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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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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

Good day, and welcome to the Northern Trust Corporation third quarter 2026 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Steve Carroll, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation's third quarter 2026 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 Trey Stegman 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 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 November 21st. 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 all 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, Steve, and good morning, everyone. Let me join in welcoming you to our third quarter 2026 earnings call. Northern Trust had a strong third quarter in a macroeconomic environment that remained constructive but evolving. Excluding notable items, revenue grew 11%, supported by 8% growth in trust fees, 14% growth in net interest income, and 38% growth in capital markets revenues, which include foreign exchange trading, securities commissions, and other trading activities. Expenses were well managed and increased 5%, generating more than 600 basis points of positive operating leverage and demonstrating the scalability of our business. Pre-tax income rose 21% and earnings per share increased 40% year-over-year. Our return on equity, pre-tax margin, and expense-to-trustee ratio were all at or slightly better than our medium-term targets, and all three businesses generated organic trust fee growth.

Our capital position remains strong, giving us the flexibility to support our clients, invest in strategic growth opportunities, and continue returning capital to our shareholders. We returned more than $500 million in the third quarter and more than $1.5 billion year-to- date. We remain focused on executing on our One Northern Trust strategy and achieving our ambition to be a consistently high-performing company. We continue collaborating across the company to bring more of the firm to our clients and capture more of the opportunity within our existing and prospective relationships. For example, in our international Global Family Office, a prominent European family during the quarter by combining our relationship expertise with our Luxembourg asset servicing platform. This integrated solution supports the family's complex investment structure and creates opportunities to deepen the relationship over time.

Similarly, a recent win with a large U.K. wealth manager brought together NTAM's index management capabilities with asset servicing strengths across custody, securities lending, foreign exchange, and fund administration. This is One Northern Trust in practice, combining capabilities around client needs, strengthening relationships, and creating additional avenues for growth across the firm. Accelerating our strategic execution and the transformation of the company is AI. Our focus has been on converting widespread adoption into business value. Our approach is disciplined, starting with outcomes, simplifying processes, and redesigning work rather than just adding tools. We consider AI to be augmented intelligence and a durable force multiplier for our service, expertise, and integrity, and the long-term value we create for shareholders. We're seeing this show up in results. Our client action plan agents now save relationship managers two to three hours on every client memo, time they can redirect to clients.

In alternative servicing, AI-enabled digitization has nearly doubled straight-through processing, improving both client turnaround and the scalability of our platform. Our internal AI assistant, Byron, provides answers to partner questions and will allow our wealth advisors to bring sharper insights into client conversations. We're building these capabilities internally and with frontier AI firms, and our employees have access to some of the most advanced models available. In institutional client onboarding, for example, we combine advanced AI with enterprise-grade privacy, security, and governance to make the process faster for clients. We're also building for where markets are headed. In digital assets, our role is to help clients connect traditional and digital financial markets with the institutional standards of control, servicing, and risk management they expect. Demand is translating into mandates across tokenization, digital settlement infrastructure, and stablecoin-related solutions, with momentum in asset servicing building in the third quarter.

We also expanded our digital liquidity capabilities with the launch of the Northern Institutional Funds Stablecoin Cash Reserves Portfolio, a money market fund that helps stablecoin issuers meet their reserve needs through high quality, short-term U.S. government assets. Separately, earlier this year, we introduced a tokenized share class of our Treasury Instruments Portfolio. Together, these launches demonstrate our continued focus on product innovation and help ensure we're well-positioned to meet client needs as the digital ecosystem evolves. Digital assets remains an emerging business for us, and we will continue to build our capabilities thoughtfully. Let me now turn to each of our businesses. In wealth management, Global Family Office fees increased 16% year-over-year, and asset flows were the strongest of any quarter this year.

