管理層發言
Ladies and gentlemen, good day, and welcome to the Northern Trust Corporation Second Quarter 2025 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, ma'am.
Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation's Second Quarter 2025 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 Trace Stegeman from our Investor Relations team. Our second quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 23 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through August 23. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding the forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.
Thank you, Jennifer. Let me join in welcoming you to our second quarter 2025 earnings call. We reported another quarter of improving results, reflecting the consistent execution of our One Northern Trust strategy, which we introduced at the beginning of 2024. We delivered our fourth consecutive quarter of generating positive organic growth and operating leverage. Revenue grew 8%, and earnings per share increased 20%, excluding notables in the prior year period, and we returned more than 100% of our earnings to our shareholders through dividends and record share repurchases. As we pass the midpoint in the year, I'd like to share our progress on our multiyear transformational strategy which is producing clear proof points that are gaining traction. Our One Northern Trust strategy is centered on our mission to be our clients' most trusted financial partner and commitment to leverage the full breadth of the firm's capabilities to deliver seamless, high-impact solutions.
We deliver a holistic client experience through the collaboration of our three businesses to serve the full spectrum of individual and institutional clients. A great example in the second quarter is our work with Timeline, one of the U.K.'s fastest-growing discretionary fund managers. As Timeline evolved its business model to launch a proprietary fund-to-funds range, Northern Trust Asset Management and Asset Servicing partnered to deliver a fully integrated solution. Together, we provided investment management, fund infrastructure, and operational support, enabling Timeline to scale its offering with speed and confidence. This win reflects how Northern Trust brings together capabilities across the firm to support the growth of high-potential clients in dynamic markets. While we continue to deliver exceptional outcomes for clients, we're equally focused on delivering long-term value for all of our stakeholders.
Our One Northern Trust strategy is anchored in three pillars: optimizing growth, driving productivity, and strengthening resiliency and managing risk. These overlapping pillars operate as a flywheel, each one amplifying the others. Our organic growth is gaining momentum, fueled by numerous strategic initiatives launched over the past 12 to 18 months that are now delivering results and are well-positioned to drive greater performance in the months and years ahead. In parallel, we're driving meaningful gains in productivity across the organization through a client-centric capability-driven operating model. We're aligning resources more effectively to deliver value where it matters most. We're also accelerating the deployment of AI tools to streamline processes, reduce manual effort, enhance decision-making, and manage risk. Together, these efforts are bending the cost curve and freeing up resources to enable reinvestment in growth and innovation, all while delivering higher margins and a better experience for our clients and employees.
Finally, the investments we've been making in resiliency are paying off through an enhanced control environment. Over the past year, we've added new roles across our three lines of defense and built greater stability, security, and scalability into our technology infrastructure. These capabilities are increasingly embedded into how we operate, influencing decision-making and enabling us to manage risk proactively and stay ahead of a rapidly evolving industry. As we execute on our One Northern Trust strategy, we're advancing several enterprise growth initiatives that are aligned with both evolving client needs and represent opportunities where we have differentiated capabilities across our businesses. One of these is clearly alternatives, which I'll spotlight today. The rapid expansion of global private markets is undeniable and projected to continue at twice the pace of public markets over the next decade, with total assets expected to exceed $60 trillion.
Our integrated model and expanding capabilities position us well to capitalize on this growth and deliver long-term value for clients and shareholders. We're leveraging this vast opportunity in several ways. First, 50 South Capital, the alternatives investment platform within our Asset Management business, which specializes in fund-to-funds, primarily targeting emerging managers, is having a record fundraising year. They recently closed their largest secondaries fund with investors across wealth, family offices, intermediaries, and institutions. Second, in Wealth Management, we continue to build out our platform for third-party funds. Several year-to-date raises have already exceeded initial targets, underscoring the strength of our offerings and the trust clients place in our platform. We're also unlocking incremental value for clients through collaboration with 50 South Capital's research team, which has cultivated relationships with over 270 managers to offer access to highly curated, hard-to-reach alternative investment funds.
As a result, our fund launch pipeline has tripled compared to prior years, reflecting strong client demand. Third, for clients with significant alternatives portfolios, we also offer our alternatives advisory services, which provide consulting and customized solutions. Assets under advisement are up 66% year-over-year, reflecting demand from both institutional and wealth clients for differentiated high-conviction strategies. Recent examples such as a $1.25 billion private credit mandate for a multinational corporate pension and one for a family office from the Middle East highlight our ability to deliver bespoke solutions at scale. And fourth, in Asset Servicing, we continue to expand our leadership position, in particular, in the semi-liquid fund market, where we now support six of the twelve long-term asset funds in the U.K. with seven more in the pipeline. We're building real momentum in alternatives, and we're only just beginning to unlock the full potential.
In parallel with these firm-wide priorities, each of our businesses is executing targeted growth strategies that reflect their unique client bases and market opportunities. Starting with Wealth Management, our Wealth Management business continues to deliver on its unique value proposition and is making solid progress on the three core strategic priorities I outlined at the beginning of the year. First, our Global Family Office franchise is a powerful example of our strategy in action by integrating asset servicing industry-leading custody platform and technology capabilities, Wealth Management's deep fiduciary and banking expertise, and Asset Management's innovative investment solutions, GFO delivers a seamless end-to-end platform tailored to the world's most sophisticated family offices. GFO continues to deliver strong organic growth with revenue growing 8% in the first half of 2025, including international revenue growing at over 20% and now accounting for nearly 15% of total GFO revenue.
