Prepared remarks
Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's fourth quarter 2024 earnings conference call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our fourth 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 January 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 February 23rd. 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 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. Let me turn the call over to Mike O'Grady.
Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2024 earnings call. Our fourth quarter results capped off a solid year of progress executing against our strategic priorities. Relative to the prior year, fourth quarter trust fees were up 12% and net interest income grew 15%. Excluding notables in the prior year, revenue was up 13% and earnings per share grew by more than 50%. Importantly, we generated positive trust fee and total operating leverage for the second consecutive quarter while continuing to make significant investments in our business and infrastructure. For the full year, excluding notables, revenue was up 8% and we generated positive trust fee operating leverage and total operating leverage in excess of two points, which translated into EPS growth of 24%. We also returned more than $400 million to shareholders in the fourth quarter and $1.5 billion for the full year, reflecting a five-year high.
Our results benefited from strong market performance, but also reflect continued progress implementing our One Northern Trust strategy. Turning to Slide 4. At the beginning of last year, we launched our One Northern Trust strategy, which serves as our roadmap to becoming a consistently high-performing company and producing meaningful value for all stakeholders. Our strategy is underpinned by three pillars: optimizing growth, strengthening resiliency, managing risk, and driving productivity. Turning to Slide 5, we made significant progress across all three pillars in 2024. Let's begin with optimizing growth. Our organic growth trajectory improved across all three businesses, with good momentum exiting 2024. Our One Northern Trust strategy places an emphasis on enhancing the client experience while driving sustainable, scalable organic growth. Leveraging the capabilities of the entire firm, we deepened existing client relationships, adding products and services to meet their increasingly complex needs.
We also embraced a more intentionally united focus for servicing our global client franchise, executing a joint calling program, which resulted in over 140 new business opportunities. As an example, NTAM, our asset management business, worked in close partnership with our global family office and asset servicing businesses to develop a money market solution for a client seeking greater tax efficiency for its sizable cash investments. This turned out to be highly attractive to a number of our clients, and we experienced one of the fastest fundraises in NTAM history, raising nearly $3 billion over the course of six months with participation from 18 clients. As we enter 2025, we will further institutionalize these approaches through enterprise-wide initiatives aligning with meeting our clients' greatest needs and key industry trends, such as alternative investment solutions, family office services, and liquidity solutions.
We will also continue to prioritize growth in wealth and asset management and foster stronger collaboration between both businesses. Relative to strengthening resiliency and managing risk, critical to maintaining our reputation for strength and stability for clients, regulators, and the markets. Last year, we designed and launched a multi-year effort to uplift our risk and control system and added new capabilities to strengthen resiliency. We invested in technology to eliminate legacy software applications, mature our cloud environment, and bolster our cyber defenses. We also made steady progress automating processes and adopting additional artificial intelligence tools, thereby reducing the number of manual processes meaningfully. In support of these initiatives, we created a new operating model and made a number of strategic hires. In 2025, we will continue to prioritize investments to further strengthen our resiliency, including modernizing our core platforms, accelerating our cloud adoption, and pursuing additional opportunities to automate and deploy AI.
We made meaningful progress driving productivity in 2024 and laid the groundwork to generate efficiencies in the coming years. We focused on key cross-functional areas in 2024, such as workforce and vendors, ending the year with headcount down 1% compared to two years ago, despite launching a number of growth initiatives and adding resources to support our resiliency efforts. Within asset servicing, we've reduced headcount for seven consecutive quarters, translating to more than a 7% decrease relative to peak staffing levels. And importantly, many of the resiliency initiatives have also resulted in significant savings, particularly from automation and digitization. Going forward, we will continue to enhance our productivity efforts, including leveraging the Office of the Chief Operating Officer to implement more structural changes to further centralize, standardize, and automate operations and processes.
Turning to our business unit-level performance, beginning with wealth management on Slide 6. In 2024, we made foundational investments to deliver higher levels of organic growth on a more consistent basis. We grew our sales talent by nearly 20%, enhanced our lead flow channels, and grew our prospect pipeline materially. More recently, we transitioned our executive leadership and made important strategic hires across various markets and functions. As a result of these efforts, we saw steady improvement throughout the year in our organic growth trajectory, with particular strength in Global Family Office. We also increased wealth deposits by 9% and expanded our segment pre-tax margin by nearly 400 basis points relative to the prior year. As a testament to the value proposition we provide to clients, we were awarded Best Private Bank in the US for the 13th time in the past 16 years by the Financial Times Group.
