Northern Trust Corp (NTRS) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation Third Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mark Bette, for opening remarks and introductions. Please go ahead.

Thank you, Todd. Good morning, everyone, and welcome to Northern Trust Corporation's Third Quarter 2018 Earnings Conference Call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; and Kelly Lernihan from our Investor Relations team. For those of you who did not receive our third quarter earnings press release and Financial Trends Report via e-mail this morning, they 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 October 17 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through November 14. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our safe harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2017 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.

(Operator Instructions) Thank you again for joining us today. Let me turn the call over to Biff Bowman.

Good morning, everyone. Let me join Mark in welcoming you to our third quarter 2018 earnings conference call.

Starting on Page 2 of our quarterly earnings review presentation. This morning, we reported third quarter net income of $374.5 million. Earnings per share were $1.58, and our return on common equity was 15.1%. As noted on the second page of our earnings release, this quarter's results included a $8.1 million community development investment impairment within other operating income, $2.7 million of severance-related and restructuring charges within expenses, a $5.5 million tax benefit relating to adjustments recorded in the current quarter associated with the IRS guidance issued with respect to the Tax Cuts and Jobs Act.

Before going to our results in detail, I would like to comment on some macro factors impacting our business during the quarter. Equity markets had a favorable impact on us during the quarter. End-of-period markets were favorable on a year-over-year basis, with the S&P 500 and MSCI EAFE indices increasing 15.7% and 2.3%, respectively. On a sequential basis, both indices also increased, with the S&P 500 up 7.2% and the EAFE up 1.8%. Also on a sequential basis, the average daily market value of the S&P 500 was up 5.4%, while the EAFE declined 0.2%. As you will recall, some of our fees are also based on lagged pricing, and in the prior quarter, the S&P 500 was up 2.9% while the EAFE was up 2.5%.

Short-term interest rates continued to increase during the quarter, driven by a rate hike from the Federal Reserve as well as from the Bank of England. Currency rates influenced the translation of non-U. S. currencies to the U.S. dollar and, therefore, impact client assets and certain revenues and expenses. The British pound and euro versus the U.S. dollar ended the quarter down 3% and 2%, respectively, compared to the prior year. The British pound and euro also declined sequentially. The year-over-year and sequential declines for the pound and euro against the U.S. dollar had an unfavorable impact to revenue and a favorable impact to expense.

Let's move to Page 3 and review the financial highlights of the third quarter. Year-over-year, revenue increased 9%, with noninterest income up 8% and net interest income up 14%. Expenses increased 7% from last year. The provision for credit losses was a credit of $9 million compared to a credit of $7 million 1 year ago. Net income was 26% higher year-over-year.

In the sequential comparison, revenue declined 2%, with noninterest income down 2% and net interest income down 1%. Expenses increased 1% compared to the prior quarter. Net income declined 4% sequentially.

Return on average common equity was at 15.1% for the quarter, up from 12.2% 1 year ago but down from 16.5% in the prior quarter. Assets under custody and administration of $10.8 trillion increased 12% compared to 1 year ago and increased 1% on a sequential basis. Approximately half of the year-over-year growth was driven by the acquisition of UBS Asset Management's fund administration units in Luxembourg and Switzerland.

Assets under custody of $8.2 trillion increased 6% compared to 1 year ago and were up 1% on a sequential basis. The year-over-year growth was driven by favorable market impacts and new business, partially offset by unfavorable moves in currency exchange rates. The sequential growth was primarily due to favorable markets, partially offset by unfavorable moves in currency exchange rates.

Assets under management were $1.2 trillion, up 4% year-over-year and up 2% on a sequential basis. The year-over-year increase was driven by favorable markets and new business flows, while the sequential increase was primarily related to favorable markets, partially offset by lower end-of-period securities lending collateral levels as well as unfavorable moves in currency exchange rates.

Let's look at the results in greater detail, starting with revenue on Page 4. Third quarter revenue on a fully taxable equivalent basis was $1.5 billion, up 9% from last year and down 2% sequentially. Excluding the acquisition, revenue was up approximately 8% from last year. Trust, investment and other servicing fees represent the largest component of our revenue and were $939 million in the third quarter, up 8% year-over-year and down slightly from the prior quarter. Excluding the UBS acquisition, fees were up approximately 6% on a year-over-year basis.

Foreign exchange trading income was $72 million in the third quarter, up 46% year-over-year and down 9% sequentially. The year-over-year increase was primarily due to increased foreign exchange swap activity in our Treasury function as well as higher client volumes. The sequential decline was driven by lower client volumes.

Other noninterest income was $55 million in the third quarter, down 25% compared to 1 year ago and down 22% sequentially. The year-over-year decline was primarily due to the previously mentioned investment impairment, lower impacts from net hedge activity, a decline relating to the valuation of existing swap agreements related to Visa Class B common shares and lower banking and credit-related service charges. The sequential decline was also impacted by the investment impairment and the Visa swap valuations as well as lower security commissions and trading income, lower treasury management fees and lower banking and credit-related service charges. Net interest income, which I will discuss in more detail later, was $418 million in the third quarter, increasing 14% year-over-year and down 1% sequentially.

Let's look at the components of our trust and investment fees on Page 5. For our Corporate & Institutional Services business, fees totaled $541 million in the third quarter, up 8% year-over-year but down 2% on a sequential basis. Approximately 1/2 of the year-over-year growth was due to the UBS acquisition. The translation impact of changes in currency rates reduced year-over-year C&IS fee growth by approximately 0.5 points.

Custody and fund administration fees, the largest component of C&IS fees, were $375 million, up 11% compared to the prior year and down 1% sequentially. This line does include the UBS acquisition-related fees. Excluding these fees, custody and fund administration fees were up approximately 4% compared to the prior year. The year-over-year growth was driven by new business and the impact of favorable markets, partially offset by currency translation. The sequential decline was primarily due to the unfavorable impact of currency translation and lower transaction volumes, partially offset by favorable markets.

Assets under custody and administration for C&IS clients were $10.2 trillion at quarter-end, up 12% year-over-year and up 1% sequentially. Approximately half of the year-over-year growth was attributable to the UBS fund administration acquisition. Excluding the acquisition, the year-over-year increases primarily reflect favorable markets and new business, partially offset by unfavorable currency translation.

Sequentially, the benefit of markets were partially offset by unfavorable movements in foreign exchange rates. Recall that lagged market values factor into the quarter's fees, with both quarter-lagged and month-lagged markets impacting our C&IS custody and fund administration fees.

Investment management fees in C&IS of $109 million in the third quarter were up 4% year-over-year and down 4% sequentially. The year-over-year growth was primarily due to favorable markets and a change to gross revenue presentation for certain clients. The sequential decline was primarily due to outflows and adjustments made in the prior quarter due to a change to gross revenue presentation for certain clients.