With the launch of Family Office Solutions earlier this year, we're building on the proven success of our GFO playbook to bring a new offering to ultra-high-net-worth clients that do not have a dedicated family office structure but can benefit from institutional-grade capabilities and the personalized service Northern Trust delivers. The new offering leverages the same elite capabilities as GFO combined with a dedicated Family Office Solutions relationship adviser serving as a single point of contact to coordinate the client's entire financial life. In just the first two quarters, this new approach has achieved a higher than 75% win rate with a deep pipeline heading into the second half of the year. We're also making deliberate changes and investments to increase our market share in key geographic markets. We recently reorganized our core Wealth Management business from three to four regions and appointed new leadership in both the West and Northeast, bringing in experienced executives with strong market connectivity and a clear mandate to accelerate growth.
We're also actively investing in revenue-generating talent across these regions to strengthen client coverage and drive new business. Northern Trust Asset Management continues to execute successfully against its strategic priorities. In addition to scaling our alternatives platform through both 50 South Capital and our alternatives advisory capability, we're expanding into other key growth areas, particularly custom SMAs. As a leader in direct indexing and tax-advantaged equity strategies, we continue to build on strong inflows into our strategies by investing in technology and adviser tools to scale personalization, extend internationally, and deepen penetration across institutional and wealth channels. Another example of our success is a recent $1 billion equity mandate with the public investment fund in Saudi Arabia, one of the largest sovereign wealth funds in the world. We expect this mandate to expand to additional quant strategies demonstrating our ability to serve the world's most sophisticated sovereign clients.
In ETFs, we're enhancing our platform with the planned upcoming launch of 11 new fixed income strategies in the third quarter. These products are designed to meet growing demand for efficient, transparent, and scalable exposures and will complement our existing index and liquidity offerings. Our Asset Servicing business is executing on a disciplined strategy, centered on scalability and client centricity to drive profitable growth. We serve a focused set of client segments where we have deep expertise and a differentiated value proposition, one that continues to drive strong win rates and high levels of client satisfaction and retention. I already mentioned our strong position with alternative investment managers where assets under administration are now approaching $1 trillion, underscoring the strength of our platform and the trust placed in us by leading institutional clients. We also have good momentum in the Asset Owner segment, one of our highest margin businesses, which now comprises 50% of our segment-level revenue.
Our success is driven in part by our upmarket strategy to serve larger, more complex institutions with tailored solutions and global reach. Recent wins include the $89 billion University of Texas, Texas A&M Investment Management Company, a $55 billion Canadian foundation, a top 20 U.S. pension plan, Telstra, one of Australia's most significant superannuation funds, and a large sovereign wealth fund, our first front office solutions client in Saudi Arabia where our technology was cited as a key differentiator. Our Capital Markets business continues to perform well. In the first half of the year, revenue was up 15%, including more than 30% growth in both outsourced trading and currency management. These results reflect the strength of our capital-efficient model and our ability to deliver scalable, high-value solutions to institutional clients. This disciplined approach is delivering tangible results.
Organic growth is accelerating with new business tracking well and at above-average profitability and overall margins improving significantly. We've demonstrated our ability to bend the cost curve and remain firmly committed to continuing to do so while making necessary investments in critical infrastructure and growth initiatives. Through the first half of the year, expense growth was 4.8%, and we're on track to achieve our full-year goal of below 5%. Our progress is underpinned by a series of structural and operational advancements. We're modernizing our operating model and increasingly leveraging AI, such as GitHub, Copilot and document digitization to enhance employee productivity and increase automation across the enterprise. For example, thoughtful reorganization of our global operations under our Chief Operating Officer is unlocking efficiencies while preserving our world-class service.
Headcount within asset servicing and operations has declined for nine consecutive quarters and is down 7% from its peak. Importantly, these gains are accreting to margin, and we've strengthened our governance and controls to ensure they are sustainable. We've also implemented centralized oversight of multiyear technology programs and introduced new tools to monitor hiring activity and workforce composition in real-time. These measures give us confidence in our ability to continue driving productivity and margin expansion while maintaining the flexibility to reinvest in areas that support growth. And that reinvestment is underway, focused on three levers: talent, product expertise, and technology. On the talent front, we're hiring revenue-generating professionals across wealth and asset management. From a product standpoint, we're ensuring we have the expertise to create innovative solutions and support the growth across the businesses, which I described earlier.
In technology, we're investing in capabilities that enhance the client experience and support scalable growth. These investments are enabling us to deliver more personalized, efficient, and high-impact solutions. Together, these efforts reflect our disciplined approach to cost management and our commitment to sustainable margin expansion while continuing to invest in the capabilities that will drive long-term value for clients and shareholders alike. Our financial model is designed to deliver an attractive combination of growth and returns, and we're making tangible progress against these targets. Organic growth is steadily improving and should accelerate as our initiatives further develop and expand. We have a clear and credible pathway to generate higher margins. At the core is our rock-solid balance sheet, which provides flexibility for our clients and meaningful capital return optionality for our shareholders.