Clients with $100 million or more in assets continued to outpace the broader wealth management portfolio, with both fees and assets under management in this group growing at double-digit rates year-to-date. Demand is also growing for Global Family Office solutions, our outsourced offering for families with complex needs, and we are investing in the specialized talent needed to scale it. We also continue to build our alternatives offering. Client interests remain broad-based across venture and growth, value buyout, hedge funds, and customized strategies. Year-to-date fundraising has already well surpassed the level achieved in all of 2025. Talent remains one of the most important drivers of growth in wealth management. Our focused recruiting efforts have accelerated hiring and contributed to growth in our revenue-generating population quarter over quarter, and we will continue that campaign through year-end.

Turning to asset servicing, we continue to expand our work with complex asset managers and asset owners while driving scalable, profitable growth. Third quarter pre-tax margin exceeded 30%, up 6 percentage points year-over-year. Excluding notable items, our year-to-date pre-tax margin is 30%. Expanding relationships with existing clients remains an important source of growth. We recently announced an agreement with UBS to broaden our long-standing fund administration relationship. Subject to regulatory approvals, UBS's Swiss and Luxembourg management companies will extend our mandate to additional funds over the next two-plus years, including administering the former Credit Suisse funds in those markets, increasing UBS assets we service by more than 50%. The expansion further cements our position as the leading fund administrator in Switzerland and reflects UBS confidence in us to handle more complex work. 

In the U.K., J.O. Hambro appointed our Integrated Trading Solutions desk, building on a servicing relationship that dates back to 2008. We are also seeing relationships that begin with trading expand into broader asset servicing mandates. Alternatives also continue to be an important growth area, supported by demand for semi-liquid fund solutions, with combined assets in our LTAFs and ELTIFs more than doubling from the prior year. In the U.S., where asset managers increasingly want a single provider to support both mutual funds and ETFs, we are meeting that need through the launch of our ETF servicing platform. In asset management, NTAM continued to execute across its priority growth areas: ETFs, tax alpha, alternatives, and quantitative equities. We achieved our sixth consecutive quarter of positive ETF flows and launched 10 new ETFs, expanding our fixed income capabilities and broadening the range of tax-efficient solutions available to clients.

Our intermediary business also delivered its strongest quarter of long-term flows in three years. Looking ahead, we plan to convert six Northern Funds, representing approximately $33 billion in assets, into ETFs during the first quarter of 2027. In tax alpha, we are building on long-standing capabilities to capture opportunities in a direct indexing market estimated at more than $1 trillion. Our direct indexing advisor education program received a 2026 Wealth Management Industry Award, and demand for our long-short strategies continues to build, with a growing pipeline across a range of mandate sizes. Our quantitative equity business is also gaining traction. Institutional clients, including a Middle Eastern sovereign wealth fund and a large asset owner in the Nordic region, are seeding key strategies in our new adaptive equity suite, which brings together our established quantitative expertise with advanced data science and AI-assisted research.

Stepping back, this quarter showed progress across each of our businesses, and One Northern Trust is broadening what we do for clients. We have demonstrated the strength and resilience of Northern Trust across a range of macroeconomic environments, and we will continue to grow the franchise and pursue the opportunities ahead with discipline. Before I turn it over, I want to acknowledge that Dave Fox has announced his plans to retire. He will remain CFO through the first quarter of next year to ensure a seamless transition, and there will be ample opportunity to recognize his many contributions before then. With that, Dave, over to you.

Thanks, Mike. Let me join Steve and Mike in welcoming you to our third quarter 2026 earnings call. Let us discuss the financial results of the quarter. This morning, we reported third quarter net income of $642.9 million, earnings per share of $3.40, and return on average common equity of 20.1%. Pre-tax income was $804.2 million, and our pre-tax margin was 34.9%. Our results reflect continued progress against our financial objectives, including positive organic growth, disciplined expense management, and another quarter of substantial operating leverage. Our reported results included a $48.7 million pre-tax gain in other operating income, including a $34 million pre-tax gain related to the sale of the guardianship services business, and a $14.7 million pre-tax gain related to our participation in the second Visa exchange offer. Together, these notable items had an approximately $36.6 million favorable impact to net income in the quarter.