Assets under management for C&IS clients were $876 billion, up 4% year-over-year and up 2% sequentially. Favorable market impacts and net new business were the drivers of the year-over-year growth. The sequential performance was driven by favorable market impacts, partially offset by a lower level of end-of-period securities lending collateral as well as unfavorable movements in foreign exchange rates.

Securities lending fees were $24 million in the third quarter, up 6% year-over-year but down 20% sequentially. On a year-over-year basis, higher volumes were partially offset by lower spreads. The sequential quarter decline reflects the typical season patterns, with the international dividend season driving wider spreads in the second quarter of each year. Securities lending collateral was $167 billion at quarter-end and averaged $170 billion across the quarter. Average collateral levels increased 14% year-over-year but declined 8% sequentially.

Other fees in C&IS were $34 million in the third quarter, down 7% year-over-year and up 4% sequentially. The year-over-year decline reflects lower sub-adviser fees. The lower income associated with sub-adviser fees has an associated lower expense in the outside services category. This decline in sub-adviser fees is consistent with the prior 3 quarters, when we discontinued the service offering. The decline in sub-adviser fees was partially offset by higher fees associated with other ancillary services such as risk and analytics services. The sequential growth was also driven by higher fees associated with ancillary services.

Moving to our Wealth Management business. Trust, investment and other servicing fees were $398 million in the third quarter, up 9% year-over-year and up 2% sequentially. Within Wealth Management, the Global Family Office business fees increased 9% year-over-year and were flat sequentially. The year-over-year growth was driven by new business and favorable markets. Sequential performance reflects new business and favorable markets, partially offset by a decline in transaction volumes.

Within the regions, the year-over-year growth was driven by favorable markets, higher fees resulting from the adoption of the new revenue recognition standard and new business. Sequential performance benefited from favorable markets and new business as well as higher service-related fees. Assets under management for Wealth Management clients were $296 billion at quarter-end, up 4% year-over-year and up 3% sequentially.

Moving to Page 6. Net interest income was $418 million in the third quarter, up 14% year-over-year. Earning assets averaged $113 billion in the third quarter, essentially flat with the prior year. Total deposits averaged $94 billion and were down 4% year-over-year. Interest-bearing deposits declined 2% from 1 year ago to $74 billion. Noninterest-bearing deposits, which averaged $19 billion during the third quarter, were down 11% from 1 year ago. Loan balances averaged $32 billion in the third quarter and were down 5% compared to 1 year ago. The net interest margin was 1.47% in the third quarter and was up 18 basis points from a year ago. The improvement in the net interest margin compared to the prior year primarily reflects the impact of higher short-term interest rates and lower premium amortization, partially offset by a balance sheet mix shift.

On a sequential quarter basis, net interest income was down $4 million or 1%. Average earning assets declined 2% sequentially, driven by decreases in deposits. On a sequential basis, the net interest margin decreased 1 basis point as the favorable impact of higher short-term rates was offset by balance sheet mix and day count.

As we have discussed in our most recent quarters, we did continue to see the opportunity for foreign exchange swap activity with our Treasury function. This activity has the impact of reducing our interest income relating to central bank deposits as we swap out of U.S. dollars but increase our level of foreign exchange trading income. For this quarter, we saw additional foreign exchange trading income of $19 million, offset by $17 million less in net interest income.

Looking at the currency mix of our balance sheet, for the third quarter, U.S. dollar deposits represented 69% of our total deposits. This compared to 70% 1 year ago and is unchanged from the prior quarter.

Turning to Page 7. Expenses were $1 billion in the third quarter and were 7% higher than the prior year and up 1% on a sequential basis. As previously mentioned, the current quarter included $2.7 million in expenses associated with severance and other charges. For comparison purposes, note that 1 year ago, our results included severance and other charges of $7 million, while the prior quarter included $6.6 million in severance and other related charges. The UBS acquisition contributed just under 2.5 points of year-over-year growth. Excluding both the UBS acquisition and the called out charges, expense for the current quarter was just over 5% higher than a year ago.

With respect to the remaining increase in year-over-year expense growth, the following items were key drivers within the categories. Compensation was higher, driven by increased incentive compensation and this year's base pay adjustments, which were effective in April. The impact of staff growth on salaries was more than offset by staff actions and our ongoing location strategy efforts. Benefits were higher primarily due to an increase in retirement plan expenses, medical costs and higher payroll tax withholding compared to the prior year. Outside service costs were higher, driven primarily by higher technical services expense and third-party adviser fees, partially offset by lower consulting, legal and sub-adviser expenses. There was a corresponding increase to trust, investment and other servicing fees as a result of the higher third-party adviser fees due to the change to gross revenue presentation.

Equipment and software expenses was up year-over-year due to higher software amortization and disposition charges. Occupancy-related costs were higher compared to the prior year, primarily relating to higher building operation costs, real estate taxes and rent expense. Other operating expenses were up slightly from the prior year due primarily to higher business promotion and other miscellaneous expense.

Shifting to the sequential expense view. Excluding the expense charges in both the current and prior quarter, expenses were up 1%, primarily reflecting higher other operating expense, partially offset by a decline in compensation expense. Compensation expense declined sequentially due to lower equity and cash-based incentives. The decline in equity incentives was driven by lower expenses related to long-term performance-based incentive compensation resulting from higher charges recorded in the prior quarter associated with grants to retirement-eligible employees.

Other operating expense increased 29% from the prior period, driven by higher business promotional spend primarily associated with the Northern Trust golf tournament, which was held during the quarter, as well as other miscellaneous expense. Staff levels increased approximately 4% year-over-year and less than 2% sequentially. Approximately 1/2 of the year-over-year staff growth was the impact of the UBS acquisition. The remainder of the growth was all attributable to staff increases in lower-cost locations, which include India; Manila; Limerick, Ireland; and Tempe, Arizona, partially offset by reductions in our higher-cost locations.

Turning to Page 8. As we have discussed on previous calls, through our Value for Spend initiative, we are realigning our expense base with the goal of realizing $250 million in expense run rate savings by 2020. Concurrently, we are embedding a sustainable expense management approach. We expect these efforts to slow our expense growth to be more closely aligned with our organic fee growth.

Our third quarter results reflect approximately $28 million in expense savings, reducing the year-over-year expense growth rate by approximately 3 points. This would equate to approximately $114 million on an annualized basis against the $250 million goal. We continue to cultivate a healthy pipeline of opportunities.

Turning to Page 9. A key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we've made in recent years to improve the expense-to-fee ratio, pretax margin and, ultimately, our return on equity. The ratio of expenses to fees is a particularly important measure of our progress as it addresses what we can most directly control. Reducing this measure from where it was previously, as high as 131% in 2011, to the levels we see today is a key contributor to the improvement in our pretax margin and, ultimately, our return on equity.