Continued successful execution should translate into double-digit annual earnings per share growth, substantial capital return, including meaningful share repurchases and higher ROEs. Given our recent momentum and confidence in our trajectory, we're changing our ROE target from 10% to 15% to 13% to 15%. To close, I want to reaffirm our commitment to remain independent. Contrary to recent speculation, during my tenure as CEO, we have never entertained discussions regarding the sale of the company with any financial institution, nor do we intend to. The Board and management team remain confident that Northern Trust is well-positioned to continue driving long-term growth and value creation as evidenced by our visibly improved performance and momentum in our One Northern Trust strategy. Our 135-year track record of stewardship of multi-generational personal and institutional wealth, unwavering fiduciary commitment, ingrained culture of integrity, and long-term perspective instill confidence in our clients that we will be here for them, not just today but for generations to come. And with that, I'll turn it over to Dave to review our second-quarter results.
Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our second-quarter 2025 earnings call. You may have noticed that we included a number of new disclosures in our earnings materials this quarter. They include additional segment-level detail, including average loans, average deposits, pretax profit and margins, along with enhanced regulatory and capital metrics. These additional metrics aim to enhance the quality and transparency of our disclosures, ensuring we are responsive to shareholder feedback. Now let's discuss the financial results of the quarter, starting on Page 12. This morning, we reported second-quarter net income of $421 million, earnings per share of $2.13 and our return on average common equity was 14.2%. As Mike mentioned, we delivered our fourth consecutive quarter of generating positive organic growth and positive operating leverage. It's also our fourth consecutive quarter of delivering positive trust fee operating leverage, and improving our expense to trust fee ratio on a year-over-year basis, excluding notables.
These are clear signs that we're moving in the right direction, and our strategy is gaining momentum. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 100 basis points. Relative to the prior period, currency movements favorably impacted our revenue growth by approximately 110 basis points and unfavorably impacted our expense growth by approximately 130 basis points. Trust, investment, and other servicing fees totaled $1.2 billion, a 1% sequential increase and a 6% increase compared to last year. Net interest income on an FTE basis was a record $615 million, up 7% compared to the prior period and up 16% from a year ago. Excluding notables in the prior year, other noninterest income was down 4% year-over-year, largely reflecting weaker reported FX trading income, partially offset by strength in other capital markets activities.
One reminder related to our FX trading income. We've seen steady growth in the underlying core business over time, but it's often muted by the overnight swap activity conducted by our treasury department, which was more pronounced this quarter. Core FX trading revenue, excluding the impact of our swap activity was up 10% year-over-year. Our assets under custody and administration were up 7% sequentially and up 9% compared to the prior year. Our assets under management were up 6% sequentially and up 11% year-over-year. Overall, our credit quality remains very strong with all key credit metrics in line with historical standards. The provision for credit losses increased to $16.5 million in the second quarter, largely reflecting an increase in reserves related to a small number of nonperforming loans, but we expect it to return to more normalized levels in subsequent quarters. Relative to the prior year period, and excluding notable items, revenue was up 8%.
Expenses were up 4.8%. Our pretax margin was up 160 basis points. Earnings per share increased 20%, and our average shares outstanding decreased by 5%. Turning to our Asset Servicing results on Page 13. Our Asset Servicing business performed well in the quarter. Transaction volumes were particularly strong. Capital Markets activities were up double digits over the prior year, and new business growth continues to be booked at attractive margins. Assets under custody and administration for Asset Servicing clients were $16.9 trillion at quarter end, reflecting a 9% year-over-year increase. Asset Servicing fees totaled $692 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $469 million, up 5% year-over-year, largely reflecting the impact from strong underlying equity markets, favorable currency, robust transaction activity, and new business generation.
Assets under management for asset servicing clients were $1.2 trillion, up 11% over the prior year. Investment management fees within Asset Servicing were $157 million, up 8% year-over-year due to favorable markets and new business activities. As you can see on the right side of the slide, average deposits grew 7% sequentially, accounting for most of the total increase. Loan volume increased slightly relative to the first quarter. Asset Servicing pretax profit nearly doubled over the prior year period. And the Asset Servicing pretax margin was up more than 10 points to 23.2%. Excluding $75 million in notables in the prior year, asset servicing pretax profit increased 29% and the pretax margin expanded by approximately 330 basis points, reflecting the pivot in our new business approach, our focus on cross-selling high-margin capital markets and other adjacent products and services and our efforts to streamline our operations.
Moving to Wealth Management business on Page 14. Wealth Management also had a healthy quarter with continued strength in Global Family Office. Assets under management for our Wealth Management clients were $469 billion at quarter end, up 12% year-over-year. Trust, investment, and other servicing fees for Wealth Management clients were $539 million, up 5% year-over-year, primarily due to strong equity markets. As you can see on the right side of the slide, both average deposits and average loans were flattish relative to the first quarter. Wealth Management's pretax profit increased 18% over the prior year period and the pretax margin was flattish at 37.2%. Excluding approximately $33 million in notables in the prior year period, Wealth Management's pretax profit increased 5% year-over-year, while the pretax margin decreased 25 basis points. It's worth noting that more than two-thirds of the $16.5 million second-quarter provision was allocated to the Wealth segment.