Excluding notable items in all periods, total revenue was flat sequentially and up 11% year-over-year. Total expenses were flat sequentially and up 4.9% year-over-year. We delivered over 600 basis points of operating leverage. Year-over-year, currency movements had an immaterial impact on revenue and benefited expense growth by approximately 35 basis points. Trust, investment, and other servicing fees totaled $1.4 billion, up 2% sequentially and up 8% compared to the prior year, benefiting from favorable markets and organic fee growth across all three business units. Excluding notable items, other non-interest income was up 19% year-over-year. While market volatility moderated from second quarter levels, foreign exchange trading and securities commission and trading income remained strong, supported by elevated client activity and continued momentum in Integrated Trading Solutions.

Our assets under custody and administration were $20 trillion, down 1% sequentially and up 9% year-over-year. Our assets under management were $2 trillion, flat sequentially and up 11% year-over-year. Moderate equity market appreciation in the third quarter was offset by lower fixed income market values and outflows from short duration strategies. Overall, our credit quality remains very strong. In the quarter, we recorded a $5 million reserve build, primarily related to a specific charge-off, while broader portfolio trends remained stable. Our effective tax rate was 19.3%, down 630 basis points from the prior quarter, and down 680 basis points from the prior year. The third quarter rate reflects an updated assessment of the tax impact from our international operations in 2026, including greater expected utilization of U.S. foreign tax credits.

We expect the effective tax rate to be closer to 25% in the fourth quarter and going forward. Turning to our Wealth Management business on page five. Wealth management delivered another strong quarter, supported by growth in our core advisory business, serving ultra high net worth clients, as well as strength in Global Family Office. Trust, investment, and other servicing fees for wealth management clients were $612 million, up 9% from the prior year quarter. Assets under management for our wealth management clients were $536 billion at quarter-end, up 9% year-over-year. Average deposits within wealth management were $27.5 billion, up 3% sequentially, while average loans were $36.4 billion, up 2% sequentially. Pre-tax income was $392 million, generating a pre-tax margin of 41%. Moving to our asset servicing results on page six.

Asset servicing delivered another strong quarter, reflecting disciplined execution on new business economics, broader solution penetration, and strength across capital markets. Assets under custody and administration for asset servicing clients were $18.5 trillion at quarter-end, up 9% from the prior year quarter. Asset servicing fees totaled $762 million, up 8% from a year ago. Custody and fund administration fees were $512 million, up 6% year-over-year and flat sequentially. Lagged benefits from favorable equity markets were offset by lower transaction activity as volatility moderated from elevated second quarter levels. Assets under management for asset servicing clients were $1.4 trillion, up 11% year-over-year. Investment management fees were $176 million, up 10% from the prior year quarter. The increase was driven largely by favorable markets and year-over-year benefit of higher liquidity assets, partially offset by price compression and select index mandates.

Securities lending income was $29 million, up 38% year-over-year, supported by borrowing demand across U.S. equities, Asia-Pacific markets, and IPO-related securities. Average deposits were $96 billion, down 5% sequentially, while average loans were $5.3 billion, down 8% sequentially. The sequential decline in deposits largely reflected typical third quarter seasonality and was consistent with our expectations. Pre-tax income was $405 million, generating a pre-tax margin of 30%. The year-over-year margin expansion reflects an improved business mix and a supportive macro environment. Turning to our balance sheet and net interest income trends on page seven. Our average earning assets were $148 billion, down 2% sequentially as lower deposit balances drove a decline in money market assets. The fixed percentage of the securities portfolio was 51%, down slightly from the prior quarter, including the impact of swaps.

The duration of the securities portfolio was 1.4 years, and the duration of our total balance sheet remained under one year. Average deposits were $123 billion, down 3% sequentially, largely reflecting the typical third quarter seasonality discussed earlier. Within the deposit base, interest-bearing deposits decreased 3% sequentially, and non-interest-bearing deposits decreased 5%, representing 15% of the overall mix. Net interest income on an FTE basis was $679 million, down 1% sequentially and up 14% from a year ago. NII declined modestly as lower deposit balances more than offset the benefit of higher securities yields, including the impact of late second quarter securities repositioning, as well as one additional day in the quarter. Our net interest margin on an FTE basis was 1.83%, up 2 basis points sequentially, reflecting the benefit of our securities investment strategies. Turning to our expenses on page eight.