Turning to Page 10. Our capital ratios remained strong with our common equity Tier 1 ratio of 13.4% under the advanced approach and 12.9% under the standardized approach. The supplementary leverage ratio at the corporation was 6.9% and at the bank was 6.4%, both of which exceed the 3% requirement that became applicable to Northern Trust effective at the start of the year. With respect to the liquidity coverage ratio, Northern Trust is above the 100% minimum requirement that became effective at the start of 2017. As Northern Trust progresses through fully phased-in Basel III implementation, there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules.

In the third quarter, we repurchased 2.2 million shares of common stock at a cost of $236 million. We also increased our dividend 31% to $0.55 per quarter (sic) [per share]. These 2 actions combined represent a payout ratio of just over 100% for the quarter.

In closing, Northern Trust continued to deliver solid financial results in the quarter, growing earnings per share 32% over the prior year and achieving return on average common equity of 15.1%. Importantly, as we seek to drive profitable growth, we delivered positive fee operating leverage and positive operating leverage on a year-over-year basis. As compared to the prior year, our organic fee and expense growth rates were better aligned.

Performance has also been strong on a year-to-date basis with earnings per share growth of 42% and return on average common equity of 15.9%. Through 3 quarters, we have achieved 4.4 points of positive operating leverage and 3.5 points of positive fee operating leverage.

Profitability continues to be strong in each of our businesses. On a year-to-date basis, our Wealth Management business grew pretax income by 18% versus 1 year ago while improving the pretax margin from 39% to 42%. Our C&IS business similarly drove strong year-over-year performance, with pretax income growing 33% and pretax margin improving from 30% to 33%. Both businesses delivered strong year-over-year fee operating leverage and total operating leverage.

The consistency of our relationship-focused strategies positions us as a leader in attractive markets. We are focused on continuing to invest for the future to accelerate our growth and improve our profitability.

Thank you again for participating in Northern Trust Third Quarter Earnings Conference Call today. Mark and I would be happy to answer your questions. Todd, please open the line.

(Operator Instructions) We have our first question from Michael Carrier with Bank of America.

Biff, so my first question, just on the C&IS, I guess the assets and then the fund administration and investment management revenues. Like when I look sequentially, it just seems like when we look at the market trends, whether it's end of period, average and lag, it still seems like the growth rates, there's something else that's off. And I understand the FX, too, but when we look at the markets, we usually include those in the market returns. So I'm just trying to understand, on a sequential basis, like was there anything else that was impacting the growth rate, both in the custody and fund administration and investment management? Because both came in lighter relative to sort of the market expectations.

Yes. So let me walk you through. There was a sequential decline, as you pointed out, and I'll try to add color to that. If we look, we were down about $11 million sequentially. About half of that, about $6 million of that was securities lending fees, which have, as you know, some sequential between the second and third quarter, some seasonality. That was driven, really, by lower volumes, lower borrower demand, particularly in global equities. And the spreads tightened as we saw versus LIBOR in that. Then you get to investment management fees. They were also down sequentially about $4 million -- a little over $4 million. About half of that decline was driven by what I would say there were some outflows and modest repricing captured in that line. So that drove some of that, along with we had a -- about half of that $4 million was from a net-to-gross true-up in the second quarter, so a couple million dollars from that, that we -- when we lap it sequentially, it creates some of the variance. And then you get to the custody and fund administration fees and the growth rate there or lack of growth rate there. There was some currency translation, as you put out. But I think it's important to remember that transaction volumes are also a factor in this line item. And somewhere between 20% to 25% of our C&IS custody and fund administration fees are really driven by transaction volumes. They're not driven by market levels. So that was an important driver in the decline there. As it relates to growth in the business or organic growth in the business, I'd like to bring this point out. I think that when we look at organic growth in our businesses, we like to look at it on a year-to-date or over longer periods of time. And when we look at where we are through 3 quarters of this year, we're in the range that we've discussed with you around the organic growth rates in our businesses, and we talked about that being in the 4% to 5% range as a firm. We're in that year-to-date. In quarter, in any given quarter, we could be slightly lower than that. In this quarter, we were slightly lower than that, and particularly, in the C&IS business, we were below their trend rates. That being said, as we look out into the fourth quarter, where we have known new business implementations both in our pipeline and known new business implementations, we still feel very good about getting to that historical organic growth rate that we've talked to you about. In any given quarter, that could potentially drive the fees going directionally a different way. But we feel good about what we know in the fourth quarter. Some implementations, particularly in the C&IS business, can be pushed from quarter to quarter, and that can cause a little bit of fluctuation in any one given quarter. But we still, like I said, feel good about the year's view of the organic growth rate in both of our businesses, quite frankly.

Okay. And then just a follow-up. Just on the net interest revenue, you mentioned the $17 million, I think, that was included as a headwind given the swap activity. I guess just when we think about going forward, any way to think about like how much of that activity will continue?

And then given the reduction that you saw on the deposit side, your comments on the growth organically, just any kind of outlook in terms of how we should be thinking about the balance sheet going forward.

Okay. So a couple of questions in there, right? I've got a balance sheet question and then the FX trade. So let me -- on the FX trade, as we pointed out, it was $19 million of additional FX in the quarter but with a $17 million net interest income give-up in the quarter. One of the ways to look at this is the...

3-month cross currency. The U.S. dollar-euro swap is one that you can look at because euro is an area where we have been doing these trades during this quarter.

Yes. So if you go on to Bloomberg, you can look at that and pull that up, and if that spread narrows, that trade becomes -- there's more NII give-up and less FX spread over that. So that's one way on that line item. We will continue to look at that and determine if it's in the best interest of our shareholders to leave that trade on or not, and we just have to look at market trends and where we are. So far, in the quarter, that trade, particularly euros versus dollars, is still profitable for our shareholders, and that's what we'd see if you looked at it on the Bloomberg terminal.

And that's something, Mike, that we'll look to give an update on as we get later into the quarter and we have an opportunity.

In terms of the second part of your question, which is probably getting to what others would say around the balance sheet. What I would say on the balance sheet is this. We certainly continue to monitor the noninterest-bearing deposits and have regular dialogues with our clients. You saw the $2 billion or so that came off of our balance sheet in noninterest-bearing deposits in the quarter. We provide them with a number of solutions for their liquidity needs, whether that's on-balance sheet, off-balance sheet, et cetera. As far as the declines we saw this quarter on that $2 billion, about 40% of that decline was within the category that we've discussed before here, which represents mainly from our fund services business. And these would be asset managers and hedge funds, et cetera. This is also the category that we saw the most declines in when you think back to the second quarter and third quarter of 2017. What we do believe is that most of what remains within that category is now just under $5 billion -- which is now just under $5 billion, is that there is -- they're there for day-to-day operational needs, that we are actually seeing the interest rate sensitivity in that bucket. Most of those clients, we think the balances that stay with us are there for operational needs, so i.e. we have seen much of the rundown in that bucket that we think we would see. If you look at the remainder of where that $2 billion went, the other part of the $2 billion was split, really, between 2 categories. The first was what I would say is our global institutional asset servicing business or kind of BAU custody business. And I think those deposits can ebb and flow from a quarter-to-quarter basis, depending on our clients' cash and capital deployments. They're just putting it to work as a part of their regular BAU, business-as-usual, dealings. We see this kind of fluctuation on a regular basis. And then the last portion of that $2 billion was really more around our treasury management or commercial DDA-type accounts. And that's quite transactional in nature. And so we can see that kind of volatility to that was a little bit more pronounced than we would normally see, but it was a little bit more in the commercial DDA bucket.