Moving to Page 15 and our balance sheet and net interest income trends. Our average earning assets were up 6% on a linked-quarter basis fueled by higher deposit levels, which drove an increase in cash held at the Fed and other central banks and a slight increase in securities. The duration of our securities portfolio decreased to 1.5 years. While we're opportunistically adding duration to protect against future rate cuts, we've also shifted the mix of the portfolio slightly. So the fixed-to-floating breakdown is now 52% to 48%, including the impact of swaps. The duration of our total balance sheet remains under 1 year. Net interest income on an FTE basis was a record $615 million, and our net interest margin held steady at 1.69%. NII outperformed our expectations, largely due to higher-than-expected deposit levels. Average deposits were $122 billion, up 6% compared to the first quarter levels.
Within this, interest-bearing deposits increased by 7%, while noninterest-bearing deposits decreased by 60 basis points, comprising 14% of the overall mix. The quarterly contribution from transactional and other one-time items was elevated in the second quarter, mostly due to the overnight FX swap activity conducted by our treasury team as we capitalized on FX volatility during the quarter. We estimate this added an incremental $10 million to second-quarter NII that is not expected to persist. Turning to our expenses on Page 16. Excluding notable items in the prior period as listed on the slide, expenses in the second quarter were up 4.8% year-over-year. Excluding notables and unfavorable currency movements, expenses were up just 3.8%, the lowest rate of growth in the past six quarters. 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 minimums.
Our common equity Tier 1 ratio under the standardized approach decreased by 70 basis points on a linked-quarter basis to 12.2% with capital accretion more than offset by an increase in RWA. The RWA growth was driven largely by quarter-end lending, coupled with higher capital markets activities. Our Tier 1 leverage ratio was 7.6%, down 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $481 million, and we returned $486 million to common shareholders in the quarter through cash dividends of $146 million and common stock repurchases of $339 million, reflecting a payout ratio of 117%. Finally, based on the 2025 CCAR results, we recently disclosed that our stress capital buffer will remain at the 2.5% minimum requirement. And yesterday, our Board approved a $0.05 or a 7% increase to our quarterly dividend. Starting with expenses, we continue to expect our total operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements.
Turning to NII, we now expect the full year NII to increase by mid-single digits over the prior year. This assumes a modest decline in third-quarter deposits in line with seasonal trends and mostly stable deposit mix, meaning that we wouldn't expect absolute levels of NIB to move materially from current levels, but the percentage of the overall mix could change. Market implied forward curves as of this week, and slightly weaker institutional deposit betas with the next series of global rate cuts. And with that, operator, please open the line for questions.
分析師問答
And our first question comes from Glenn Schorr with Evercore.
Thank you for the clear explanation. I appreciate it. I am interested in the various initiatives related to alternatives and the 11 new fixed income ETFs planned for the second half. Could you provide any metrics on these, such as assets under management, capital raising, assets under custody, or revenue? I'm also keen to understand if you view this rollout as a proactive push, where you are introducing products and promoting them, or a reactive pull, where you're responding to demand from clients or advisers with your developments. Thank you.
Sure. Thanks, Glenn. Regarding the alternative investments, we are making significant efforts in that area. Overall, I would describe it as a strong demand from our clients. This is largely due to the market shift towards private investments over public ones. It’s essential for us to ensure we offer the right alternative options to our clients, which is the main factor driving our focus. Internally, we need to push ourselves to create these alternatives. We're taking various approaches, like initiatives from 50 South and our advisory services to our third-party platform. In the first half of the year, we raised about $2.5 billion across these areas, not including roughly $1 billion from our advisory services. When considering the potential, our wealth management client base currently allocates less than 5% to private markets. There is significant room for growth in their portfolios. For the higher-end clients, such as family offices, allocations can reach over 40% in alternatives, while other clients might be closer to 10% or 15%. This indicates there is still ample opportunity for them to increase their investments in this area.
Thanks. Maybe anything on what's driving the 11 fixed income ETFs? You talked about efficient scalable exposures, I'm just curious what that might encompass that you didn't already have in the portfolio.
Sure. So on the ETFs that we're rolling out, I would say, at this point, our ETF complex has mostly index and other certain exposures, whereas there's less on the fixed income front, particularly the type of fixed income characteristics that our client base is looking for. This is another example of how Asset Management and the Wealth Management business work together to develop specific products that fit the needs of our client base. So I won't go into all the detail because we're going to be rolling that out very shortly. But think about the needs across municipal securities. Think about the need for fixed income ladders, all trying to put that in a very efficient vehicle for them to be able to invest in.
And our next question comes from Betsy Graseck with Morgan Stanley.
I wanted to just dig in a little bit on the decision to tighten up the range for ROE. I think it's from 10% to 15% to 13% to 15%. And within that, understand where the line of sight is that you have on the expense ratio with the operating leverage that you're delivering? Where do you anticipate you can take this expense ratio to as you move forward over the next several years in the medium term?
Sure. If we go back in time a little bit, when we first set the range at 10% to 15%, our ROE was below 10%. A lot of the objective at that point was to get into the range, which we did some time ago. We've continued to move up in that range and at times have been at the top end and even a little bit over. It definitely depends on our organic performance and execution, but also it's influenced by market conditions. That's why we, over time, maintained it at 10% to 15%. It took into account different interest rate cycles and significant changes in the equity markets. We felt like that was the right broad range. Well, we've been producing returns now at that upper half for some time. With the momentum that we have here in the strategy, we think that's going to continue to be the case. And I would also say that over time, there's been less clarity or certainty around the capital framework, the regulatory capital framework.
