Northern Trust Earnings Call: Record NII, Higher Targets

Northern Trust Corporation ((NTRS)) has held its Q4 earnings call. Read on for the main highlights of the call.

Northern Trust Leans on Record NII and Efficiency Drive Amid One-Off Charges

Northern Trust Corporation’s latest earnings call struck a cautiously upbeat tone, with executives emphasizing strong underlying operating performance despite headline pressure from notable charges. Record net interest income, healthy fee growth excluding one-offs, expanding assets under custody and management, and visible productivity gains painted a picture of a franchise gaining momentum. At the same time, severance costs and other notables weighed on reported results, kept the expense-to-fee ratio slightly above target, and highlighted ongoing balance sheet and deposit normalization risks. Management responded by raising medium-term profitability targets and committing to further AI- and productivity-led efficiencies while returning more than 100% of earnings to shareholders.

Revenue and Fee Growth: Solid Momentum Beneath the Noise

Fourth-quarter revenue rose 9% year-over-year excluding notable items, with full-year 2025 revenue up 7% on the same basis, underscoring healthy core growth in Northern Trust’s franchise despite optical pressure from prior-year one-offs. Trust, investment and other servicing fees — a key metric for the bank’s fee-driven business model — advanced 7% year-over-year in the quarter, supported by higher asset levels and sustained client activity across wealth, asset servicing and asset management. Management’s focus on fee expansion, particularly in higher-value advisory and servicing mandates, helped offset the drag from notable items, positioning the topline on a firmer footing than headline figures suggest.

Record Net Interest Income and NIM Tailwinds

Net interest income (on a fully taxable equivalent basis) climbed to a record $654 million in the fourth quarter, up 10% sequentially and 14% year-over-year, as Northern Trust benefited from a more favorable rate environment and active balance sheet management. Net interest margin improved to 1.81%, aided in part by a one-time FTE true-up, indicating better earnings on interest-bearing assets relative to funding costs. This record NII performance is notable for a trust bank whose business model is not primarily loan-driven, and it provided a critical offset to expense growth and market-related volatility elsewhere in the franchise.

Profitability Strength Ex-Notables: Margins and EPS Climb

Excluding notable items, Northern Trust delivered robust profitability, with pretax margin expanding to roughly 33% in the fourth quarter and 30% for the full year. Earnings per share rose 19% in Q4 and 17% for the year on this adjusted basis, while return on equity reached the mid-teens, with management highlighting a 14.8% ROE excluding notables. These metrics indicate that, beneath the impact of severance and other discrete charges, the underlying business is operating with improving efficiency and scale, and generating returns that support increased capital distributions and higher medium-term performance targets.

Rising AUC/AUM Underscore Franchise Scale

Northern Trust’s core strength in custody, servicing and wealth management was reflected in double-digit asset growth. Assets under custody and administration reached $17.4 trillion for asset servicing, up 11% year-over-year, benefiting from both market appreciation and new business wins. Overall assets under management rose 12%, while wealth management AUM increased 13% to $507 billion. This broad-based asset growth not only supports fee revenue but also reinforces Northern Trust’s positioning as a scaled global player across institutional and high-net-worth segments.

Capital Returns: Aggressive Buybacks and High Payouts

Capital return was a key theme, with Northern Trust returning $1.9 billion to shareholders in 2025, including a record $1.3 billion of share repurchases that reduced the share count by 5%. Payout ratios were around 113% in the fourth quarter and 111% for the full year, signaling a willingness to return more than the company earns in the near term. While this underscores management’s confidence in the earnings power and capital trajectory of the business, it also heightens the importance of closely monitoring regulatory capital ratios and balance sheet flexibility.

Productivity and Efficiency: Structural Cost Actions Taking Hold

Management highlighted significant productivity gains, with savings representing more than 4% of the expense base in 2025. Under the COO organization, Northern Trust increased managerial spans of control by over 35% and reduced management layers by more than 20%, signaling a structural effort to simplify the organization and flatten decision-making. With plans to raise its productivity target by 10% for 2026, the bank is clearly leaning on process redesign, technology and automation to drive scalable growth and positive operating leverage, even as it absorbs one-time restructuring and severance costs.

Business Unit Momentum Across Wealth, Asset Servicing and Asset Management

Operational momentum was evident across Northern Trust’s three major business lines. In Wealth, the Global Family Office unit delivered record new business, and international flows rose 15%, helping lift wealth trust fees to $578 million in Q4, up 6% year-over-year. Asset Servicing saw fees rise 8%, with custody and fund administration fees up 9%, and pretax profit growing 23% year-over-year — or roughly 40% excluding severance — reflecting scale benefits and new mandates. In Asset Management, the company recorded its 12th consecutive quarter of positive flows, with liquidity AUM approaching $340 billion, a doubling of product launches year-over-year including 11 ETFs, and $5 billion of net flows into its tax-advantaged equity suite. Together, these trends illustrate robust client demand and expanding distribution reach.

Strategic Progress: ‘One Northern Trust’ and AI-Led Scalability

Northern Trust emphasized its “One Northern Trust” strategy, highlighting tighter cross-business collaboration that is expanding its private markets footprint and boosting its capital markets presence, which now contributes more than one-third of enterprise revenue. The bank is also accelerating AI deployment through its NT Byron initiative and broader automation efforts, which management expects will support scalability, reduce manual processes and drive further operating efficiency. These strategic moves are designed to deepen client relationships, diversify revenue and position the firm competitively as digital and data capabilities become increasingly central in financial services.