We'll take our next question from Ken Usdin with Jefferies.

On the outflows, I guess the bigger question is, is that -- it's really tough to just game -- just the size of the balance sheet moving forward. And I guess I want to just ask you, underneath all that, do you still see or expect to see deposit growth from core customers as the business grows? Or are we still at the point where we're just going to be sun-setting the proportion, the noninterest-bearing directionally, and we might not see the overall balance sheet grow that much from here? How do you guys think about that big picture?

Yes, we do, Ken. We think we will still get that growth from the core custody business, and we do a lot of modeling around that as we need to do to understand, for instance, our liquidity coverage ratio and others. But there's significant correlation between our growth in AUC and other things that absolutely drive the balance sheet larger, but we've got to continue to grow the core business. But we do believe that the balance sheet will grow from core asset servicing wins over time. There could be some bumpiness in that as we look at the balance sheet and it seeks certain yield. But I think over long periods of time, if we continue to grow the franchise with the organic growth rates we've talked about here, we will see the balance sheet respond with that type of growth as well.

Okay. And then within the buckets, can you just talk about just deposit pricing? Interesting, we saw not unexpected faster deposit pricing, at least in terms of the rates paid sequentially, even with some of the declines shown in the savings money and other. So can you just talk to us about the trajectory there and split it across the businesses like you've done in the past? Where have you gotten to in terms of those betas? And how are deposits continuing to act in that regard?

Yes, sure. I'll start off by saying I think we have a very disciplined process when it comes to our deposit pricing, but we've got to be competitive. So if I look at deposit betas, I'd offer you some of the following color. It's a little difficult to just look at 1 quarter, but I'm going to try to break this apart for you because -- I'm sorry, if we look at just 1 quarter, we can have catch-ups, and I think you need to look at the deposit betas over a longer period of time, perhaps, looking at it on a couple of quarters or a year. So if you look at our betas over the last couple of quarters, here's what I would say. For the U.S. dollar portion of our non-U. S. office deposits, we're probably between a 65% and a 75% beta. The vast majority of these deposits, as you know, are institutional-type deposits. Roughly 55% of our non-U. S. deposits are U.S. dollar, and there's also some wholesale deposits within that mix. If you look at the savings, money market and other line or think of that as largely our Wealth Management deposits, or a portion of them, we are probably in the 50% to 60% range for betas over the last couple of quarters in aggregate. I think that line includes our retail Wealth Management deposits, as I just said, which are a little bit below that range. But there's also some institutional deposits in this savings, money market and other line, which are above that range, which brings the blend somewhere into that 50% to 60% range. And then I'd just add that we continue to monitor what money funds and other alternatives bring in terms of the viability of those inside and the competitiveness of those as we think about the betas going forward. So hopefully, that's enough color.

And then, Ken, I think you had also asked about the decline that we saw in savings, money market and other. And within that bucket, about 75% of that is Wealth Management deposits. And that is where we saw declines during this quarter, was on the Wealth Management side. And we did see, of that, about half of that would have moved into off-balance sheet funds. And then what's left would kind of split between whether there was deployment from clients, whether it was investments or debt pay-downs. And then there were some that we would have seen of that other bucket that would have just left our balance sheet or the balances were pulled down by clients.

We'll take our next question from Brennan Hawken with UBS.

Actually, I just want to follow up on that last comment. I believe, Mark, that you made about the proportion of the decline in the noninterest-bearers rolling onto the balance sheet. Given those dynamics, does that result in a bit of a catch-up on the deposit cost when you see those Wealth Management clients roll into interest-bearing? And can that put some temporary upward pressure on what would look like a single-quarter beta, which I think, Biff, you referenced earlier?

Yes. One thing I would say, Brennan. So the decline that we saw in Wealth Management deposits, the noninterest part of Wealth Management deposits was actually pretty stable for the quarter. The decline that we saw was in the interest-bearing side for the Wealth Management deposits.

It was already in there. But Brennan, to the larger point you brought up there, that's why I tried to say, in any given quarter, the betas can look large if there's catch-up from either being slightly lagging market and disciplined -- and we really do try to look at them over a year or some longer period of time to understand how the beta has actually moved. In any given quarter, there could be pricing catch-up. Sometimes, there can be pricing slowdowns if we got ahead in any quarters. This quarter would look like more like pricing catch-up in some of the lines.

Okay, that's really helpful. And then when we think about the transactional volumes, which you referenced having an impact on the C&IS rate, so to speak, the way we kind of have to model it from the outside, was that transactional weakness fairly consistent through the quarter? Or was September particularly weak? And then I'm guessing, when you think about fourth quarter, given your comments about looking at the pipeline and your outlook and an expectation of rebound, that would suggest that fourth quarter volumes look like a return to a more normal pace. Is that fair?

Yes. They were slower in the early part of the quarter and certainly slowest in August, with some pick up a little bit in September, particularly as we got near the end of September. And I don't have the numbers through October. We'll give you some color on that in December. But I would say the earlier quarter was the slower periods from transactions.

We'll take our next question from Brian Bedell with Deutsche Bank.

Not to beat the dead horse on the deposit beta, but maybe just coming at it from 1 different angle on the noninterest-bearing side. Just looking at the last tightening cycle in '04, '06, and I appreciate the company is structured a little bit different, but just looking at noninterest-bearing versus total deposits, I think that came down from something like 20% or 21% at the start of that cycle down to about 11% to 12% by the end of the cycle. This cycle, so far, you're starting in at around 28%, and now you're down to about 21%. So just -- and again, that's the noninterest-bearing deposits divided by the total deposits. I just wanted to understand the nature of the structural difference and in thinking about that bucket going forward from here. Sorry if I missed the breakout of the total balance between Wealth Management and C&IS, but if you could bifurcate that just so we could understand maybe some of the risks to that on, at least, the Wealth side. And of course, you mentioned money market products being another substitute. How do you view clients switching into those types of products?

