Northern Trust Corporation Third Quarter 2026 Earnings Conference Call - NORTHERN TRUST CORP

Explicit Guidance:

• Q4 2026 Net Interest Income (NII): Expected to increase 8–9% year-over-year, assuming a stable market and interest rate backdrop (driven by Sept/Fed hike carry-in, December hike anticipation, and typical Q4 deposit seasonality).
• Q4 2026 Total Revenue: Expected to increase 6–7% year-over-year, assuming a stable market and interest rate backdrop.
• Full Year 2026 Operating Leverage: Expected to deliver 500 basis points or more of positive operating leverage (excluding notable items), with Q4 expected to show positive operating leverage.
• Effective Tax Rate: Expected to rise to approximately 25% starting in Q4 2026 and continuing forward (up from 19.3% in Q3), reflecting updated assessments of international operations and U.S. foreign tax credits.
• CFO Transition: Dave Fox remains CFO through Q1 2027 to ensure a seamless transition; specific financial guidance remains unchanged by this leadership change.

Business-Segment Outlook:

• Wealth Management:
  • Family Office: Continued investment in specialized talent to scale outsourced family office solutions; demand for these solutions is growing.
  • Ultra-High Net Worth (UHNW): Clients with $100M+ in assets expected to continue outpacing broader portfolio growth (double-digit AUM and fee growth year-to-date).
  • Alternatives Fundraising: Year-to-date fundraising in alternatives already surpassing 2025 levels; broad interest across venture, growth, value, and hedge funds.
  • Margins: Willing to accept temporary margin compression in Wealth Management to fund aggressive growth initiatives (talent acquisition, digital marketing, AI-enabled prospecting).
• Asset Servicing:
  • UBS Partnership: Expansion of mandate with UBS (Swiss/Luxembourg) to include former Credit Suisse funds over the "next two-plus years," increasing serviced assets by >50%.
  • ETF Servicing: New ETF servicing platform launch in the U.S. to capture demand for single-provider solutions for mutual funds and ETFs.
  • Alternatives: Combined assets in LTAS and LTIFs expected to more than double year-over-year, driven by semi-liquid fund demand.
  • J.O. Hambro: Integrated Trading Solutions Desk appointed; trading relationships expanding into broader asset servicing mandates.
  • Margin Trajectory: Q4 fees expected to face headwinds from lagged fixed-income market pressure, partially offset by recovering transaction activity (approx. 20% of fees) and organic new business wins.
• Asset Management (NTAM):
  • ETF Conversion: Plan to convert six Northern funds (approx. $33 billion AUM) into ETFs in Q1 2027.
  • Tax Alpha: Aiming to capture share in a >$1 trillion direct indexing market; pipeline for long/short strategies growing.
  • Quantitative Equities: New "Adaptive Equity Suite" gaining traction with institutional clients (e.g., Middle Eastern sovereign Wealth Fund, Nordic asset owner).
  • Talent Strategy: Hiring campaigns to accelerate revenue-generating population will continue through year-end 2026.

Market and Competitive Outlook:

• FX & Capital Markets: FX trading run rate reset to a "new normal" estimated in the $70M range (up from traditional ~$50M) due to new client onboarding and outsourced trading mandates; current levels ($90M+) likely exceed this sustainable run rate as volatility remains low.
• Deposit Dynamics: Q4 deposit balances expected to recover sequentially from Q3 seasonal dips; NII growth driven by yield tailwinds and deposit mix rather than significant volume expansion.
• Fee Compression: Notable price compression identified in wealth management liquidity mandates (approx. 10 bps on specific money market funds), impacting revenue by ~$2M/month; no further repricing anticipated.
• Share Shifts: Competitive positioning remains strong in fund administration (Switzerland) and custody; focus on high-margin, scalable relationships over lower-margin mandates.

Macro / Industry Outlook:

• Interest Rates: Management anticipates one additional Fed hike in December 2026; portfolio yields expected to rise to ~3.5% with reinvestment opportunities at 4–5%, supporting NII growth.
• Market Environment: Assumes a "constructive but evolving" environment; expects volatility to moderate from Q2 levels but remain at "very high levels" relative to historical averages, sustaining trading revenues.
• FX Translation: Currency movements expected to have an immaterial impact on Q4 revenue and benefit expense growth by ~35 bps.
• Liquidity Backdrop: Broader market liquidity backdrop is expected to normalize as clients redeploy cash from deposits/money markets into fixed income.

Strategic Initiatives:

• AI Transformation:
  • Efficiency: "Byron" internal AI assistant deployed to answer partner queries; client action agents saving relationship managers 2–3 hours per client memo.
  • Productivity: AI-enabled digitization in alternative servicing doubled straight-through processing rates.
  • Onboarding: AI combined with enterprise-grade privacy accelerating institutional client onboarding.
  • Cost Management: Developing a flexible, multi-provider AI strategy (including Microsoft and frontier models) to manage rising token/compute costs and avoid single-vendor lock-in.
• Digital Assets:
  • Monetization: Momentum in tokenization, digital settlement, and stablecoin-related solutions; launching "Northern Institutional Fund's Stablecoin Cash Reserve Portfolio" to serve issuers.
  • Product Innovation: Tokenized share class for Treasury Instruments portfolio; building capabilities to bridge traditional and digital markets with institutional standards.
• Capital Allocation:
  • Dividends: Maintaining focus on covering the dividend as the primary capital priority.
  • Buybacks: Aggressive buyback program expected to continue into Q4 2026; no fixed quarterly amount, balanced against organic growth funding.
  • M&A: Actively seeking "bolt-on" acquisitions in wealth and asset management (liquidity-focused firms) if strategic fit and financial hurdles are met; prefers M&A over buybacks if strategic value exists.
• Operational Efficiency: "One Northern Trust" strategy continues to integrate capabilities across wealth, asset management, and servicing; reorganization around the COO office driving scalable growth.

Risks and Headwinds to Outlook:

• Market Volatility: Sustained low volatility could reduce FX and securities trading revenues below the elevated current run rates.
• Fixed Income Markets: Headwinds from lower fixed income market values and transaction volumes may dampen asset servicing fee growth in Q4 2026.
• Interest Rate Path: While currently constructive, a "flattening" yield curve or unexpected rate moves could impact NII assumptions and capital buffer requirements.
• AI Costs: Rising costs of compute and tokens pose a potential margin risk; requires successful scaling to offset.
• Competitive Pricing: Ongoing price compression in liquidity mandates and index mandates may pressure fee realization.

Management Tone on the Future:

• Confidence: High confidence in "disciplined" execution and the scalability of the "One Northern Trust" model; describes current operating leverage as "not a one-off" but a sustained trend.
• Strategic Focus: Shift from short-term quarterly metrics to a multi-year view, emphasizing client needs and product innovation over pure market beta.
• Talent & Culture: Emphasis on "augmented intelligence" as a durable force multiplier; viewing AI not just as a tool but as a strategic imperative to enhance service and integrity.
• Resilience: Confident in the business model's ability to generate positive operating leverage across different macroeconomic cycles.

Miscellaneous:

• Leadership Transition: CFO Dave Fox retiring after two years; CEO Michael Grady emphasizing the need for a new CFO with strong financial, strategic, and technological (AI/tokenization) acumen.
• Credit Quality: Portfolio remains "pristine" with only one isolated charge-off in the CRE portfolio; broader trends stable.
• Capital Ratios: CET1 ratio at 12.4% and Tier 1 leverage at 7.8%; management comfortable maintaining ratios between 11–12% despite rate uncertainty.
• Tax Impact: Q4 tax rate uplift driven by international operation assessments, not tax law changes.