Non-interest expense was $1.5 billion, down 9% sequentially and up 5% year-over-year. Excluding notable items, non-interest expense was flat sequentially and up 5% year-over-year, primarily reflecting higher technology costs, compensation and benefits, and higher account servicing costs. Excluding notable items, our expense-to-trust fee ratio improved to less than 109%, compared to 112% in the prior year quarter. Turning to capital on page nine. Our capital position remained strong in the third quarter, and we continue to operate at levels well above our required regulatory minimums. Our Common Equity Tier 1 ratio under the standardized approach was 12.4%, up 20 basis points from the prior quarter. The increase was primarily driven by lower risk-weighted assets, reflecting a decline in quarter-end overdraft balances, which more than offset a modest decline in CET1 capital. Our Tier 1 leverage ratio was 7.8%, up 20 basis points from the prior quarter.

At quarter-end, our unrealized after-tax loss on available-for-sale securities was $547 million. We returned $514.2 million to common shareholders in the quarter through common stock dividends declared of $161.9 million and common stock repurchases of $352.3 million. This represented an 82% payout ratio on a reported basis. Excluding notable items, the payout ratio was approximately 87%. Our capital position remains strong, providing flexibility to support clients, invest in the business, and return capital to shareholders. Turning to our guidance on page 10. Assuming a relatively stable market environment and interest rate backdrop, we now expect fourth quarter net interest income to increase 8%-9% year-over-year, and total revenue to increase 6%-7%. Excluding notable items, we expect to deliver positive operating leverage in the fourth quarter and 500 basis points or more of operating leverage for the full-year.

With that, operator, please open the line for questions.

Thank you. If you have dialed in via the telephone and 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. Please limit yourself to one question and one follow-up in order to allow everyone an opportunity. Again, press star one to ask a question. We'll go to our first question from Brennan Hawken with BMO Capital Markets.

Good morning. Thanks for taking my question. Curious about the impact of the price compression that Dave spoke to on the index mandate. Could you help us understand the magnitude of that, and should we consider that sustainable on a go-forward basis?

The price compression on the index mandates. I think what I was talking about specifically on some price compression for the quarter was the liquidity mandates that we had. We had to do a repricing of our money market fund related to our Wealth Management business of roughly 10 basis points, and that's about $2 million a month or $6 million a quarter. So that's what I was talking about in terms of the price compression, more importantly.

Okay. Got it. The operating leverage here that you generated in the outlook is really encouraging and certainly feels like a new direction. Can you speak to what's going on under the hood and the progress that the office of the COO is making to drive greater efficiency?

Sure, Brennan. It's Mike. To your point, this has been a focus for us, ensuring that we're driving scalable growth in a way that still delivers the highest quality service for our clients. Going back basically a couple of years ago to when we did reorganize around the COO office, that was a big part of it. But the other aspect of it, to your point, under the hood, was changing to this client-centric capability operating model.

By doing that allows us to arrange not only the operations that we provide, but also the technology that's necessary in order to provide those capabilities. That gives us greater resiliency, but also greater efficiency. This is something that we have been just working our way through capability by capability in order to get those outcomes. I think that, yes, you're seeing some of the results of that in the positive operating leverage and scalability that we're generating.

Okay. It sounds like you guys feel good about the sustainability of that momentum.

Yeah, absolutely. This is something that is not a, I'll say, one-off, but something that we've been executing on for the last couple of years and continue to do that going forward.

We'll go to our next question from Manan Gosalia with Morgan Stanley.

I wanted to focus on the NII guide. Your guidance for next quarter implies some growth over 3Q levels. Can you walk through some of the assumptions, especially around the seasonality on the deposit side, deposit betas as rates move higher, and any earnings asset growth and reinvestment yields that you expect?