Okay. Here's what I'd say. I think we have a fairly significant different business mix between 2004 and 2006 when you look at the construct of the balance sheet. There are more institutional, large institutional Asset Management-type clients that exist on the balance sheet for that period of time. So that measure you have of it moving from 20% to, let's call, 12% over that period of time may not necessarily translate to now because the mix of clients on the balance sheet could be fairly meaningfully different. We did our largest acquisition in the GFS space in 2005, and it's moved to be a much different proportionality of our business. If I look at that mix though of the $19 billion, the second part of your question, was sort of how is that $19 billion mix today. First, let me start off, about 90% of that is in dollars. Just under 90% of it's in dollars, about 87%. And then about 30% of that is in Wealth Management deposits. 20% is what I'd say are in support of our treasury cash management business. And then the remaining 50% is really attributable to what I just described, the C&IS business. Some core and some supporting asset managers in there. So that's kind of the breakdown of that $19 billion to $20 billion. But I wouldn't want to presuppose that it moves back down to 11% or 12% as a percent of the balance sheet because our mix is different. I don't have that answer, but I think that you can make that assumption correctly given the different business mix for the company. And that need for that cash to be there to support large asset managers' activities.

Right, right. That's super helpful. And then just to follow up, I guess, just on the expense side. How should we think about your target on that expense to trust fee ratio and bringing that down? How should we think about that behaving if we have more pressure on the equity markets that would obviously reduce the denominator of that? Or do you feel that you can be responsive on the expense side to downturns in market-based fees? Or should we just think of that as sort of a natural outcome of any pressure in the market that, that expense to trust fee ratio may drift back up?

So I would say -- let me give you a longer-term view first, is we absolutely think that we can continue to drive that lower with things like Value for Spend and a lot of initiatives that we have going on. In the short term, to be able to react to market volatility or down drafts in the market in any given quarter, that may be difficult. Remember that some proportionality of our expenses are going to move with that same market decline. So they move directionally with that, so we get that benefit. But there are others that are more fixed or not directly tied to that market level, and we're getting after those. We think though over quarters that we can have an expense discipline that's more closely aligned with the revenue fees that we're seeing. That's why I would just add that we talk on these calls a lot about continuing to do what we can to drive the organic fee leverage into our business, meaning the things that we can most control are how fast we grow it organically and how much expense we need to support that growth. And as long as we get those in line with some leverage, the markets over long periods of time will likely be upward sloping and be our friend. So hopefully, that answers your question.

We'll take our next question from Alex Blostein with Goldman Sachs.

So maybe just to wrap up the NIR conversation, a couple of things I wanted to follow up on. I guess, one, I think in the past, you talked about just the overall size of noninterest-bearing deposit. What you guys consider sort of at risk or runoff, I think, was in about $5 billion to $6 billion range. And now, Biff, you gave us a bunch of comp breakdown by bucket, and that was helpful. But is the total $5 billion to $6 billion still the right number? So you kind of said, look, $2 billion left, so we're still dealing with like maybe $4-ish billion or so at risk? Is that sort of the right framework still? Or is the $5 billion to $6 billion maybe a high number? That's part one, and then I have a quick follow-up on the deposit beta. I'll just ask that after.

Alex, I think that, that number is actually smaller than $5 billion to $6 billion now. I think that where the rate moves we've seen with, what, 8 hikes I think we had now, we actually think that the rate sensitive money in there has probably already -- in our discussions with that pool, we think that the rate sensitive portions of that have started to move or have already moved. I should say have already moved. So it's smaller. It's not 0. I should be clear. But I think it's smaller than the $5 billion to $6 billion we talked about, so I think we're seeing some of that rate sensitivity money already have taken action. So I would size that a little smaller than that. I can't give you the exact number because -- but we -- I think we've seen a lot of that action. Some of what you saw in this quarter is I tried to described earlier. There was some that moved from that bucket. I think we said about 40%. So I think that part. The others, I would say, was more what I'd say BAU kind of moves that we can see from the normal transactional volume. It can leave and come in any given quarter. So that -- hopefully, that helps a little bit more color.

Yes. No, that's helpful. And then with respect to deposit betas, so I know you guys said, I think, like 55% or 60% deposit betas, and I wasn't sure if you're talking about kind of over the course of the year. Because if I look at Q3, it seems a bit higher than that, especially when you consider a portion of deposits outside the U.S. So was there any particular catch-up? I know you said occasionally there might be 1 or 2, was there an outsized catch-up in deposit pricing this quarter. So again, kind of looking at it to Q4, perhaps we're not going to see as big of a move?

I think it would be fair to assume that the outsized or the larger beta that you saw in the quarter would have some competitive catch-up in it, where we have to evaluate where we are and we may have had the benefit in Q2 and we have to assess where we are on the competitive landscape. We get some of that data at end of quarters, as you may know, from others, and that provides us with the opportunity to price competitively. So that's the assumption and we'll let you go from there.

Yes. That's what it sounded like. All right. Last one. Promise. So you said that you guys made some pricing adjustments in C&IS in the investment management side. Can you expand on that? I know it sounded like there was maybe a little bit of a drag on investment management fees in C&IS this quarter. And then just bigger picture, when you guys talking about 4% to 5% organic growth over time, obviously not quarter-to-quarter but kind of on an annual basis maybe, you guys are thinking about it in terms of organic fee growth, correct? Not organic asset growth? Just taking into account any sort of price degradation we might see?

So yes, it's organic fee growth, is exactly right. And the first part of the question was around -- sorry, repeat...

The repricing within Asset Management.

Oh, repricing within Asset Management was -- I would say it was along the lines of we have a large passive franchise inside of our C&IS business in particular. And as you know, the competitive nature of that is very much in the press, and we're not immune to that either. And we have important clients, and we have dialogues with them on a regular basis around their pricing, and we have some of that in the period. It has a negative impact on our fees.

We'll take our next question from Geoffrey Elliott with Autonomous Research.

Maybe more on the custody fund administration side. Could you talk there about what you're seeing in terms of competition and fee pressure? It feels like part of the industry your serving is under pressure. How is that translating into pressure on the fee rates you can generate there?

Geoff, it certainly continues to remain competitive in that space, and it really has more nuance than just for me to just say that broad brush. In certain markets, we could see very highly competitive pricing, parts of Asia or we could see it in other parts of the world. In other parts where we see what I would say is more measured and pragmatic pricing, so I'm hesitant to give you anything other than it's a really competitive landscape for pricing. We feel pretty good about our ability to complete and still drive margins. We talked about the margins in our C&IS business continued to expand in the quarter, so they're able to win without margin erosion in that space. So we feel pretty good. But it is still a very competitive landscape in that space. I do think in the macro environment, we are able -- if you can bring value proposition, you can still get paid for it in the space. But you have to demonstrate the value you're creating for the marketplace in which we compete, particularly in the institutional side of the business, which is what I think you were referencing. I think on the Wealth side, we demonstrate that value proposition very effectively, and we've seen really very strong growth on the fee side on the Wealth Management business.

