vice President, Director of Investor Relations

Thank you, Stephanie. Good morning, everyone. And welcome to Northern Trust Corporation’s second quarter 2021 earnings conference call. Joining me on our call this morning are Mike O’Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Briar Rose 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 21st 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 18th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our Safe Harbor statement. What we say during today’s conference call may include forward-looking statements which are Northern Trust’s current estimates and expectations of future events or future results.

Actual results, of course, could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict.

I urge you to read our 2020 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.

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.

Michael G. O’GradyChairman, President and Chief Executive Officer

Thank you, Mark. Let me join in welcoming everyone to our second quarter 2021 earnings call. During the second quarter, we continued to successfully execute on our growth strategies across each of our businesses. In our wealth management business, our goals-driven approach and last year’s launch of the Northern Trust Institute continue to resonate with our clients, further increasing client satisfaction levels.

Our digital Navigate the Now campaign, which we introduced last year, is successfully generating new contacts and leads, creating more opportunity. Uncertainty in tax law changes has also contributed to new business momentum. And earlier in the quarter, we announced the launch of our Tax Policy Resource Center, an extension of the Northern Trust Institute.

Within asset management, we continue to see momentum in our liquidity products as well as strong growth in our FlexShares ETF and ESG strategies. We continue to focus on expanding Sustainable Investment Solutions, and earlier this month announced the launch of the quality, low-volatility, low carbon world strategy, an actively managed strategy focusing on high-quality, low volatility stock, while maintaining a low carbon footprint relative to the MSCI World Index.

We also introduced the Northern Trust ESG Vector Score, which measures financially relevant ESG-related criteria that could impact the operating performance of publicly traded companies. Within our asset servicing business, we continue to see growth that was well diversified across regions, products and client segments. Recent notable public wins include Fundsmith, Marks & Spencer Pension Trust, Martin Currie Investment Management and Coal Pension Trustees Services Limited.

We continue to invest and expand our asset servicing solutions as evidenced by us finalizing our acquisition of Parilux Investment Technology, which underscores our commitment to the front office solutions business.

The execution of our growth strategies, combined with favorable markets, resulted in 12% year-over-year growth in our trust fees, despite significant headwinds from money market fee waivers. Our expense growth of 8%, inclusive of a pension settlement charge, generated 4 points of positive fee operating leverage. The expense growth reflected new business as well as investments in both technology and our staff as we continue to build a diverse engaged workforce with skills for the future.

I also want to draw your attention to our latest Corporate Social Responsibility report, which we published last week, marking a full decade of transparent detailed CSR reporting about the company. The report details our progress toward creating long-term value for our clients, employees, shareholders, communities and other key stakeholders.

Moving into the second half of 2021 and beyond, we remain focused on continuing to effectively navigate the persistent low interest rate environment, focusing on driving greater efficiencies as well as continuing to grow organically in a scalable and profitable manner.

With respect to the public health environment, we continue to operate in what we call resiliency mode, which means we’re focused on providing our clients continuity of service, while the majority of our employees worldwide are working remotely.

However, during the third quarter, we expect to see more of our staff returning to the respective locations. Our return to office plans are being driven, first, by robust health and safety protocols specific to each location and, second, by business function needs and timelines.

Finally, I want to express my sincere appreciation for our employees, whose commitment, expertise and professionalism continues to be exceptional.

Now, let me turn the call to Jason to review our financial results in greater detail for the quarter.

Jason J. TylerExecutive Vice President and Chief Financial Officer

Thank you, Mike. Let me join Mark and Mike in welcoming you to our second quarter 2021 earnings call. Let’s dive into the financial results for the quarter starting on page 2.

This morning, we reported second quarter net income of $368.1 million. Earnings per share were $1.72 and our return on average common equity was 13.7%. This quarter’s results included a $17.6 million pension settlement charge within the employee benefits expense category.

As you can see on the bottom of page 2, equity markets performed well during the quarter. Recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels, and both the S&P 500 and EAFE Local had strong sequential performance based on those calculations.

As shown on this page, average one month and three-month LIBOR rates were stable during the quarter, with only modest declines. US dollar was weaker on a year-over-year basis, which had a favorable impact on our reported revenue, but it’s unfavorable to our expenses.

Let’s move to page 3 and review our financial highlights of the second quarter. Year-over-year, revenue was up 5% with non-interest income up 10% and net interest income down 9%. Expenses increased 8%, while net income was up 18%.

In the sequential comparison, revenue and expense were both flat, while net income, taking our credit provision and taxes into account, was down 2%. The provision for credit losses reflected a release of $27 million in reserves in the current quarter compared to a provision of $66 million in the prior year and a release of $30 million in the prior quarter. Return on average common equity was 13.7% for the quarter, up from 12.2% a year ago and consistent with the prior quarter.

Assets under custody and administration of $15.7 trillion grew 30% from a year ago and 6% sequentially. Assets under custody of $12.2 trillion grew 32% from a year ago and 6% sequentially. Assets under management were $1.5 trillion, up 22% from a year ago and 6% sequentially.

Now, let’s look at results in greater detail, starting with revenue on page 4. Trust, investment and other servicing fees, representing the largest component of…

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