It was also taking into account that there could be higher capital requirements as much as we can't predict where that goes and for how long. At this point, we believe there's a very constructive framework around capital, and we just have greater comfort that the capital requirements are in the range that we're in right now. As long as we continue to execute and under somewhat normal levels of market conditions, we think that range of 13% to 15% is appropriate. Just to address the expense part of it. From an expense to trust fee ratio perspective, we believe the right range is 105% to 110%. We're working our way towards that. We're at 115% now, down from where it was. We will look to continue to grind it into that range.
Our next question comes from Ebrahim Poonawala from Bank of America.
So Mike, thanks for your insights regarding the strategy update. Considering the potential for independence or mergers, do you see any scenario where mergers and acquisitions might benefit shareholder returns? Or do you believe that the distinctiveness of the Northern franchise and the scale of the custody business render M&A strategically unappealing? How should we, as shareholders, view this from the outside?
Sure. As you've heard from my comment, we are completely focused on executing on our strategy. We believe that, that strategy of independence is what will produce the best returns for our shareholders ultimately. The reason why that is, is a little bit to your point. We believe that, that provides a unique value proposition for our clients. Through the last several weeks, we've heard from a lot of our clients who've made it clear that they have lots of alternatives for various providers or financial partners that they could have across families through very large institutions who have said, we chose Northern Trust because it's a different value proposition. It's one where you are focused on trying to provide a higher level of client service, where you do have very targeted expertise in just certain segments of the market where you compete. We believe that, that differentiated value proposition is the one that's going to create the most value.
Over time, as you know, we have done acquisitions that enable us to either enter another market or to bolster our capabilities in a particular market. We'll continue to look at those over time if they make sense. We're an organic growth company. So it's not, by any means, the primary driver. But if at times, there's something that would be attractive for us on the inorganic front to improve that value proposition, we would consider doing it, obviously, with very high standards.
Got it. Just sticking with capital deployment, could you remind us how you view the pace of buybacks given that the stock has performed well year-to-date? Is there a specific valuation, such as price to earnings or price to tangible book multiple, at which buybacks may seem less appealing?
Yes. When we look at buybacks, it isn't just about the stock price, right? We're looking at our regulatory capital, earnings power, ROE, loan growth, as you know, dividends. We like our balance sheet to be available for our clients. We still like to run a little bit of a cushion, if you will, that we want to have in the system. We've picked up our capital return to shareholders significantly. When you think about the current pace that we're on, we will probably end up exceeding what we did all of last year, and last year had Visa included in it. I think we're at a very healthy clip close to $500 obviously this quarter. You take all those factors into consideration, not just the stock price when we look at it, and we balance that against our capital requirements and other issues at the time.
And we'll take our next question from Mike Mayo with Wells Fargo.
I'd like to continue this discussion. There's been a lot of media coverage, which must be disruptive to both your clients and employees, and possibly frustrating as well. However, it remains a topic of interest among investors. I recognize your commitment to maintaining independence for the long run, aiming for 135 years of existence and beyond. You've also highlighted short-term growth over the next four quarters and operating leverage, with medium-term goals of higher return on equity and a long-term vision of One Northern Trust. I understand this fully. Mike, with your background in deal-making prior to Northern Trust, it's clear. Yet, that doesn't stop others from considering potential acquisitions. This has been a recurring scenario for the past three decades, so it’s not entirely new. That said, under what conditions would you contemplate divesting the custody business? You've mentioned scalability as a key focus in your update; perhaps that area could benefit from more growth. I see the private bank and asset management as core assets for you. While you are optimizing those areas, there's potential for further strategic moves, either by enhancing your own scale or possibly acquiring another firm to achieve that.
When it comes to scale, it's important to start with the fact that size does not necessarily equal scale. We absolutely need scale, but we don't need size to get there. Our strategy is around that, but then you have to execute to demonstrate it. Because scale is all about the ability to, I'll say, grow the revenue side at a pace that's faster than the cost side or increase your volume at lower unit cost, so to speak, as you go forward. The reason why I say it's not about size is that there are different drivers of creating that scale. We try to focus on just certain sectors where we believe we can build scale within the sector and also differentiate ourselves. When you think about specific areas on the institutional side like U.S. pension plans, U.K. pension plans, our business with hedge funds in the U.S., those specific segments where we say our value proposition resonates but now we also have to drive scale so we can get the value proposition to a place that's attractive and we can get financial returns on that front.
The second place you get scale is through technology. How can we apply technology in such a way and leverage technology to create that? The direction of travel on that front is one that, once again, doesn't necessarily favor just being bigger. There's more complexity with being bigger and the ability to not have to operate everything yourself. Mean on-prem and do more through the cloud is an equalizer when it comes to scale. And then there are different parts of the value chain that create scale for you. We're trying to take the common processes from across the businesses, but particularly within asset servicing and focus them on capabilities as opposed to necessarily being in a particular region or just a particular segment. We need to continue to demonstrate it. We know we need to demonstrate it. So it has to flow through to the numbers that’s why the margins in our Asset Servicing business need to go up. We're in the low 20s right now. Those should be in the high 20s, and that's what we're moving towards with that.