In 2025, wealth management will continue to maintain and strengthen our lead position in the upper wealth tiers. Within our Global Family Office business, we will continue to optimize existing client relationships, bolster investment advisory capabilities, and expand into new markets, including international areas with significant potential. By establishing a separate ultra-high net-worth practice, we will leverage our world-class family office platform to better serve wealthy families with more than $100 million in net worth whose needs differ from those of our core wealth clients. We also plan to deepen our penetration of select target markets in the US that have significant wealth and where we have an opportunity to increase our market share. To capitalize, we will add talent, invest in brand awareness, and pursue market-specific growth opportunities. We will also expand our suite of alternative investment solutions for wealth clients.
Turning to asset management on Slide 7. We refreshed our strategy in 2023 following the hiring of Daniel Gomba, our Asset Management President. This included focusing on products where we have the clear right to win and more fully leveraging the full capabilities of the firm. We made meaningful progress in 2024 through investing in our platform and in core products. We refined our go-to-market partnership with asset servicing, creating more comprehensive solutions for clients and prospects, which resulted in more than 35 new client wins. Leveraging the success, we launched multiple products specifically geared toward the needs of our asset servicing, Global Family Office, and ultra-high net-worth wealth segments. As a result, we realized positive net flows for the year, including 13% growth in liquidity, which surpassed $300 billion in AUM and generated positive long-term flows in the second half of the year.
We also improved the trajectory of our organic fee growth meaningfully, all while delivering investment performance above our benchmarks. We aim to carry this momentum into 2025 by investing in areas of growth that are both aligned with secular trends in the industry and where we have the right to win. These include expanding our alternatives offerings, capturing growth in custom SMAs, and broadening our ETF presence while simultaneously maintaining our focus on core strengths in liquidity solutions, indexing, quant, and fixed income. Turning to asset servicing on Slide 8. Last year, we began to pivot the focus of our asset servicing business to pursue scalable growth in the core business, leveraging existing capabilities rather than bespoke build-outs to generate positive operating leverage and maximize our value to both clients and shareholders. To support this effort, we implemented disciplined criteria for new business generation to ensure that it is accretive both at inception and on an ongoing basis.
As a result, we bid on fewer opportunities in 2024 but saw no meaningful degradation to our win rate. We also prioritized growth within our highly scalable capital markets business, which grew 17% in 2024, with roughly 50% of this growth coming from new clients. These new clients, in turn, became prospects for our core custody and fund administration services. As a result, we finished the year with improved organic growth and profitability and a solid pipeline of business to onboard. In 2025, we will continue the momentum, investing in areas to support our clients' evolving needs and to capitalize on industry changes and asset flow trends. This includes sharpening our focus on global private markets and targeted asset owner clients and accelerating the growth of our banking and capital markets business. I hope these additional slides have given you a deeper understanding of our business and strategic objectives.
Let's turn to our medium-term financial targets on Slide 9. By focusing on driving organic growth and generating positive fee and total operating leverage, our medium-term targets are to achieve an expense-to-trust fee ratio of 105% to 110%, pre-tax margins above 30%, and an ROE in the upper half of our range of 10% to 15%, along with double-digit EPS growth and meaningful capital return to shareholders. In conclusion, we're confident in our One Northern Trust strategy and determined to execute with discipline to be a consistently high-performing company for all our stakeholders. Our success couldn't be possible without the unwavering efforts of our more than 23,000 global partners. I'd like to thank them for their ongoing support of our clients with service, expertise, and integrity, the enduring principles that underlie all that we do. And with that, I'll turn it over to Dave to review the financials.
Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2024 earnings call. Let's discuss the financial results of the quarter starting on Page 11. This morning, we reported a fourth quarter net income of $455 million, earnings per share of $2.26 and our return on average common equity was 15.3%. Excluding notables relative to the prior year, the stronger US dollar was immaterial to revenue growth but favorably impacted our expense growth by approximately 50 basis points. Excluding notables, relative to the prior quarter, currency impacts unfavorably affected our fourth quarter revenue growth by approximately 50 basis points, largely within our asset servicing, custody, and fund administration segment, and favorably impacted our expense growth also by approximately 50 basis points. Trust, investment and other servicing fees totaled $1.2 billion, a 2% sequential increase and a 12% increase compared to last year.
