Northern Trust raises ROE target to 13%-15% as One Northern Trust strategy builds momentum

Earnings Call Insights: Northern Trust Corporation (NTRS) Q2 2025

Management View

• CEO Michael Gerard O’Grady reported another quarter of improving results, stating, “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.”
• O’Grady highlighted progress on the multiyear One Northern Trust strategy, emphasizing integrated client solutions and strategic wins, including work with Timeline, a rapidly growing UK discretionary fund manager. He noted, “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.”
• The CEO spotlighted alternatives as a growth priority, mentioning a record fundraising year for 50 South Capital and that assets under advisement in alternatives advisory services are up 66% year-over-year. He pointed to a $1.25 billion private credit mandate as an example of Northern Trust’s bespoke solutions at scale. O’Grady added, “Our fund launch pipeline has tripled compared to prior years, reflecting strong client demand.”
• In Wealth Management, O’Grady described the launch of Family Office Solutions targeting ultra-high net worth clients, achieving a “higher than 75% win rate with a deep pipeline heading into the second half of the year.” The business was reorganized from three to four regions, with new leadership appointed in the West and Northeast and active investment in revenue-generating talent.
• Asset Management is expanding custom SMA offerings and launching 11 new fixed-income ETFs in the third quarter. O’Grady referenced a recent $1 billion equity mandate with the Public Investment Fund in Saudi Arabia as evidence of success with sophisticated clients.
• Asset Servicing now supports $16.9 trillion in assets under custody and administration, with assets under administration for alternatives approaching $1 trillion. O’Grady cited recent large client wins and noted, “Organic growth is accelerating with new business tracking well and at above-average profitability and overall margins improving significantly.”
• On cost management, O’Grady said, “Expense growth was 4.8%, and we're on track to achieve our full year goal of below 5%,” attributing this to AI-driven productivity gains and operational efficiencies.
• O’Grady announced, “we're changing our ROE target from 10% to 15% to 13% to 15%.”
• O’Grady stated, “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.”
• CFO David W. Fox reported, “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%.” Fox highlighted “fourth consecutive quarter of generating positive organic growth and positive operating leverage.”

Outlook

• Management reaffirmed guidance for total operating expense growth below 5% for the full year, excluding notable items and regardless of currency movements.
• Full-year net interest income (NII) is now expected to increase by mid-single digits over the prior year. Fox specified, “We now expect the full year NII to increase by mid-single digits over the prior year.”
• O’Grady stated the new ROE target is 13% to 15%.

Financial Results

• Net income for the quarter was $421 million, earnings per share $2.13, and return on average common equity 14.2%.
• Trust, investment, and other servicing fees totaled $1.2 billion, a 1% sequential increase and up 6% year-over-year.
• Net interest income on an FTE basis reached a record $615 million, up 7% from the prior period and 16% from a year ago.
• Assets under custody and administration were $16.9 trillion, up 7% sequentially and 9% year-over-year; assets under management were up 6% sequentially and 11% year-over-year.
• Asset Servicing business saw transaction volumes particularly strong; fees totaled $692 million, up 6% year-over-year; pretax margin rose to 23.2%.
• Wealth Management assets under management reached $469 billion, up 12% year-over-year; pretax profit increased 18% over the prior year period.
• Provision for credit losses increased to $16.5 million, mostly allocated to the Wealth segment.
• Second quarter expenses (excluding notables and currency impact) were up 3.8%, the lowest growth rate in six quarters.
• Board approved a $0.05 or 7% increase to the quarterly dividend.

