Q3 2025 Earnings Call: Contradictions Emerge on Deposit Growth, Fee Pressures, and Expense Control

The above is the analysis of the conflicting points in this earnings call

Date of Call: October 22, 2025

Financials Results

• Revenue: Revenue up 6% year-over-year (relative to prior year and excluding notable items)
• EPS: $2.29 per diluted share, up 14% year-over-year
• Operating Margin: Pretax margin expanded by ~200 basis points year-over-year

Guidance:

• Operating expense growth expected to be below 5% for the full year (excluding notable items and regardless of currency)
• Full-year net interest income (NII) now expected to grow mid- to high-single digits versus prior year
• Full-year effective tax rate expected to be in line with year-to-date rate (~26.1%)
• Continue returning capital (on track to return at least 100% of earnings for the full year)

Business Commentary:

* Strong Financial Performance: - Northern Trust reported third-quarter net income of $458 million, with earnings per share of $2.29, and a ROE of 14.8%. - The company delivered a positive organic growth and operating leverage, with a pretax margin expansion by nearly 200 basis points compared to the prior year. - This performance was driven by favorable equity markets and an effective management of expense growth.

• Wealth Management Growth:
• Assets under management for Wealth Management clients were $493 billion at quarter end, up 11% year-over-year.
• Trust, investment, and other servicing fees for Wealth Management clients were $559 million, up 5% year-over-year, primarily due to strong equity markets.

• The division's success was attributed to strategic investments in alternative offerings, new business activity, and a focus on high-net-worth clients.

• Asset Servicing and New Business Wins:

• Assets under custody and administration were $17 trillion, reflecting a 4% year-over-year increase.
• Asset Servicing fees totaled $707 million, reflecting a 6% increase year-over-year, with notable wins including the Sacramento County Employees' Retirement System and a $19 billion New Mexico Educational Retirement Board.

• Growth was driven by a disciplined strategy focused on high-margin capital markets and alternatives, along with strong client relationships and a comprehensive service model.

• AI Integration and Operational Efficiency:

• Northern Trust reported that AI has generated measurable results across 150 use cases, saving significant hours and enhancing client service.
• This technology is embedded in various areas such as client servicing, workflow automation, and data analysis, leading to improved resiliency and process efficiency.
• The investment in AI is expected to continue accelerating efficiency gains, further bending the cost curve and unlocking additional capacity for reinvestment and growth initiatives.

Sentiment Analysis:

Overall Tone: Positive

• Management: "third quarter revenue increased 6%, our pretax margin expanded by nearly 200 basis points and our earnings per share grew 14%..." Return on equity 14.8%, positive organic growth for a fifth consecutive quarter, and continued productivity/AI initiatives cited as drivers of efficiency and margin improvement.

Q&A:

• Question from Ebrahim Poonawala (BofA Securities): Where do deposits stand, how should we think about deposit mix and asset sensitivity to potential Fed cuts affecting NII?
  Response: Deposits performed in line with expectations, slight pickup in Q4 (ended Sept ~$135B); NII guidance mid- to high-single digits implies Q4 roughly flat to +1–2%; for 2026 management models limited rate cuts (not more than two) and expects NII flat to +1–2% after repricing, deposit actions and securities rolloffs.

• Question from Ebrahim Poonawala (BofA Securities): Can you elaborate on the Wealth Management investment product challenges and actions being taken?
  Response: Pressure driven by index/fee compression and underperformance in value-leaning multi-manager products; response is to adjust pricing/performance, expand ETFs/SMAs and accelerate alternatives access for Wealth clients.

• Question from Kenneth Usdin (Bernstein Autonomous LLP): AUC/A up 1% but press release noted outflows—was this an unusual quarter or normal client-to-client ebb and flow?
  Response: AUC movement driven by a few large asset-manager restructurings (one client ~2/3 of the impact) converting to lower-fee CITs and one large redemption; fee impact small (~$300–400k/month) and may partially reverse next quarter—characterized as normal ebb and flow.

• Question from Kenneth Usdin (Bernstein Autonomous LLP): Any incremental thoughts on maintaining sub-5% expense growth and bending the cost curve?
  Response: Fourth quarter and full-year expectations remain below 5% expense growth; management is flexing productivity initiatives and expects further expense curve improvement, with greater productivity gains anticipated in 2026.