Net interest income on an FTE basis was $574 million, a new record, up 1% sequentially and up 15% from a year-ago. Our assets under custody and administration were down 4% sequentially, but up 9% compared to the prior year. Our assets under management were down 1% sequentially but up 12% year-over-year. And overall, our credit quality remains very strong. Excluding notable items in all periods, other non-interest income was up 13% sequentially and up 17% over the prior year. Revenue was up 3% sequentially and up 13% on a year-over-year basis. Expenses were up 1.2% sequentially and up 5.5% over the prior year, and earnings per share increased by more than 50% as compared to the prior year. Turning to our asset servicing results on Page 12. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up 20%, and new business growth continues to be booked at attractive margins.
Assets under custody and administration for asset servicing clients were $15.6 trillion at quarter-end, reflecting a 9% year-over-year increase due to strong market levels and client inflows, partially offset by unfavorable currency movements. They were down sequentially due to unfavorable currency movements and weaker markets, particularly bonds. Asset servicing fees totaled $676 million. Custody and fund administration fees were $457 million, up 9% year-over-year, largely reflecting the impact of strong underlying equity markets and new business generation. Both year-over-year and sequential comparisons were dampened by the client exits we discussed in the second quarter, which are now fully reflected in our run rate. Assets under management for asset servicing clients were $1.2 trillion, up 12% over the prior year. Investment management fees within Asset Servicing were $157 million, up a strong 20% year-over-year due to favorable markets and new business activities.
Moving to our wealth management business on Page 13. Wealth Management also had a healthy quarter with particular strength in Global Family Office. Assets under management for our wealth management clients were $451 billion at quarter-end, up 12% year-over-year, including 5% growth in the global family office AUM. Trust investment and other servicing fees for wealth management clients were $547 million, up 14% year-over-year due to strong equity markets and modestly higher flows. Moving to Page 14 and our balance sheet net interest income trends. Our average earning assets were down 1% on a linked-quarter basis as an increase in loans and securities was offset by a decline in cash held at the Fed and other central banks. The duration of our securities portfolio is 1.6 years, and the total balance sheet duration continues to be less than one year. Net interest income on an FTE basis was $574 million, up 1% relative to the 3rd quarter, and our net interest margin was 1.71%.
The strength was attributable to several factors. First, the deposit mix came in modestly better than our expectations. Average deposits were $113 billion, flat with third quarter levels, but non-interest-bearing deposits increased 7% on a linked-quarter basis and increased 100 basis points as a percentage of the total mix to 15.5%. Second, deposit pricing improved. As part of our focus on client liquidity management, we made certain pricing adjustments to be more aligned with current market conditions. And as expected, we continue to realize a very strong deposit beta on institutional accounts relative to fourth quarter rate cuts. And third, we saw a pickup in loan activity. Fourth, we continue to have higher-than-trend quarterly contributions from transactional and other items, although not as strong as what we observed in the 3rd quarter. Turning to our expenses on Page 15. Non-interest expense was approximately $1.4 billion in the fourth quarter, up 1% sequentially, but down 1% as compared to the prior year.
Excluding notable items in the prior period as listed on the slide, expenses in the fourth quarter were up 1.2% sequentially and up 5.5% year-over-year. Let's now go back and review our core expenses from the quarter. Compensation expense was up 5.5% over the prior year, reflecting the impact of this year's base pay adjustments, modest levels of hiring associated with our modernization initiative, and underlying growth in the business. Outside services expenses increased 7% relative to the prior year period, largely due to incremental modernization and resiliency spending. It was down 2% sequentially as we started to see some consulting expense shift into compensation expense as we made permanent hires to replace consultants. Equipment and software expense increased 9% year-over-year, mostly related to higher depreciation and amortization expense and costs associated with our cloud journey.
We generated over 600 basis points of trust fee operating leverage, nearly 800 basis points overall operating leverage, and our expense to trust fee ratio improved by 100 basis points on a linked-quarter basis to 113%. Turning to the full year's results on Page 16, trust fees were up 8% in 2024 due to both strong underlying markets and solid new business generation. We generated record net interest income, up 8% for the year, driven by sharply increasing deposits at the beginning of the year and stability over the remainder of the year, a healthy loan book, and the multiple securities repositioning trades we completed. Total revenue on an FTE basis was up 22% for the full-year, and excluding notables, it was up 8%. Reported expenses were up 6.6% for the full-year. Excluding notables, they were up 6.1%, which includes the impact from our mid-year decision to accelerate certain modernization and resiliency expenditures to offset a portion of the gains we realized from the Visa monetization.