Sure. Obviously, the rate path has moved in our favor. We've got a carry-in benefit from the September rate hike. Our outlook is anticipating also one more Fed hike in December. We still have very healthy back book repricing opportunities, and that remains a tailwind. Portfolio yields of roughly 3.5% and reinvestment opportunities of, let's say, 4%-5%, the portfolio keeps rising as securities mature and are reinvested. From that perspective, that gives us a tailwind. Then improving deposit balances is very typical in the fourth quarter after the seasonal dip we had in the third quarter. Our average deposits are going to be higher than they were before. Then lastly, we're not seeing any NIM compression going forward because a lot of the NIM sensitive deposits were already sort of priced in with the September rate hike.

Got it. Very helpful. On the asset servicing side, I think you've spoken about becoming a little bit more selective with new business and exiting lower margin relationships.

Can you talk about how much more opportunity there is to improve margins through business mix and other higher value servicing businesses like outsourced trading?

Sure. To your point, we've been very focused on scalable growth within the asset servicing business, and you can see some of the results of that with strong revenue growth at 12% in this quarter, expense growth at 3%, the pre-tax margin year-to-date at 30%. Continuing to make progress on that and want to continue to drive that forward. To your point, that's coming in a number of ways. I talked about it on the cost side and efficiency that we get through the COO office. But also on the front office and the type of business that we're pursuing, there is a focus on trying to grow the scalable revenues faster.

Even within custody and fund administration, the custody revenues in this past quarter and year-to-date are growing faster than the fund administration and investment outsourcing revenues that we have on that front. To your point, you see NII growth and then capital markets at over 30% growth year-over-year. Some of that's certainly very market-oriented and the volatility in the markets, but underneath it is adding additional clients for the types of services really that we're offering in capital markets, such as the outsourced trading. It's that combination underneath that we're trying to drive consistently going forward. To your last point, just on clients and client activity, yes, that's something we continually work with our clients to make sure that we're in the right place.

That can mean pricing one direction or another in order to have those scalable, profitable long-term relationships. Yes, we've worked through some of it, but I would say that's something that we do on an ongoing basis so that we have a very durable, consistent fee growth rate that we can have in that business overall and continue to produce scalable growth.

We'll go next to Ken Usdin with Autonomous Research.

Hey, guys. Good morning. On the core custody line, I heard your comments, Dave, that the market levels were offset by lower volume. Just kind of thinking about the fourth quarter implied outlook for fees, because you gave NII and total revenues, what does that imply for trust revenue as you think ahead? A little bit lower start kind of than we would have thought, but how does that activity versus wins versus levels kind of act as you think ahead to the fourth quarter? Thanks.

Yeah. What you've got really is a battle between the lagged pressure you're going to get from fixed income, the pressure in the fixed income market balanced against transaction activity that should return to normal.

Then continued organic growth. It's not the same for both businesses, but let's just say for asset servicing, obviously, a lot of the fixed income pressure came late in the third quarter, and those are going to weigh sequentially in the fourth quarter. They're going to be offset hopefully by some rising equity markets in the third quarter as well, but ultimately that will be a bit of a headwind. On the tailwind side, we're hoping the transaction activity will recover. It already has started to recover in September, part of October, and roughly 20% of our custody and fund admin fees are driven by transaction income. So that should help alleviate some of the market pressure. Then new business remains strong, so organic growth should lift fees sequentially as well. So that's the way I look at it.

The only business within wealth that has a lagged effect is GFO, although frankly, fixed income is not as high a proportion of their asset base as it is in the asset servicing. The thing that will affect probably the wealth business the most is the ongoing liquidity repricing actions that we took that were already fully reflected in the third quarter results, and we're not contemplating any further actions going forward. So asset flows in the wealth side were actually very positive, and Global Family Office, in particular, had a very strong third quarter.

Got it. On similar question, on the fourth quarter positive operating leverage. Third quarter was 5% with modest help from FX translation. Can you help us understand where you are expecting the expense growth to land? You are only kind of just telling us generally positive operating leverage. I mean, we can triangulate to the 500 basis points plus, but just some things to think about on that front as well would be helpful. Thank you.