Q&A

• Glenn Paul Schorr, Evercore: Asked about alternatives and fixed income ETF strategy. O’Grady responded that growth is driven by client demand (“pull”) and internal “push,” citing $2.5 billion raised in alternatives and an additional $1 billion in advisory. On ETFs, O’Grady explained the new products will focus on “municipal securities” and “fixed income ladders.”
• Betsy Lynn Graseck, Morgan Stanley: Asked about tightening the ROE target range and the expense ratio. O’Grady explained the move from 10%-15% to 13%-15% reflects greater confidence due to momentum and a constructive capital framework. He stated the expense-to-trust fee ratio target is 105%-110% and current progress is “at 115% now that's down from where it was.”
• Ebrahim Huseini Poonawala, Bank of America: Inquired about M&A and independence. O’Grady reaffirmed focus on independence and unique client value proposition. Fox clarified the approach to buybacks considers capital, earnings, and ROE, not just stock price.
• Michael Lawrence Mayo, Wells Fargo: Questioned the scalability and integration of the business model. O’Grady argued, “size does not necessarily equal scale,” emphasizing technology, centralization, and automation as drivers. Fox noted the Asset Owner segment already meets margin targets.
• Alexander Blostein, Goldman Sachs: Asked about timing to achieve 30%+ pretax margin target. O’Grady indicated “likely to be kind of 2027.” On NII, Fox discussed reinvestment opportunities and deposit mix.
• Kenneth Michael Usdin, Bernstein Autonomous: Sought detail on Asset Servicing fee drivers. Fox attributed strong transaction volume to market dislocation and noted two large client losses would be lapped post-Q3.
• David Charles Smith, Truist: Asked about deposit strength. Fox cited a “risk-off trade” and large euro deposits from clients, with normalization expected in Q3.
• Brian Bertram Bedell, Deutsche Bank: Focused on Wealth Management efficiency and digital initiatives. O’Grady detailed AI and automation to enhance client delivery and partner efficiency, aiming for scalable growth across client segments.
• Thomas Arthur Leddy, RBC: Asked about stable coins and regulatory relief. O’Grady said, “we're excited by the direction of what I'll just call more broadly, digital assets,” and sees a constructive regulatory environment.
• Vivek Juneja, JPMorgan: Questioned why the Asset Servicing margin target is high 20s. O’Grady said the model is integrated and targets would rise as performance improves.
• Brennan Hawken, Bank of Montreal: Pressed on independence and shareholder value. O’Grady emphasized the board’s fiduciary duties and stated the One Northern Trust strategy is “nowhere near finished.”

Sentiment Analysis

• Analysts’ tone was neutral to slightly negative, with questions emphasizing independence, capital deployment, scalability, and the pace of growth initiatives. Some skepticism appeared regarding shareholder returns and the company’s stock performance versus peers.
• Management maintained a confident tone, especially during prepared remarks, frequently referencing momentum, execution, and discipline. During Q&A, O’Grady’s responses were measured but assertive, using phrases like “we believe” and “we’re extremely focused on it.”
• Compared to the previous quarter, management expressed increased confidence, particularly with the ROE target raise and more assertive statements around strategy and independence.
• Analyst skepticism regarding independence and capital returns was more pronounced than last quarter, while management’s tone signaled greater conviction in the strategy.

Quarter-over-Quarter Comparison

• The updated ROE target of 13%-15% replaces the previous 10%-15% range, reflecting increased management confidence and improved performance.
• Revenue growth, operating leverage, and organic growth continued for the fourth consecutive quarter, building on momentum from Q1.
• Management detailed more advanced implementation of AI and operational efficiencies compared to prior calls.
• Strategic initiatives in alternatives, ETFs, and Family Office Solutions showed measurable progress, with specific metrics provided.
• Analyst focus shifted more heavily toward issues of independence, M&A, and shareholder value compared to the previous quarter’s heavier emphasis on market volatility and expense flex.
• Management’s tone was more assertive, particularly in defending strategic independence and articulating the integration benefits of the One Northern Trust model.

Risks and Concerns

• Management cited increased provision for credit losses due to a small number of nonperforming loans but expects normalization in subsequent quarters.
• Analyst questions highlighted ongoing risks around market share, scalability, and pace of margin improvement.
• Management noted client concentration in deposits and some large client losses in Asset Servicing, with normalization expected by Q4.
• Regulatory and market changes, including digital assets and stable coins, are areas of active monitoring.

Final Takeaway

Northern Trust’s second quarter reflected ongoing positive momentum from the One Northern Trust strategy, with management raising the ROE target to 13%-15% and reporting strong organic growth, margin expansion, and targeted investments in technology and talent. The call addressed shareholder concerns about independence, scalability, and capital deployment, reaffirming a commitment to long-term value creation through integrated solutions, operational efficiency, and disciplined execution across businesses.

Read the full Earnings Call Transcript