Turning to Page 17. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minima. Our common equity Tier-1 ratio under the standardized approach declined 20 basis points on a linked-quarter basis to 12.4% as capital accretion was offset by a slight increase in risk-weighted assets. Our Tier-1 leverage ratio was 8.1%, flat with the prior quarter. At quarter end, our unrealized pre-tax loss on available-for-sale securities was $598 million. We returned $403 million to common shareholders in the quarter through cash dividends of $149 million and common stock repurchases of $254 million. For the full year, we returned over $1.5 billion, reflecting a payout ratio of 78%, including share repurchases of $938 million, our highest level in five years. We continue to expect our total operating expense growth to be at or below 5% for the full-year, excluding notable items in both periods.
Turning to net interest income, for the first quarter, we expect net interest income to be approximately $555 million to $575 million. This assumes the current market-implied forward curve, a flattish balance sheet on a dollar-adjusted basis with stable deposit levels, a relatively stable deposit mix, stable pricing, and modest currency headwinds. For the full-year, again, assuming the market-implied forward curve, we're expecting net interest income to increase by low-single digits on a percentage basis.
Questions and answers
Thank you. Our first question today comes from Glenn Schorr with Evercore.
Hi, thank you very much. I have a quick follow-up and I appreciate the net interest income guidance. I'm interested in the sustainability of some of the underlying trends, specifically the 7% growth in non-interest-bearing deposits this quarter. Was there a temporary parking of cash by clients that is likely to flow out? Also, could you clarify when you mentioned pricing decisions in relation to market conditions? Does that mean you adjusted deposit pricing for clients as rates decreased? Thanks.
Yes, thanks for that question. I think non-interest-bearing deposits were up over $1 billion. I think that's probably higher than other quarters, and my guess would be that there's some seasonality to that number. And certainly, we welcome it, but ultimately, it's not out of step with what we've seen in the past. In terms of the pricing adjustments, we've talked about this before, we really have put a lot of effort behind our overall liquidity management and balance sheet management as it relates to deposits. So, when we think about our pricing adjustments, it's more than just a normal-course of business type of pricing adjustment. It's really taking a look at all the multiple currencies that we manage on our deposit base and having a much more comprehensive review of everything we're doing and making sure those betas are consistent with what we think they should be.
Okay. I appreciate it. The other one I want to talk about is alternatives were a big part of your objectives across each of the wealth asset management and asset servicing objectives. So my question is, A, are things accelerating? And then maybe you could talk about what is already built, and what needs to be built? And then I think we're all curious about some specifics, like what products and asset classes are seeing the most demand in? Thanks very much.
So, Glenn, I'll take that. And you're right that alternative investment solutions are something that cut across each of the three businesses. I think the way to think about it is instead of necessarily the businesses, think about the solutions that we're providing. From an investor perspective, whether that's our wealth clients and the segments within that or institutional clients, can we bring a broader set of solutions to them on this front for private market solutions? Right now, we offer that through 50 South Capital, which is a part of our asset management business, and that's in a largely fund-to-fund structure. We've seen great success with that. We raised over $1 billion that we closed on this year for that. So that's one of the solutions for a subset of the investors. In addition to that, we also have a platform that has other private capital managers on it. So different funds. At this point, to your point, it's built out, if you will, but we think that we can offer more options on that platform.
We also want to ensure that all of our portfolio managers are fully versed in the various types of private capital alternatives. We want to ensure the education and training part is in place. On the institutional side, with our asset servicing business, not only can we offer it through the vehicles mentioned, but also we can offer it in an advisory capacity. We want to work with larger institutions that will want us to provide advisory services on their portfolios in alternatives. If we're working with the private capital firms, there's a lot that we can provide to them as well. Certainly capital call facilities, but also banking solutions for the entities themselves. Then, very much so on the administration front. If you’re looking at specific areas in Europe where semi-liquids are growing at a very high rate, we have a strong position in that, providing services to the firms. Finally, we also want to work with the principles of these firms. If we're working with them in those fronts, we want to make them wealth management clients as well and have done that, but look to grow that part of the business.