Yes, Mike. I would only add that when you look at the Asset Owner segment within Asset Servicing, it already meets the bar in terms of our margins where we're trying to go. As that business gets bigger and the Asset Management side gets smaller, you're going to see the margins drift up as well. So that particular segment we've identified as already being there.
And we'll take our next question from Alex Blostein with Goldman Sachs.
I appreciate all the extra segment disclosure on the margins, profitability, and obviously, the target as well. That's all very helpful. I wanted to ask you guys around the timing to achieve some of these. So you've had the 30% plus pretax margin as a target out there for a little while. It's helpful to understand the pieces a little bit. But as you think about how long it will take you guys to get there, and ultimately, what interest environment does that contemplate? Because obviously, there's a lot of profitability related to NII, and you're talking about profitability of the firm as a whole. I'm curious how that plays into the rubric?
Just as far as the backdrop on the market environment for it, it's one of, I would say, like normalized, meaning a normal yield curve, normal shape of the yield curve, and the pace at which you get there. What makes it difficult in managing for any financial institution is the speed of those changes. We’ve gone through a time period, obviously, where rates were going up, but then they went down to 0, then they went up very fast. Now it appears that we're at the beginning of a time period where they're going to go down but at a more gradual pace, allowing for the transition of duration in the portfolio on the balance sheet to be able to leg into that change in the shape of the yield curve. So that's the expectation. But of course, we have to be positioned for different things happening on that front. I'll say the more important part, Alex, which is just what's the timeframe on that. We're executing hard on that.
You see the positive operating leverage that we achieved in a quarter like this. If you said, okay, but there are certain quarters or even multiple quarters where it's more difficult to get those chunkier yards and you're grinding more up, that would infer that it's likely to be kind of 2027 where we're achieving that 30-plus percent. If we can get there sooner, great. As I mentioned, the environment can help or create a headwind as well, but that's what we're looking to move towards.
Got you. That's helpful. Just a follow-up on NII. I heard the guidance for the full year, obviously implies something in the maybe $5.70 range per quarter, I guess, from here on. As you look at the balance sheet, I think I heard you say a little bit less than one-year duration overall with rate cuts, kind of how you're thinking about the trajectory from NII off of that jumping-off point? And are there any things you could do today to mitigate the effects of potentially lower interest rates in the U.S.?
Yes. As I've said to you guys before, we have about $1.5 billion of securities that roll off every quarter, and we can reinvest those at, I think, 100 basis points over the yield, the runoff yield. So that's one area to do it. The second area, obviously, is we've been very focused on our deposit pricing and things of that nature. We are not just in U.S. dollars and deposits. We take a look at opportunities across all the different currencies. There are rate cuts that are going to be, I think, realized with some of those currencies as well. From our perspective, it's really going to be a question of the reinvestment going out a bit longer when we have the opportunity, not just to protect Q3 and Q4 but to protect '26 as well.
And up next is Ken Usdin with Autonomous Research.
Dave, I was going to ask you to follow up on your comments about the Asset Servicing fees. You mentioned that the transaction activity was really strong. I'm sure part of that's just the core business, but was part of that just in relation to the April dislocation? And I guess, kind of how would you help us understand the push and pull between organic growth and market health that you already have baked in for the third quarter versus some of the stuff that might have been like above trend just given the environment?
Yes, it was because of that. I mean, transaction volume was higher than it would be traditionally if you look at the averages during the quarter. You also have to take into consideration in Asset Servicing. When you look at the growth side, we had two large client losses in Q2 and Q3. One of those losses, they took the business in-house. We've not lapped that yet. I would say 0.5% of the growth got nicked by that. As we get beyond those two client losses, you'll see some more realistic numbers in terms of year-over-year comparisons on that. So that's the way I think about it.
And will those be out? Do you know when those will be lapped? Are they lapped in the third quarter or after the third quarter?
Yes, in the third quarter, we'll have that lapped definitively. The quarter was client neutral. When you think about it. Keep in mind, when you look at the Asset Servicing business, you know this, I'm sure it's on a quarter lag basis. You've got to take that into consideration as well. That also affected the Wealth business. Wealth is obviously on a month lag basis. In Q1, if you look at the S&P, it was down 5%, NASDAQ down 10.5%, so take all that into consideration as you're taking a look at those absolute levels.
Yes. And a follow-up just on the Wealth side. Just like the layout that you gave and that Mike gave in the prepared remarks and the slides. Is there any change in just the organic growth rate in wealth? I know you have a lot of these initiatives going forward. But when do you think we'll start to see a definitive observable change in the organic growth rate there?
Yes. As we talked about, we are seeing positive organic growth in the wealth business, but it is not at the level that we want and are targeting. It’s a little bit more of a gradual increase in momentum. The way we're going about it is a few different ways. The first, and you heard this in my comments, Ken, but is from I'll call it a segmentation perspective. We're trying to focus more on certain segments to increase the rate there. We've had that in GFO. We're trying to replicate that in the ultra-high-net-worth segment. It’s early days on it, but the win rates are higher, and as a result, we've added more talent on that front to continue to increase the growth rate of that segment. As you go down to the tiers below that, that's where we're focused on particular geographic markets. We’re trying to get our market penetration more in line with the way it is in our more mature markets. We have very strong market share in Illinois, in Florida as you might expect, a high success rate there. We're trying to do the same in Northern California, Southern California, Texas, New York, where our market share is still low relative to potential. To your point, it takes time to get people on board, get them up to speed.