Well, as you know, I do not give guidance on expenses in particular because I have tried to move away from that and look more at the productivity funding the investments, and then, of course, the net of that becoming your expense growth. From that perspective, I think the biggest issue in fourth quarter on year-over-year is going to be the relative performance of the fourth quarter last year versus the fourth quarter this year. So it is going to be harder to keep, I think, posting extremely high operating leverage as we go forward, obviously because we had a very good fourth quarter last year. That being said, we have the discipline built into the system to make sure that we monitor that on a very flexible and ongoing basis so that we can solve for what we need to solve for during the quarter.

We are optimistic we can keep that trend going into the fourth quarter on the positive side.

We'll go next to Scott Siefers with TD Cowen.

Thank you for taking the question. Just wanted to ask on capital. Northern Trust has been growing despite pretty robust payouts. Also noticed the $3.5 billion repurchase authorization from last night. Just maybe some refreshers on priorities and thoughts on how aggressive you might plan to be from here on the repurchase.

Yeah. As Mike said, we've already returned over $1.5 billion, and we're sort of on track with our plans that we had at the beginning of the year. Obviously, if you just look at the nominal aggregate amounts relative to our earnings, payout ratio is close to 90%. We didn't anticipate, obviously, at the beginning of the year, we've outearned our pace, if you will. But we think that we've got obviously plenty of capital to continue a very robust buyback program. Obviously, in terms of prioritization, what we look to first is covering the dividend. Then we look at growth. I mean, growth is super important, and we like to have our balance sheet available for our clients, and like to be able to fund our growth initiatives organically. Then when we have excess capital, we look at the share repurchases.

We don't have a fixed amount that we look to do every quarter. We balance that against everything else that we're looking at. But clearly, it remains a focus, and I think we'll be able to continue that very easily into the fourth quarter.

Perfect. Thank you. Dave, by the way, congratulations on the announced retirement. Mike, just at a top level as you think about candidates for the CFO position. Maybe just very top-level thoughts on characteristics you kind of find most important as you kind of move forward and the industry sort of continues along with this, like technological innovation becomes sort of less traditional, et cetera. How are you thinking about those dynamics or cross currents?

Sure. Well, first of all, it will be impossible to replace Dave. I'm not even going to try, so to speak. He does a tremendous job, and eventually I had to allow him to retire. As you saw from this, Dave's agreed to stay on to make sure it's a very smooth transition. To your point, that's given us the opportunity to make sure that we look both internally, externally to find the right person for this important role as we go forward. There's no question the need for the strong financial background, but also having an understanding of the businesses that we're in, and being a strategic thinker as well, which Dave certainly has been.

To your point, with technology evolving so quickly, and frankly, the financial models around this, with tokenization or tokens and trying to understand the cost of them and the consumption of them, et cetera. That's another component we want to make sure that we take into account because we have our target financial model. We need to make sure as the cost and the financial implications of this technological revolution is happening, that we're able to manage that really well going forward. So those are all the characteristics, and it certainly has to be somebody who also carries all of the cultural and competitive attitude, if you will, that we want to have here as a part of the team.

Yep. Perfect. All right. Thank you guys for taking the questions.

Our next question comes from David Smith with Truist Securities.

On the FX trading, it didn't seem like this was a particularly volatile or active quarter broadly for FX just compared to some of the crazier quarters we've had over the past year or two. Would you say that this is a pretty sustainable run rate for the business going forward in a normal market? Or how would you characterize the extent to which you feel like you're over-earning or under-earning on FX today?

Yeah. I definitely don't think it's a normalized market. Obviously, we're down from the previous quarter, but it's still at a very high level. Volatility is still at a very high level. We did have some idiosyncratic issues that happened out of APAC that really drove the previous quarter. This quarter is still around flows and volatility. I think going forward, we have reset what I believe is the run rate of FX, which is hard to predict from what it might've been traditionally, in the 50s. I think we're probably more in the 70s in terms of a normalized rate going forward. That is largely due to the fact that we just added a whole bunch of clients, and we're getting outsourced FX trading and things of that nature that are feeding a lot of new flows. So the new business feeds new flows.

I do think we've kind of reset to a new normal, but that new normal is not where we are today.