I appreciate all that. Thank you.
And the next question will come from Brennan Hawken with UBS.
Good morning. Thanks for taking my question. I'd love to start out maybe a bit granular. In the past, you guys have spoken to targeting keeping the expense growth in 2025 at 5% or better. Dave, you had some comments at a December industry conference where it seemed as though there was a little bit of uncertainty around that. Could you clarify, is that a reasonable level to expect for 2025? And if not, what are the variables that we should watch?
Yes. Thanks for that question. I was in the chair maybe a month and a half or two months when I was asked that question. Now that I've been in the chair for four months and have gone through our planning period for 2025, I have very strong conviction around a 5% or below number. So, we can take that issue off the table, if you will. What we try to do is put that number out with larger context. Our North Star is to drive positive operating leverage. We know that the markets were pretty buoyant in 2024, and we want to prepare ourselves to have a resilient business model. The only way to do that is to keep driving the expense curve down.
Got it. That's very clear. Thanks, Dave. And then just taking a step back, you provided some good details here in your strategic update laying out the progress. But I'd like to lay out a question that I get from investors a lot, which is the ROE targets. Do you think that the ROE targets are ambitious enough? The lower end of the range doesn't suggest a ton of improvement from recent levels. Why haven't we seen those ROE targets move higher, particularly as we've seen some growth rates begin to slow?
We've had, to your point, the 10% to 15% range for some time, and that does cover different market environments and different capital requirements as those regulations have changed over time. We've even seen over the past couple of years, where there was an expectation for more capital. Now we may be in a different environment where those requirements are not going to be as high. To your question of, why not higher per se, we're driving to higher returns on capital, but we're also trying to drive to growth. If you just focus on hitting a high ROE, you could, but you might detract from your ability to grow the business. We're aiming for the optimal combination over time. As I mentioned earlier, we’re shooting for the top half of the range, and in this quarter, we were above the top end of the range. It's not to say we're trying to constrain the returns; it's more about achieving a balance between growth and returns.
Okay. Thanks for that color.
And moving on to Betsy Graseck with Morgan Stanley.
Hi, good morning.
Good morning.
During the prepared remarks, you were talking about how you've been able to get some of the expense improvements from the asset servicing business line in addition to others, obviously, but in the asset servicing piece, with some headcount reduction if I heard you correctly. The reason I'm asking is that Northern Trust has a long history of excellent quality service, right? Service quality is another north star for you. I'm wondering how you have been able to reduce headcount and keep that service quality high? In the past, it's been a friction point preventing the organization from executing the efficiencies you’re seeing now. Could you help us understand what you’re doing differently that’s enabling this headcount reduction while maintaining service quality? Is it related to technology? AI? Something totally different; how you're organized? Thank you.
Let me start, and then Dave may want to add. Betsy, you're right; service quality is a north star for us. We're trying to maintain quality while gaining efficiencies in how we provide services. Fundamentally, we’ve re-organized how we operate and structure our activities within the company. In mid-2024, we created the Chief Operating Officer role and moved operations into that group. This allows us to gain much greater efficiency in the operational aspects of our business, leading to centralization, standardization, and automation. We believe this investment makes our services better, lends greater resiliency, and provides ease of use. Some of this comes from investments in technology; we believe it makes the business more scalable. This enables us to maintain service quality while driving down headcount.
Okay. How do you see the forward look here? How many more years do you think you have to leverage this new structure?
It does take time to gain the full benefits of what we're talking about here. We see these improvements unfolding over two to three years, achieving, I’ll say, the greatest benefit in that timeline. Importantly, we're setting it up to be sustainable, capturing continued benefits over time. You're going to see more in the initial two to three years.
Thanks so much.
And the next question will come from Ebrahim Poonawalla with Bank of America.
Good morning.
Good morning.
I just wanted to follow up on the global family office piece. Looking at Slide 13, it was a priority in 2024, I assume remains a big area of focus. When we think about the revenue growth, should we expect that to be leading the way going forward? On a year-over-year basis, it showed solid growth, but it seems to have plateaued over the last few quarters. Can you talk about how we should think about revenue growth within GFO, given the investments you've made and the secular growth in that segment?