And then just a quick one on the deposit side. What gives you confidence that those outflows you saw in DDAs and in the custody business is just kind of normal ebbs and flows? Because I guess, if we look across the banks that have been reporting, there's a pretty clear mixture of noninterest-bearing deposits flowing out across the board. So what kind of gives you confidence that those might be back again in a quarter or 2?

So let me break them apart because I think you said on the Wealth side, I don't know that...

No, on the custody side and on the commercial DDAs.

Yes. Well, we track the trends client-by-client over time. We do that, and we've seen these types of things before. I guess I can't guarantee that they come back, but we have seen these types of ebbs and flows in the past from those clients that we track at a client level that drove some of this in the quarter. I can't guarantee that they'd come back. They could have been excess cash. But we're tracking at a client level, I know, have we seen these types of moves before from those individual clients? We have. So we'll continue to track that. And you're absolutely right, it could be something that was more permanent in nature, but that's our current and most informed view.

We'll take our next question from Betsy Graseck with Morgan Stanley.

Couple of questions. One, in the prepared remarks, Biff, I think you discussed a little bit about the risk in analytic services that were adding to one of the fee rate lines. And just wanted to dig in a little bit and understand some of the drivers there and opportunity set. I know also you put out a press release recently about the integrated trading solutions product and wanted to see if that was all driving the forward look on what risk and analytics services can do for you.

Yes. So they're 2 separate services, so I'll go first to risk and analytics services. We have, for a long time, provided what I will call the analytics and analysis of particularly fund performance, pension fund or whatever. So when a pension fund board or a public fund board is evaluating how their assets have performed and their managers have performed, we provide very detailed analytics. And that's another way for us to use the data we have and work with them to provide what I'd call very high value-added services. They continue to do great work and have been able to grow that business, and it's been a very value-added part of the relationship. But I'll let Mark give you an update on ITS.

Betsy, yes, so really, the ITS is kind of a bit of an offshoot from in 2016 when we acquired Aviate Global to kind of strengthen our global brokerage business. So really, those -- it's solutions for our asset owners and asset managers. It's really -- that I would say is more in the security commissions and trading space than it would be in the -- within the trust fee categories. And we have seen good growth in that area. I would say that for this quarter, the security commissions and trading performance was impacted by transition management activity being lower and as well as interest rate swap activity being lower, and those do tend to be more volatile on a quarter-to-quarter basis. But when we look at the underlying like core brokerage trends, including ITS, we see some good growth there.

And this ITS announcement looked like it was aimed at Europe. Is that accurate? Or am I -- is there something here to for U.S. as well?

Yes, I think it certainly is being primarily run through Europe right now because that's where the predominance of the Aviate acquisition was, and I think we'll look to see if there's availability in the U.S. or applicability in the U.S. or Asia.

We'll take our next question from Brian Kleinhanzl with KBW.

Biff, just a quick question on the comp expense. I want to make sure that the third quarter is a good jumping-off point when we think about where we're going in the fourth quarter. I think you mentioned that there was some impact on incentive comps in the quarter from previous quarters. Was there an accrual reversal in the quarter? Or was this the number that you posted a clean number to think about for fourth quarter?

Brian, it's Mark. Yes, I would say that it's a fairly clean number. I mean, the decline that we would have had for the equity incentive compensation really relates to when we issue the grants in the first quarter for retirement eligible expense that gets recognized over the first 2 quarters. Most of it on the first, and then $11 million of it was in the second quarter. So that would have rolled off in the third quarter. So what's left, I would say, is a pretty -- probably good, solid starting point as far as compensation goes.

Okay. And then on the outside services, I mean, I thought it was about a year ago, you mentioned there was some ability to maybe manage that number down, but it seems they just keep going up. How are you thinking about that going forward? And is there an opportunity to manage those expenses lower in '19 or '20?

I would say when we look at the year-over-year growth in outside services, we're looking at about 6% to 7%. There is -- probably about 3 points of that would've been from the acquisition. And then when you look at what's left, about 3% of growth, there is the impact of the higher third-party adviser fees for revenue recognition; and that the gross accounting, slightly offset by lower sub-adviser cost. But we would say that you're probably looking at -- when you adjust for those things, a pretty modest amount of gross really driven by technical services, which includes market data but offset by we are seeing lower consulting and legal expense on a year-over-year basis. So that's outside services on a year-over-year basis.

Yes. And I'll add one piece to that, too. There can be -- you've seen some improvement, I think, in the trajectory of the compensation line in some cases where we've chosen to outsource the outside service line picks up the expense, but the comp line should come down commensurately. So we have some -- we've talked about some of our managed services around our technology that we've done. That's another underlying driver of that as well.

We'll take our next question from Glenn Schorr with Evercore ISI.

Two quick summary questions. One on -- you gave us pieces of revenue and expense, ex UBS, ex FX, ex charges. Can I just pull it together just so I make sure what the -- what you think the clear growth of revenue expense and operating leverage was ex all those pieces?

Sure, yes. That is the way we look at it. That's good. We -- I would say if you pull ex currency, ex acquisition, ex charges, we would say that trust fees were probably up 5.5% or so percent. And we would look at our expense to be in the 5% to 5.5% range, excluding all of those items, too. That's not organic. That's just sort of at the core if we pull all those things out. So that's how we would look at fees and expenses. And core revenue, they would be about 8%. Core revenue ex all of the items that we talked about would be 8%.

Got it. Okay. And then maybe the final one, just to tie it all together on net interest income. I heard the whole thing about each of the pieces, but I'm sure people look at it as balance sheet didn't grow much, NIM was down a basis point sequentially, we had the mix shift issues and the deposit beta issues. When you put it all together, it sounds like net interest income would never grow no matter what rates do and what customer balances do. But doesn't make sense. Meaning as your business grows, as customers grows, as you win new business can -- the question I have is do you have a ballpark idea of range of what you think over a year's period of time what -- if your organic growth is 4% or 5%, what net interest income should accompany with it over time?

Yes. I won't give that range, but I will say this, we absolutely think that the NIM can expand and the balance sheet can grow and the NIM can expand as long as we continue to see the deposit betas move sort of at where we're seeing industry levels. And again, not just looking at 1 quarter, but looking at trends in the deposit betas, we think it can expand, and we think the balance sheet can get bigger with the organic growth trajectory that we talked about before. This quarter had some movement in it. We had mix shift in the balance sheet. We had some runoff of the noninterest-bearing deposits. But we absolutely think that it can expand, particularly if you think rates are going to rise in that environment. The value of the noninterest-bearing deposits that exist on our balance sheet are even greater in terms of expansiveness of that NIM. So we do believe that. It's just this quarter, it kind of flattened out. I think you need to look at the trajectory of our NIM and its migration more than just 1 quarter. I know you -- that's what you do. But we need to look at it over longer periods of times. It may have some stair stepping to it over time.