Okay. And then sticking with that volatility theme, does the uncertainty around rates at all influence the buffer that you feel like you need to run with on a capital basis? You've always run with a pretty healthy buffer on capital, and I'm wondering if that already incorporated the prospects for uncertainty in rate moves and for rates to spike up, or if you feel like maybe that buffer needs to be a little bit higher today than it had been in the past.

Yeah. We think we're very comfortable with the ranges that we have right now between 11% and 12%, and actually we're above 12%. So we feel very comfortable with our current capital ranges. On the interest rate front, what we watch carefully there is the yield curve, the direction of the yield curve. To the extent that you get a couple more rate hikes and it flattens, that's obviously something we're going to take a look at. That isn't in the cards right now. We've got a very constructive interest rate environment. All the guidance that I gave you assumes a very constructive interest rate environment going forward. But I don't think that is going to have a particular impact on how we look at capital at this point in time.

Our next question comes from Ebrahim Poonawala with Bank of America.

I guess, Mike, you highlighted just in terms of fee growth across businesses and your returns are obviously running above the medium-term targets. Maybe just bigger picture as you think about the next few quarters or the next few years, from a strategic standpoint, give us some color around where do you see sort of the best opportunity. Is it a market share play? Is it an efficiency play? Or are there new products that you are sort of leaning into that is driving growth?

Sure. So you are absolutely right. We look at it years out, not quarters out necessarily.

That is our primary focus. I think what's important when you think about our strategy is first, just to your point at the top, our strategy is client-driven. It's not a particular product or service that we then try to push everywhere, but think about where the client's headed and what are their needs going to be, and how can we anticipate it and frankly help shape what's happening there. There's so much happening with regard to the markets and also with technology. The first thing we have to take into account is the future needs of our clients are going to be different than what they need today. Not only are we utilizing AI in just about everything that we're doing, but our clients are evolving on this front as well. Their needs are going to change as well.

A perfect example of this is around data. We have tremendous data that we basically provide in different forms for our clients. The ability to provide that in different formats in different ways as our clients are utilizing data and consuming data in a different way in a different world. That's where I would say it starts. The second is around One Northern Trust, right? It is trying to deliver solutions that cut across the three businesses. That enables us to provide solutions that are more differentiated. You've heard about some of the examples that I mentioned earlier in the call here. Really where we can leverage the asset servicing platform with our wealth management clients. For example, with our GFO clients on that front. Then going a different direction with asset management. You can see the emphasis and push on ETFs.

That's because we're developing products that are specifically oriented towards our wealth clients, but then we can also distribute those through intermediaries as well. That's an area where we see a lot of opportunity on that front that both helps our existing client base, and we get the synergies from that, but also provides new growth opportunities. Without a doubt, we also look to focus on particular segments of the market. Because in our view, it's less about just the pure size of any company, but more where you're focused and those areas that you're focused that you have scale in those markets with those products and services that you're providing.

Particular markets such as the ultra-high net worth segment where front office solutions, it's an area where we can differentiate, and we're trying to further build that out and scale that capability on that front. Similarly within the asset servicing businesses, there are geographies where we've experienced strong growth, but we have the ability to invest more to expand, for example, in the Middle East on that front. There's a number of opportunities where we see longer-term to utilize this strategic framework that we have in place to both grow but also grow in a scalable, profitable way.

That's helpful. Thanks, Mike. Dave, apologies if I missed this. I know it's small, but when we think about the price compression on the liquidity mandate, was that tied to just the Fed moving in September? More broadly, how would you say pricing is behaving across asset servicing just from a competitive standpoint?

Well, so the liquidity pricing that I talked about was primarily in the Wealth Management side of the business. That was a competitive issue. It wasn't a rising interest rate issue from that perspective. So that's the way I look at it. Then in terms of, are you talking about the fee realization overall in the asset servicing business?

Yeah. So not all AUC is created equal, as you know. From that perspective, when you look at fee realization, you have to take into consideration the type of business that you're in. A lot of our wins recently are not market sensitive. When you've got mandates on the alternative side, for example, where they bill on a unit cost basis, you're not going to get the same market volatility that you might get with other assets. So you can sometimes get a disconnect between your AUC growth and your fee growth and your fee realization.