Sure. The Global Family Office business had its strongest year than ever with very high single-digit organic growth. We’ve also reached out more into international markets. Remember, our assets under management in the fourth quarter were up 5%. There’s often a lag effect, depending on when that business is brought in. I wouldn’t say it has plateaued; the GFO pipeline going into 2025 looks more robust than it did in 2024.
Understood. Maybe just a separate question. You've talked about the net interest income guide. What are your thoughts on the balance sheet gearing? If rates were to stabilize, should NII and deposit balances grow from here, all else equal?
Yes. We’re still anticipating a few rate cuts this year in the US and globally. Our deposits aren't all in dollars, as we made pricing adjustments which helped with the NII front. We're also seeing a pickup in loan activity, which we believe could continue into next year. There are many factors at play when it comes to the NII number beyond just interest rate cycles.
So, rate cuts alone would be incrementally positive or negative given your balance sheet mix?
No, we think that, obviously, fewer rate cuts would be better.
And moving on to Alex Blostein with Goldman Sachs.
Hey, Mike. Good morning, everybody. I wanted to ask you guys a question around expenses again. I heard you loud and clear on the at-or-below 5% number. In the past, the expense base used to flex up and down with revenues. I want to understand whether that's changed. If revenues are in a better fee environment in 2025, are you still committing to the 5% as the upper-end of that? Maybe what’s a better way to calibrate this is to talk about the expense-to-fee ratio you expect for the full-year 2025.
To your point, there's always going to be a relationship between expenses and revenues, even with impacts from markets on NII and capital market activities. Take capital markets as an example; we’ve had a lot of success there, seeing double-digit growth on the revenue side. There are certain expenses that come with that, like clearing expenses. The same applies on the asset management side. Our goal is to hold down expenses even when revenues are more robust, aiming to do so remained as revenues tighten. We want to ensure we keep those expenses strictly controlled.
Got you. Yes, I know that all makes sense. Ultimately, higher revenue brings higher expenses. As you think about the expense-to-fee ratio, what are you aiming for in 2025?
Without putting a specific number on it for 2025, we're looking for positive fee operating leverage, which would drive that ratio down. We’ve been at 115 for the year and at 113 for the quarter, so you can see the trajectory. What we're aiming for is between 105 and 110, which should present an efficiency level that maintains quality services, ensuring that as revenues decline, expenses won't be too high, minimizing flex on the downside.
Got it. That's perfect. Thank you, guys.
And our next question comes from David Smith with Truist Securities. Please go ahead.
Good morning. Your capital levels are still pretty elevated versus your closest peers at 12.4% CET1. Can you talk about how you expect to use your capital in the near-term and where you might want to bring your capital levels to over the next year or so?
Sure. We have very strong capital levels right now, resulting from both strong income generation and the benefits from the Visa gain earlier this year. This has allowed us to repurchase stock at higher levels as needed. We expect to continue at this pace into 2025. We're comfortable at the current capital levels but would also be comfortable moving them down slightly. We aim to stay above our closest peers in terms of capital levels, but currently, we’re in a comfortable position.
Thank you. On NII, if I take the midpoints of your Q1 and full-year NII guides, it would suggest NII staying fairly consistent throughout the year, at least on average. Is there anything we should consider in terms of the cadence with the cuts in the forward curve and your expectations for loan growth or balance sheet shifts?
One thing to keep in mind is we are a liability-driven institution. That’s why we have excess capital. For example, we saw a large pickup in loan activity last quarter. We want to ensure our balance sheet is available for clients. It’s difficult to predict when they will want to deposit or take loans. We’ve guided that NII should be up over the year by low-single digits. However, detailing when this will occur precisely each quarter can be elusive.
Understood. Thanks.
And we'll take a question from Brian Bedell with Deutsche Bank.
Hi, good morning, folks. Thanks for taking my question. Maybe just to stick along the NII line while correlating that with expenses, because what you can manage more certainly is the expense to trust fee ratio. The question is, to the extent NII oscillates around that target range, let's say, if it's lower, are you still looking to generate total operating leverage on total revenue—NII included—or would you focus more on the fee side?
We're trying to build a sustainable financial model that lasts through all cycles. At the end of the day, the cost curve must go down regardless of markets. We can't rely on external factors we don’t control. So while expenses are indeed influenced by revenue, our goal is to stabilize our cost structures even in more challenging revenue environments.