And certainly, the sequential LIBOR moves were muted this quarter versus what we saw in the first 2 quarters of the year. So on the asset side, that would have translated with less upside sequentially for the asset...

We look -- we have a shorter duration balance sheet, as you know. I think the 3-month LIBOR averaged 2.34% for both the second and third quarters. So essentially, no movement from where we saw it in the second quarter. One month LIBOR did expand. That was about 14 basis point, half -- about half of what we saw in the previous quarter. One month LIBOR is our largest impactful and 3-month LIBOR is the second. So they both were muted relative to the rate move. I don't know how long that -- I don't know what that trend will be in this quarter.

Got it. One last cleanup. In the other operating income line, you gave us all the reasons on why it was lower. I guess, my only question is, what is the right jumping-off point where we go forward? In other words, it was $20 million this quarter, it was $30 million the quarter before, it was $40 million a year ago, got a bunch of things that impacted it. Is $30 million to $40 million the right kind of hangout range?

I think if you look at this quarter, certainly in the other operating income, we hope we won't have any community investment write-downs of $8 million, so I would certainly not consider that a recurring investment. And our Visa derivative, Mark, this quarter was $5 million higher than it was a year over -- a year ago. So if you back those 2 out, I'll let you would then figure out a range and. Mark, I don't know if you have any color you want to add. But I think those are 2. -- the rest of those items in that bucket moved in somewhere around a more consistent pattern. But those 2 were somewhat extraordinary on a year-over-year basis.

And the one thing that does get volatile within that category sometimes is the hedge, the hedge, the true-up of the hedging, the net revenue hedging that we're doing, which is also a slight drag on a year-over-year basis. But that -- the overall impact of currency is kind of netted across the income statement, and that's where some of those impacts.

We'll take our next question from Jim Mitchell with Buckingham Research.

Maybe -- most of my questions have been asked and answered. But maybe quickly on deposits again. Just what have you seen, I guess, so far in October? Have you seen kind of a typical runoff from period-end? Are you seeing any stickiness or lack thereof? I guess, just how are we thinking about what you've seen so far?

Yes. I'll tell you what. We'll give you an update on that in December when we've had a chance to look at 2 months and give you some color on that. And as you see in our end of period balance sheet, it can get quite large at the end of period. And some of that can stick around for a week until it sort of gets displaced or put back into the market. And so I would be uncomfortable giving you any view of that because I don't think it's a better average, a moving average. By mid-December, when we are in the public forum, we'll be able to give you a much cleaner look.

Right. But overall, you feel like most of the hot money has mostly gone, and we can hopefully start to see some growth from here?

Yes

Okay. And then maybe on just the NIM. I had noticed LIBOR moved, too. I mean if that is sustained, should we be looking at more 1 month or 3 months for the balance sheet? And all else equal, it seems like that should help into 4Q, right? Is there anything else you can call out in terms of maybe in the securities portfolio? You might have more turnover in the fourth quarter versus the third? Or how do we think about reinvestment yields there?

So the 1-month LIBOR spread movement would be an important item for you to track. So would 3-month, but 1-month would be the primary in that. And then, you're right, as we look at assets maturing and the chance to reinvest in that, we do have a reasonable book of that business in the fourth quarter, slightly larger than the normal average, but I would focus more on the 1-month to 3-month LIBOR spreads in that space.

We'll take our next question from Mike Mayo with Wells Fargo Securities.

Can you remind us on your financial targets? I'll tell you what I think I have. I'm not sure it's right. One is the ROE target of 10% to 15%. Did you ever update that? Will you update that?

Two would be you're looking for organic fee growth in the 4% to 5% range, as you said.

Three, you look for that organic fee growth to outpace core expense growth.

And then four, you have Value for Spend looking for $250 million of savings by 2020. And also, how much of that have you achieved?

So our one stated public external target, you're absolutely right, is the 10% to 15% ROE. We have not updated that at this point. We are -- we have regular reviews to establish if that's the right range, and we look at that. I think we have that range to be something that goes through cycles. Obviously, tax reform was a secular change that we have to think about and contemplate what its impact should be, particularly if it looks like tax reform is actually going to flow through the financials and not be priced away. And that's why we waited some period of time to assess just how the world would react to that. The other targets are items we talked about on the phone. They're not formal specifically given targets, but your thought process on all those is right, $250 million for Value for Spend, trying to get to a positive organic-type view of fees to expenses. And on organic growth rate, over a longer period in the 4% to 5% range, as we've talked about.

And your answer to Glenn's question earlier, you said that ex all the noise, charges, the deal, currency, you've had, what, 8% core revenue growth, 5.5% core trust fee growth and 5% to 5.5% core expense growth. Was that year-over-year third quarter?

Yes, that's exactly right.

And what are the same numbers -- yes?

I'm sorry, that was the third quarter. Year-to-date, if you wanted year-to-date, I would say our trust fees were 8%, our total revenue was 10%, and our expense is 5% on year-to-date. So a lot of leverage year-to-date. The quarter was a little bit tighter, but we are managing it more than just 1 quarter. So that's the year-to-date performance.

And what I think I hear you saying several times is judge Northern by the years, not by every quarter. Is that what I should be hearing?

I think what you're hearing is that in any given quarter, and in particular in our C&IS business, which has very lumpy-sized wins, you can see that move a little bit in any given quarter. And you can see that net interest income with some nuances, some beta catch-up and others have some slight pressures to it. I hope that we're judged on those metrics in longer periods than just 90 days. But that's where we're at.

We'll take our next question from Marty Mosby with Vining Sparks.

Well, if you'll be patient with me. I've been putting a giant matrix together to look at all these different pieces, and I think it's pretty interesting. If you look at year-over-year, like you said, revenues are growing, NII is up double digits, fee income is up high single digits. So it's not the momentum you've had over the year, it's just a sequential quarter. If you look at sequential quarter, expenses are up. But I imagine the golf tournament refracts most of that increased expenses from second quarter to third quarter. Am I about right on that?

So the -- there's currently a sequential impact from the Northern Trust Open. There's also an offset to that, that partially offsets that is, we have some equity incentives that run down. But we have, I believe we called it out last quarter, the impact of the Northern Trust Open sequentially.

New business promo, about a $17 million sequential increase. And we were -- and you'll see when the 10-Q is filed, we were right on that range.

Yes.

So you can understand that, that's more seasonal if you look at the revenues and you get the NII going down in this particular quarter, about $5 million. But am I hearing this correctly, $17 million impact from this FX swap income in NII? So instead of a $5 million drop, you take that $17 million and add it back, that would be a $12 million increase in NII, net-net, if you take out what's happening in fee income.

So there was also a drag in the prior quarter of $14 million. So there was a $3 million decline from the FX swap activity here.