We'll go next to Mike Mayo with Wells Fargo Securities.

Hey. Hey, Dave. I'm just curious. You were CFO for two years. I know you're staying on through first quarter, so there's no imminent issues or anything like that. I think there were some naysayers out there when you first took the job as CFO, and I think you've proven the naysayers wrong. But now I find myself wondering why are you stepping down after just two years? That seems a bit of a surprise.

Well, if you take a look at when I started my career, Mike, then you probably wouldn't have that question so much in your mind. I date back to a firm that most people don't even know existed, which is called Manufacturers Hanover. So I've done my time.

I think when I was brought into this job, and one of the things Mike just mentioned about someone new coming in, was to take advantage of my knowledge of the businesses, having run a very large part of asset servicing and the highest growth part of wealth, and then having strategy and corporate development as part of the mandate was to kind of get us on a solid footing going forward with the shift that we took between the asset servicing side and the Wealth Management and Asset Management side to make sure that we had everything in place we wanted to have in place. I feel like we've accomplished that and gotten the financial model where it needs to be, and now Mike's going to fill out his bench going forward.

Okay. Then maybe as a segue for you, Mike. Asset servicing seems to be the business that's not as competitively positioned as, say, wealth or the rest of the firm. You've highlighted allocating more to, say, Global Family Office and wealth. But as it relates to AI, you highlighted the benefits. But in terms of the cost, I mean, the cost of compute's going up, which means the cost of tokens go up, which means the cost of AI goes up, which means maybe you're not as competitively positioned as your larger peers. I guess that gets to token costs, and do you pay the same rate as your big peers or not? On the other hand, I know you've always focused on scale by product and by market.

I'm just trying to understand the AI cost and where you are on that kind of cost benefit curve. Thank you.

Sure. So this is a topic, Mike, that I would say we're obsessed with right now for all the reasons that you mentioned there. We've gone about this, and are going about it, I'll say, pretty aggressively in trying to be set up to be able to ensure that we have an attractive, I'll call it cost structure around this. So a couple things on it. First is there are a number of the aspects of our technology infrastructure that are owned, if you will. We're large enough to be able to have a number of things that we do on our own, which gives us that scale. As the volumes go up, they're volumes that are on more of a fixed cost. So that's one. Two is we absolutely have to leverage our largest partners.

We are very focused on who those partners are and ensuring that we are getting the benefit, excuse me, of their scale. Certainly, for example, Microsoft is a strong partner of ours. On that front, not only do we get the benefit of their scale, but it is a partnership-driven type relationship. We need to get more out of it than, I will say, just the pricing aspect of it. That relationship, for example, we are working with forward-deployed engineers that they are providing to us to address some of these biggest opportunities that we have. They want to collaborate to not only help us but also develop some of the technology that they have in areas where we have the expertise. We have the capabilities on that front, and it enables them to advance what they are doing and then utilize that more broadly in the marketplace.

That is another really important aspect of it. The other is you have to build basically flexibility or agility into the platform. You cannot be single-threaded through one provider, one model, whatever it may be. The whole idea of being able to shift the work and shift the consumption to the best place, the optimal model, if you will, and the optimal way where you are getting the compute is another critical aspect of this. We have already seen, for example, in cybersecurity, an area where that is one of the areas that is definitely consuming the most in the way of tokens. For us to have the ability to essentially have a harness over multiple models, it enables us to automatically shift and get the right type of scanning happening on the right type of model.

That flexibility is going to be essential as we go forward because not only are we working with and expect to continue to work with some of the frontier models directly, but we also have to have the flexibility to utilize some of the latest open models as well. It is a comprehensive approach to it that is driven not only by the cost side, but certainly the capability and also the safety of the models that we are using and the whole infrastructure that goes around that.

All right. Thanks for the comprehensive answer. Dave, I do remember Manny Hanny myself, so. Take care.

Northern Trust (NTRS) Q3 2026 Earnings Call Transcript

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