And up next is David Smith with Truist.
Any color on what's driving the strength in deposits this quarter?
Yes, I mean we talked about it last quarter a little bit. Obviously, there was a bit of a risk-off trade that we took advantage of during the period. From that perspective, they are running a little higher. I will say, in the current quarter, we're starting to normalize. That’s probably why I'm keeping the guide where it is. When I look at the third and fourth quarter, the third quarter tends to be a little bit weaker just because of a seasonal pattern. Fourth quarter picks up a little bit, but they're beginning to normalize back to what I would say is a more predictable run rate. We did have, in particular, some very large euro deposits that came in. We want to have a flexible balance sheet because we have large clients that come to us not just for loans but for deposits as well. We did have some deposit activity that was concentrated among large clients in the quarter as well.
Got it. So it's normalizing beyond typical seasonality so far in the third quarter?
Yes. I mean it's back to what we thought it would be. The average is 122 for this quarter. I think if you take a look at our last three quarters before the Liberation Day and the risk-off trade, it's back to those levels. I think you said that flows and Asset Servicing were relatively neutral in the second quarter. Any detail you can offer on segments where you're seeing stronger growth versus where there's more opportunity for catch-up?
I would just go back to the upmarket of asset owners. You heard about some of the wins that I talked about which are significant clients at this point, relatively large clients as well. We often are impacted by the success of our clients. In a time period where market reasons caused net outflows for some of our Asset Management clients, we’ve seen that stabilize. That's a positive for us as well on the asset manager side.
I'd also add that AUM flows, which obviously impact both businesses, were positive. liquidity was a real standout. That is biased towards the institutional business. We saw $8 billion in the second quarter, $19 billion year-to-date on the liquidity side, which represents our tenth consecutive quarter of positive liquidity flows.
And our next question comes from Brian Bedell with Deutsche Bank.
I appreciate the detailed insights in the slides and your commentary today regarding the businesses. I have two questions, both focusing on Wealth Management. First, could you discuss the efficiency initiatives within Wealth Management, especially regarding digital advancements, AI, and the automation of services? How are these improvements enhancing client delivery and relationship management? While personal relationships are a crucial aspect, is there a risk of becoming too automated, or do you view these developments as enhancing and strengthening client relationships? Additionally, considering your movement upmarket in recent decades, is there any interest in targeting a lower market segment within the wealth spectrum to potentially boost organic growth?
Sure. On the first one, definitely those initiatives are focused on enhancing the client experience. I would put it into three categories. The first being processes, the second being partners or employees, and the third being with clients. On the processes side, think about all of the documentation involved with client relationships, in this case, I'm speaking about Wealth Management. The ability to use AI to digitize those documents definitely creates productivity for us but also makes it easier for the employees to utilize that information. That’s the type of thing we’re doing to improve the client experience as a part of that. Specifically on the partner side or our employees, making them more efficient, giving them the tools to be able to do things more quickly. We have deep knowledge databases, if you will, of this deep knowledge, the Northern Trust Institute, et cetera. Ability for our partners to be able to tap into that data and information quickly to provide advice is another unlock on that front.
Enhancing in that way. Lastly, providing clients additional capabilities that enable them to do things on their own because of the technology is the third aspect. All of that goes to the experience, producing efficiency and productivity. Regarding the market, you're thinking about our strategy correctly, we’re trying to say, how do we replicate for the different tiers such that we get higher organic growth overall. You heard me talk about GFO but then ultra-high net worth.
That's great color. And then on alternatives, you mentioned, I think, a 5% or less than 5% penetration across the franchise. But GFO, obviously much more institutional based. Can you strip out the allocation between those two segments? Excluding GFO, what do you really see as the current penetration and therefore the runway? And do you currently have all the right products available? What I'm getting at is access to the largest, even publicly traded alternative managers or private market managers that have democratized product in the channel. Do your clients have full access to those yet?
Sure. On the GFO side of it, when considering the assets we custody for them, the amount invested through alternatives is relatively small. They go direct to the largest managers on their own. We have found that we have the ability to bring differentiated opportunities to them. Some of them utilize 50 South, but often they utilize the research capability of 50 South, where he will then bring certain managers to them that they might not otherwise have access to. More broadly, with our core wealth, it’s less about providing access to things they don't have or that we couldn't get access to; it's just providing more of it. Our clients are interested in bespoke or hard-to-get tight managers where we do have the relationships through 50 South. The vehicles will continue to evolve from what used to be straightforward funds to interval funds to evergreen funds. We're going to make sure that we have the right vehicle base.
On the GFO front, access to top managers is not a problem. We have the client base that all the top managers want. We're extremely discerning and have a very high bar in terms of what makes it onto our platform. We're doing a lot more on the alternatives advisory front. A lot of our clients that got very heavy into alts have not seen a lot of realizations, and they have come to us seeking advice. We’ve been restructuring a lot of what they have and giving them advice to make sure they've got the right mix within their portfolio.
And up next, Gerard Cassidy with RBC.
This is Thomas Leddy standing in for Gerard. Just given all the recent headlines, can you give us your latest thoughts on stable coins and how broader adoption could impact both your businesses and then deposit levels?