So I don't -- you've got to do apples-to-apples, Marty, I think it would've been about down $1 million-ish.

Okay. So that's what I was trying to get at in the sense that you kept telling about incremental. Really, it's about $3 million-ish between quarters. So NII was relatively flat this particular quarter.

Exactly.

If you look at the fee income -- yes, so if you take that impact out NII was relatively flat, you then flip over and look at your fee income and look at the actual components of the fee income between second quarter and third quarter, you actually had about $4 million of pricing impacts, you had $6 million of seasonality and you had then growth in the core. So if you look at the actual core business, it's still up. Seasonality and then one pricing decision that you make is what basically brings your core down a couple of million dollars. But again, that's 2 different things that are very understandable. FX is actually down $7 million, but that's very noisy, it kind of comes in and out. So that's a very kind of quarter-to-quarter. You just kind of see where that ends up.

Also seasonal. The third quarter is seasonally slow. There's a lot of holiday in July and August in Europe, particularly where we drive a lot of that. Yes.

And then if we look at the $8 million and other decline, so looking at that number, it's going to be the swap thing that's going over the Visa Class B already taking out the $8 million related to the unusual item. And then you've got some basically some security commissions and trading that's down $4 million. So I mean that's driving that. So in other words, we've got an unusual sitting down here. We've got some noise in trading that's from quarter-to-quarter. So if I back through this, instead of seeing a decline of something like $25 million to $27 million in revenue, you really have core revenues that are up, and then you've got seasonality hitting a couple of spots, you've got a price -- one pricing decision, and you got some noise in other. So when you start looking at it that way and say, well, year-over-year, we're still growing revenues 10%. In this particular quarter, it's just got a litany of things that once you start looking at it cause everything to kind of round to the -- for the negative, which is what I'm hearing you in your conversation trying to say, but the noise really covers that up this particular quarter. So I just wanted to kind of make sure I was walking through all that correctly.

Well, I think all of your -- I was following all of your mental calculations there. I think they're all accurate. But that's what happens in a quarter, right? Those are the kinds of moves that can happen, the sequential impacts that you talked about and others. We -- I think you've accurately portrayed how they moved in the quarter, and we continue to make decisions that are longer focused than that and we think are the right decisions, and these things sort themselves out in more than 90 days sometimes. So we'll continue to make those calls. And we believe that at a 15.1% ROE with all those things going your way, that's still a pretty attractive return in terms of on ROE, and I would say it's also a pretty strong return when you consider that we're sitting on a 12.9 Common Equity Tier 1 ratio. So it's a well-capitalized franchise that can still generate pretty strong returns.

We'll take our next question from Gerard Cassidy with RBC.

Biff, can you -- you just talked about that Visa differential in the quarter being $5 million greater this quarter. What was the total amount of the Visa mark in the other income this quarter?

It was -- if we add all of the components together, it was a little over $8.8 million in the quarter. So it's a large number. But again, a year ago, that was closer to about $4 million, $3.5 million to $4 million. So -- and that Visa mark is driven by a series of factors. We look at the equity price of Visa. We look at our expected duration of the litigation. We look at the conversion ratio of our B shares to A shares. And that's driven, in many cases, by any contributions made to settlement funds. So all of those can, in any given quarter, be valued and come out. The Visa stock price has moved. Our thinking around the duration of the litigation can change in any given period, and all of those ended up being a quite significant move this quarter. The -- you can calculate it. It's in our Q. Our Visa Class B shareholdings are somewhere in the $900 million to $1 billion range right now depending on the Visa stock price as we sit here today. I don't know where it is, but somewhere in that range. So it's a substantial off balance sheet. It's not off-balance-sheet. It's on the balance sheet at 0. So it's on but at a 0 valuation.

Very good. Can you also share with us -- I think you said that 20% to 25% of C&SI's (sic) [C&IS] custody and administration fees come from transaction volumes. What transaction volume should we monitor from the outside to see what type of activity may show up in a quarter in this area?

Yes. Gerard, it's hard. I mean, you can look at overall global market volumes as a driver. There is some -- sometimes with -- through the sub-custodian network, there might be different timings of recoveries when those types of buildings come through, and then they come into the fees as well. But in general, I think looking at overall market volumes is a good way to probably try to judge that.

We'll take our next question from Vivek Juneja with JPMorgan.

Can you hear me? Yes. Can you hear me?

Yes, yes.

I'm sorry. So my question -- your CET1 ratio, it's grown pretty sharply in the quarter to 12.9%. Firstly, what drove that 50 basis point increase? And secondly, what is your plan with that since you are -- it's so far above your targets. What do you -- especially with balance sheet growth being slower, do you accelerate your buybacks even more significantly over time?

Yes. So the drivers of that in this quarter were really a decline in the risk-weighted assets. And as we said earlier, our total payout ratio in the quarter was a little bit north of 100. So we didn't really add anything to the equity portion, but we did have lower risk-weighted assets in the quarter. The drivers of that lower risk-weighted assets were lower foreign exchange exposures, lower securities lending exposures, lower what I will call other. And we can have things like client settlement, securities, client overdrafts and others. All of those quite frankly kind of went in our favor at period-end and they helped drive the risk-weighted asset out down, which drove the CET1 up about 50 basis points. So that was the driver in the quarter. Those can have some end-of-period volatility to them.

The second part of your question was really more around the how do we think about that. Look, we increased our dividend 31% in -- starting in the third quarter, and we bought or we were approved -- excuse me, we were not objected to by the Federal Reserve to buy up to $1 billion worth of stock in the quarter. We executed on that in this quarter, as you can see from the buyback. And we continue to look at that. We will look at that in our evaluation with our Board and others in coming quarters and in the spirit of the next year's CCAR and capital ask with the Board to see what the right return levels of capital are. But it's a strong position, and we take all the factors you mentioned into consideration as we look at that capital return.

And how are you thinking about dividend payout in this? Because your payout ratio has been below what it used to be several years ago. You're now in the -- depending on quarter-to-quarter, anywhere -- with this increase this quarter, you're still only at about 34%, 35%. So do you think about -- where do you see that going longer term?

Yes. We do think about that. We think about that -- how that dividend payout ratio would be able to sustain itself in stress. We take great consideration of -- and we want a great deal of certainty around the ability to pay that dividend. And so when we do our stress testing, we want to make sure that we have the dividend payout ratio that can sustain itself in stress when the earnings and other things are in stress. We have, I think publicly said, that we think being in that 30% to 40% range from a dividend payout ratio is an area where we feel comfortable with that over time, and we'll continue to evaluate that. But I think that's a reasonable range with the rest of our total payout ratio obviously being in the form of stock buyback. But we think that gives us the right mix and the right comfort around the importance of that dividend to our Board and others.

This concludes today's questions. We thank you for joining today's call. You may now disconnect, and have a great day.

Thank you.