• Question from Brennan Hawken (BMO Capital Markets): Allowing marginal business to roll off—is this prioritizing profit over top-line growth?
  Response: Yes—priority is on profitability and margin accretion: accept potential top-line trade-offs by onboarding only high-accretive new business, improving economics on existing clients or transitioning out underperforming contracts.

• Question from Brennan Hawken (BMO Capital Markets): Beyond GFO, did you see fee-rate pressure elsewhere this quarter or was math/market movement the cause?
  Response: No material new fee-rate cuts in the quarter; asset management faces persistent fee pressure broadly but management is disciplined on pricing and focused on accretive product mix (ETFs, SMAs, alternatives).

• Question from Michael Mayo (Wells Fargo): You're running Asset Management/Wealth for growth and Asset Servicing for profitability and letting low-margin business run off—correct?
  Response: Yes.

• Question from Michael Mayo (Wells Fargo): Under what conditions would you downsize/disinvest in custody business?
  Response: They retain scale in targeted segments and would reassess only if unit economics weaken; tech/AI and digital-asset tokenization are improving scalability and reinforce their decision to compete.

• Question from Michael Mayo (Wells Fargo): Why can Northern compete on tech/AI without spending like the largest firms?
  Response: Differentiation and focus—compete in selected segments with an integrated tech+service proposition rather than broadscale spending everywhere.

• Question from Betsy Graseck (Morgan Stanley): Will AI benefits vary across businesses—where will it help most?
  Response: AI is applicable company-wide; early measurable gains in technology (≈20% improvement in engineering productivity), operations (private-capital processing), asset management (automating research/transcripts) and wealth advisory (prospecting and client prep), with more capture to come.

• Question from Betsy Graseck (Morgan Stanley): What's your stance on stablecoins—will you issue one or participate differently?
  Response: Not planning to issue a stablecoin; focus is on tokenization (e.g., tokenized money market funds) and the ability to utilize stablecoins where they reduce cross-border friction while ensuring interoperability with clients' broader assets.

• Question from Glenn Schorr (Evercore ISI): Why did the rate paid on savings/money market deposits rise 6 bps in a quarter that included a rate cut?
  Response: Deposit rates reflect multicurrency dynamics; management offered to provide more granular currency-level detail rather than a single-cause explanation.

• Question from Glenn Schorr (Evercore ISI): Can you describe 50 South feeder fund and private-market/Asset Servicing activity?
  Response: 50 South used its due diligence to offer Wealth clients access to select single top-tier private funds via feeder structures; Asset Servicing sees robust demand in private-capital administration and new vehicles (LTAF/LTIF), plus hedge-fund services—positioned to support growing tokenization/liquidity trends.

• Question from Steven Alexopoulos (TD Cowen): Can you sustainably remain above a 30% pretax margin going forward even if rates change?
  Response: Yes—management believes the financial model can operate at 30%+ pretax margin on an ongoing basis, acknowledging quarter-to-quarter variability from markets but noting a multi-year margin improvement trend.

• Question from Steven Alexopoulos (TD Cowen): Are AI/productivity gains material to expense performance this year or mostly future?
  Response: Some savings are being realized today (notably in engineering), but majority of capture is forward-looking; management is coupling tools with disciplined headcount/span control to convert efficiency into lasting expense benefits.

• Question from David Smith (Truist Securities): How much of FX trading and securities commissions strength is share gains versus market-driven?
  Response: Both—performance reflects strategic execution (converting trading and FX into recurring 'as-a-service' offerings like outsourced trading and currency management) plus favorable market conditions, producing more predictable, recurring revenue.

• Question from Gerard Cassidy (RBC Capital Markets): How do you view lending to non-depository financial institutions (NDFI) categories?
  Response: Northern's exposure is primarily subscription lines to PE (secured by LP commitments), management-company loans secured by fees, and diversified NAV loans with low advance rates—distinct and more conservative than other bank NDFI exposures.

• Question from Gerard Cassidy (RBC Capital Markets): How do you advise Wealth clients if we face a major market correction?
  Response: Use goals-driven wealth management: set lifetime objectives, determine appropriate asset allocation and reserve/liquidity buffers so clients can avoid forced selling and stay focused on long-term goals during drawdowns.