Notable Items Weigh on Reported Results

Despite strong underlying trends, reported results were dampened by net unfavorable notable items totaling $69 million in the fourth quarter, including approximately $59 million of severance and a $19 million Visa-related expense. When these items are factored in, full-year 2025 revenue declined 2% and EPS fell 11% versus 2024, which had benefited from large favorable one-offs. The contrast between reported and ex-notable figures underscores the sensitivity of Northern Trust’s headline numbers to discrete items and helps explain why management repeatedly focused on underlying run-rate performance.

Expense Growth and the Expense-to-Trust-Fee Ratio

Expenses were a focal point, as reported operating costs rose 9% year-over-year in the fourth quarter. Excluding notables, expenses increased 5%, or about 3.8% when also excluding unfavorable currency effects. The expense-to-trust-fee ratio — a key efficiency metric for Northern Trust — came in at 110.8% excluding notables, slightly above management’s target of below 110%. While the overshoot was modest, it reinforces the need for continued cost discipline and supports the company’s shift toward managing to positive operating leverage and a downward trajectory in expense growth rather than a simple top-line expense target.

Severance Costs and Segment Margin Pressure

The sizable severance charge in Q4 pressured segment-level profitability, particularly in wealth management. Wealth pretax profit declined 3% year-over-year, and its pretax margin contracted by 300 basis points to 38.9%; even excluding severance, margin still compressed by about 120 basis points, reflecting ongoing investment and cost pressures. Asset servicing margins were also hit by severance but improved on an ex-notable basis. Management framed these actions as upfront investments to streamline the organization and unlock future productivity, but they temporarily weigh on the optics of segment performance.

Reported vs. Underlying Performance: A Year of Two Stories

Full-year reported metrics told a weaker story than the underlying business trends, with revenue down 2% and EPS down 11% after including all notable items. In contrast, excluding these items, Northern Trust delivered mid- to high-single-digit revenue growth, strong EPS expansion and healthier margins. This divergence highlights the volatility that discrete items can introduce into a fee-and-NII-driven model and explains management’s emphasis on normalized run-rate metrics when communicating the company’s earnings power to investors.

Balance Sheet and Capital: Leverage and Securities Marks in Focus

On the balance sheet, Northern Trust’s Tier 1 leverage ratio declined 20 basis points to 7.8%, primarily due to balance sheet growth. The company also reported unrealized after-tax losses of $401 million in its available-for-sale securities portfolio at quarter end, a reminder of rate-related marks that can affect capital and book value. Against this backdrop, the decision to return more than 100% of earnings through dividends and buybacks underscores confidence but also elevates the need for ongoing capital discipline and careful management of balance sheet expansion.

Deposit and Loan Normalization Risks

Deposits and loans showed some volatility that management expects to normalize. Average deposits increased late in the fourth quarter to $119.8 billion, boosted by temporary factors such as a government-related surge and seasonal dynamics, and are expected to revert toward more typical levels in the first quarter. On the lending side, wealth average loans fell 4% sequentially following the repayment of a large Global Family Office loan, while asset servicing loan volumes were down 8% year-over-year. These shifts highlight the episodic nature of certain client flows and the importance of managing funding and credit exposures through cycles.

Tax Rate and Currency: Small but Notable Headwinds

The effective tax rate ticked up to 26.5% in the fourth quarter, about 30 basis points higher year-over-year, and management expects a similar 26–26.5% range in 2026. Currency movements also shaped reported results, with foreign exchange offering a roughly 90-basis-point benefit to revenue but a 140-basis-point headwind to expenses year-over-year in Q4. While these impacts are modest compared with core business drivers, they add incremental variability to quarterly results and remain relevant for investors modeling earnings.

Guidance and Outlook: Higher Targets, Positive Leverage and Ongoing Buybacks

Looking ahead, Northern Trust guided to low- to mid-single-digit growth in full-year 2026 net interest income, assuming current interest rate paths and a relatively stable deposit mix, and aims to deliver more than 100 basis points of positive operating leverage. The company intends to continue returning more than 100% of earnings to shareholders and reiterated its expected 2026 effective tax rate of roughly 26–26.5%. Strategically, management is shifting away from a rigid expense-growth target toward a focus on positive operating leverage and a clear downward direction for expenses, while raising its medium-term goals to a 33% pretax margin and mid-teens return on equity and maintaining an expense-to-trust-fee target below 110%. Northern Trust is also targeting double-digit EPS growth through cycles and has increased its 2026 productivity target by 10% after already achieving productivity savings exceeding 4% of its 2025 expense base, with “medium term” defined as three to five years.

In summary, Northern Trust’s earnings call highlighted a company with strong underlying growth, record NII, improving margins and expanding assets, but whose reported results were temporarily clouded by severance and other notable charges. Management’s willingness to raise medium-term return targets, commit to further productivity and AI-driven efficiencies, and sustain outsized capital returns suggests confidence in the durability of its business model. For investors, the key watchpoints will be execution on cost and productivity goals, the path of deposits and capital ratios, and the company’s ability to translate its growing asset base and product momentum into consistent, double-digit EPS growth over the cycle.