Ken Houston

Kenneth Houston questioned the strong Net Interest Income (NII) exit in Q4, asking what factors might have led to 'over-earning' that may not continue. He also followed up on the delta of the terminated swaps burden from Q3 to Q4 and its projection into the next year.

Answer

CFO John Woods explained that Q4 NII strength was partly due to seasonal factors in deposit mix, particularly non-interest-bearing balances, which might moderate in 2026. He noted that while Q4's Net Interest Margin (NIM) was 110 basis points, the full-year 2025 NIM was 100 basis points, and 2026 is expected to be higher than 2025 but potentially lower than the Q4 run rate. He confirmed that terminated hedges would continue to be a tailwind, contributing about 2 basis points in Q4 with some lumpiness, and will have a positive impact into 2026.

Kenneth Houston asked about the strong Net Interest Income (NII) performance in Q4 2025, identifying any seasonal or non-recurring factors, and the expected impact of terminated swaps on NII going forward.

Answer

CFO John Woods explained that Q4 NII benefited from seasonal factors, particularly strong growth in non-interest-bearing deposits, which are expected to moderate in 2026. He noted that the Net Interest Margin (NIM) is projected to rise in 2026, albeit potentially lower than the Q4 2025 run rate but higher than the full year 2025. Terminated hedges provided a tailwind of approximately two basis points in Q4 and are expected to continue contributing positively in 2026 with some quarterly lumpiness.

Ken Houston with Autonomous asked for an update on the expected trajectory and installation pace of State Street's servicing fee wins, particularly concerning Alpha mandates, and how installations are progressing. He also inquired about the magnitude of operating leverage the company is capable of and CFO John Woods' approach to balancing savings and strategic investments for expense growth.

Answer

CFO John Woods noted a $400 million backlog in servicing fees at 9/30, with half expected to be installed by year-end and a significant portion by end of 2026. CEO Ron O’Hanley confirmed being on track with installation goals, emphasizing improved repeatability and faster implementation for newer Alpha mandates. John Woods added that the backlog mix is attractive, focusing on back office and private markets. Regarding operating leverage, John Woods explained that year-over-year expense growth includes FX and revenue-related costs, with underlying net investment supporting productivity. CEO Ron O’Hanley highlighted ongoing transformation efforts, aiming for $500 million in savings this year, and leveraging AI for productivity and client experience improvements.

Ken Houston asked about the dynamics of Northern Trust's Assets Under Custody and Administration (AUCA) growth, specifically the 1% increase despite new business wins and some outflows, questioning if this was a normal or unusual quarter. He also sought further insight into the company's commitment to sub-5% expense growth and future strategies to maintain this level.

Answer

CFO David Fox explained that AUCA growth was impacted by individual client restructurings, particularly an asset manager moving from mutual funds to a less expensive CIT structure, noting the low fee realization on these assets. He reaffirmed the commitment to below 5% expense growth for Q4 and the full year, highlighting ongoing efforts to 'bend the cost curve down' and anticipate greater productivity in 2026.

Ken Houston asked for clarification on the 1% increase in Assets Under Custody and Administration (AUCA), reconciling new business wins with reported outflows, especially given overall market strength. He also inquired about Northern Trust's continued commitment to sub-5% expense growth, positive operating leverage, and future strategies to maintain expense control.

Answer

David Fox, Chief Financial Officer, explained that AUCA growth was influenced by individual client movements, including an asset manager's restructuring from mutual funds to a less expensive CIT structure, which impacted assets but not client relationships. He noted the fee realization on the degraded AUCA would be minimal. Fox reaffirmed the commitment to below 5% expense growth for Q4 and the full year, emphasizing ongoing efforts to 'bend the cost curve down' and anticipate greater productivity in 2026.