We're excited by the direction of what I'll just call more broadly, digital assets. This is an area that we've been embracing and developing capabilities for. We really do feel like we're on the precipice of the next stage of evolution for digital assets. Starting with stable coins, we think it will evolve into tokenization of asset classes. We’ve developed capabilities to do both stable coins and tokenized assets. The key part of it is that we’ve done them on private blockchains. A lot of this now will move to public blockchains, so we need to have the capability to interact with public blockchains. We've already done a number of things with tokenization for carbon credits and in other areas. We see this as the next stage for this.
That's helpful. Just a quick follow-up. It appears expected regulatory relief for the industry will have a big impact on at least the money center banks. We saw the recent stress test results and the resulting SCBs. Can you just share your thoughts on the potential benefits for Northern Trust more specifically from expected relief?
The regulatory environment is very constructive overall. There's a number of changes. I think they're trying to make, and from our perspective, whether it's across capital, liquidity, but as they think about how they regulate operational risk. All of this is setting up for a constructive environment for us. A lot of it is around predictability, and we do feel that we're in a time period that allows us to ensure that we have the right risk management framework at the company, the right controls. We've made investments over the last number of quarters on that front. We have more to do, but feel very good about the results we’re getting.
And our next question comes from Vivek Juneja from JPMorgan.
My question, a follow-up on some of the questions that have come up on the call today. I hear you want to increase your operating margin on the custody of the servicing business to the high 20s. Why is that good enough? Given your mix, you've got hedge funds, that's an attractive margin business as your peers have discussed. Some of your peers are well above that today. Why would you not consider something much more value additive more quickly rather than over a multiyear period? Think about alternatives like spinning off or merging the custody part. If the Wealth Management is where your unique service ability is, why not split the two? Why is that not a consideration?
The business model for Northern Trust is highly integrated. When you consider the various segments, there are a number of ways why we have a One Northern Trust strategy. The interplay between the businesses is significant. You think about the success and differentiation we have with GFO. The platform behind GFO is our Asset Servicing platform and the technology, much of it is from our Asset Servicing business. A lot of the deposits we generate on the institutional side through Asset Servicing get deployed through Wealth Management. We believe that the model is integrated. We know we have to be able to demonstrate the profitability of all aspects of the business and the company overall. We have to get through the high 20s to get to the 30s.
I'd just also emphasize particularly for the Family Office business that it isn't just about investments. It's about operating alpha. At the end of the day, many Family Offices don't want to be in the vendor management business. They would rather go to a firm with scale and ability to help them operate the full infrastructure inside a family office. We have that scale through GFO and by leveraging off our asset servicing business to do that.
And up next is Brennan Hawken with Bank of Montreal.
I recognize you've gotten a lot of questions on this. And I appreciate that it's disruptive. But some of your shareholders have asked me to ask a fiduciary obligation question here. Mike, I'd like to explore your conviction that remaining an independent company is in the shareholders' best interest. A couple of subpoints, like you said in your prepared remarks that you're well positioned to continue to create value; but when I pull up the comp function for Northern and Bloomberg, which just shows the past five years, the stocks lagged like all of the relevant benchmarks and the close peers. I appreciate that some of your customers want you to be independent, but the company isn't structured as a mutual. So it's owned by the shareholders, not the customers. So why be so categorically closed off to exploring those options when the independent path has resulted in the stock lagging?
First of all, we have an exceptional board. They take their fiduciary duties extremely seriously. They understand the duty they owe to shareholders, and that's how they operate. That’s the framework through which they look at everything. You heard where they stand with regard to the strategy, but they also understand that they have to be upholding those fiduciary duties. Stepping back a bit on performance over time, divide it into some different time periods to understand the stage we're in right now. We could use any number of different periods, but there was a time where we operated within our target financial model. Going into and coming out of COVID, the growth rates for revenue, both organic and overall, were within that target financial model. Our average pretax margin was about 32% over that time period. Earnings per share grew at double digits. Then we made investments across enhancing and bolstering the resiliency of the company, which we outlined for investors. Investments hit margin in the short term but produce the opportunity for long-term organic growth. Sometimes, you need to make those investments that hit margin. That's why, going to the beginning of 2024, we launched the One Northern Trust strategy. We're now executing on it. The momentum we're creating speaks to it. While we're nowhere near finished, we're generating confidence.
Right. Okay, Mike, thank you for the clear and thoughtful answer to what can be a very charged question. So I appreciate that. For the first time, I actually have my follow-up related. Great to see the ROE target come up, but if you guys are moving all in and staying independent and totally committed, why not re-underwrite some of these targets? You said you've been at the upper end of the new range, but you also said recent performance has sort of lagged. Why not up the ante and make the ROE target range in its entirety, not just the lower end, but the upper end too? Move higher and really press for some value creation?
It's like we're going to work our way through this range and then we’ll reestablish a range above that to the extent we say, okay, now we've been performing in that range. Maybe that’s part of our, I'll say, approach or culture to deliver what we say we're going to do. That’s the intention. Part of it is that ROE is important, but not just the ROE. As I talk about our financial objectives, it's growth and returns. If it was a matter of just can you top tick on the highest ROE in a particular time period, we don't think that creates the greatest value for shareholders. They want growth as well.
And there are no further questions in queue at this time. I will now turn the conference back to Jennifer Childe for closing remarks.
Thank you, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again in the future.
Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect, and thank you for participating.