Yes, that's good insight. Shifting over to the wealth management business, you discussed the mission of improving the penetration within that channel for Northern Trust-managed products. Looking ahead, how do you envision that over the next 1-2 years? A few years ago, the mix of NTAM product within the channel was above 40%. It’s now in the high-30s. Do you see that returning to the low to mid-40s over time? What do you think the incremental revenue pickup would be from this or would it remain neutral?
We see it being a positive outcome. We’ve structured our asset management and wealth management businesses to closely collaborate. Over the past year, we've seen benefits from this alignment. While it's in early days, we are optimistic about the improved coverage of wealth management by asset management. We've segmented solutions effectively. The needs of our Global Family Office clients differ from our core wealth clients, allowing us to tailor our offerings. We see strong potential in targeting our ultra-high net-worth segment with more customized alternatives, providing greater opportunity for growth.
Great. Thank you.
And moving on to Jim Mitchell with Seaport Global Securities.
Hey, good morning. Maybe just on asset servicing. I see you guys have narrowed your focus to more back-office custody. The pipeline seems solid. How do you view the organic growth from here, and how do you balance that with improving incremental margins? Have you seen pricing pressure or competition increase for pure custody deals given many larger peers are attempting a similar strategy?
Sure. Our business is relatively balanced between serving asset owners globally and asset managers. We feel good about that mix and expect organic growth rates to be similar. In the past, the asset manager side grew, but asset-owner business is inherently more scalable for us. We aim for optimized growth within our capital markets space, and the pricing conditions have recently improved, resulting in favorable conditions for new business in 2024. We've intentionally opted out of a few RFPs with unfavorable pricing—this year’s conditions better support our focus.
Just to clarify, pricing has improved as companies focus on margins. Is that the key takeaway?
Absolutely. We’ve already seen improvements in our portfolio of new business for 2024, which will transition over the next 12 to 18 months, leading to higher-margin opportunities as we are intentional about this focus.
And our next question will come from Steven with Wolfe Research.
Hi, good morning. I wanted to start-off with a question on the strong performance and better organic growth noted for wealth and asset servicing. What drove the more subdued AUM and AUC growth relative to peers in Q4? Are there any future plans to include organic fee or asset growth targets in addition to the medium-term targets that you just unveiled?
For asset servicing, take client losses off the table; our client activity was very solid in the quarter. Currency movements were about 80% of our decline. We have high exposure to certain markets like fixed income, which were low, and broader international markets faced challenges as well. That’s really what impacted performance more than anything else.
Are there any plans to launch future organic fee or asset growth metrics in your targets?
Not at this point. The calculation of organic growth involves estimates of market and currency impacts, making it difficult as a reportable number. It is a great KPI for driving business but remains a granular metric rather than one we explicitly report.
Understood. If I could squeeze in one more, regarding the pre-tax margin target, given you've achieved a 30% profitability level in the back half of the year, what informed the decision to set the bar at 30 instead of something higher? What's the reasoning behind the longer-term objective?
We reached a 30% pre-tax margin for a quarter but not for the year. We're still working to achieve that level consistently. The range we present covers different market conditions and barring unforeseen events. We seek growth while increasing efficiency; the right combination is found in the mid-30% range that we aim for.
Understood. Thanks for taking my questions.
And next will be Gerard Cassidy with RBC.
Hi, Mike. Hi, Dave.
Good morning.
David, when you mentioned regarding building a sustainable financial model, can you define that model through cycles?
Yes. A sustainable financial model is reliant on factors we can control, like expenses and organic growth. We can’t predict external events—maintaining organic growth increases resilience in our financial model, which we view as a sustainable goal moving forward.
Thank you. Michael, a macro question now. Many investors share optimism regarding the outlook for your business and the markets in general for 2025. What are the risks that you keep your eyes on aside from the global geopolitical climate?
Gerard, we focus on what we can control while tracking external events. We are no stranger to volatility, and market downturns are a primary concern. We're prepared for both operational risks that can arise and the financial implications for our clients. Central bank activities greatly affect our business; changes in liquidity levels can create pressures on our model, and we actively seek preparedness for those scenarios.
Thank you, Michael.
Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Jennifer Childe, Director of Investor Relations.
Thank you, operator, and thanks everyone for joining us today. We look forward to speaking with you again in the future.
Thank you. And that does conclude today's conference call. We do thank you for your participation. Have an excellent day.