Northern Trust Corp (NTRSO) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation first-quarter 2015 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, Bev Fleming, for opening remarks and introductions. Please go ahead.

Thank you, Priscilla. Good morning, everyone, and welcome to Northern Trust Corporation's first-quarter 2015 earnings conference call. Joining me now on our call this morning are Biff Bowman, our Chief Financial Officer; Jane Karpinski, our Controller; and Allison Quaintance from our investor relations team.

For those of you who did not receive our first-quarter earnings press release or financial trends report via email this morning, they are both available on our website at NorthernTrust.com. In addition, and also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call.

This April 21 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 May 19. Northern Trust disclaims any continuing accuracy of the information provided on 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 2004 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.

During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and allow as many people as possible the opportunity to ask questions as time permits.

So thank you again for joining us today. Let me turn the call over to Biff Bowman.

Good morning, everyone. Let me join Bev in welcoming you to Northern Trust's first-quarter earnings conference call. As is our customary practice, today I will review our results for the quarter, after which Bev and I would be happy to answer your questions.

Starting on page 2, this morning we reported first-quarter net income of $231 million. Earnings per share were $0.94, 25% higher year over year. Our return on equity was 11.3% in the quarter.

Environmental factors which impact our businesses and our clients were mixed in the first quarter, a theme which has been ongoing for some time. US equity markets were higher year over year, with the S&P 500 up 10% but relatively flat sequentially. International equities, as measured by the MSCI EFA index, were down approximately 3.5% year over year and up 4% sequentially, and were negatively impacted in both comparisons by a stronger US dollar. In bond markets, the Barclays US aggregate index was up 2% year over year and 1% sequentially.

Client assets under custody ended the quarter at $6.1 trillion, up 6% over last year and 2% versus last quarter. And assets under management ended at $960 billion, up 5% year over year and 3% sequentially. I'll provide further details on asset trends later in this call.

Currency markets had multiple impacts this quarter. Currency volatility as measured by the G7 index was 33% higher than the first quarter of last year and 22% higher than last quarter. Currency volatility influences our foreign exchange trading income as does the level of client activity. Currency rates, which influence the translation of non-US currencies to the US dollar, impact client assets and our revenues and expenses. The dollar was stronger both year over year and sequentially. Dollar strength tempered custody asset growth and related fee growth but benefited expense growth.

Short-term interest rates rose slightly compared with the fourth quarter yet remained at very low levels, continuing to pressure our net interest margin and resulting in fee waivers on our money market mutual funds. Three-month LIBOR and fed funds effective rate both increased 2 basis points sequentially to 26 and 12 basis points respectively, and the overnight repo rate increased one basis point to 15 basis points.

With those comments providing context on the environment, let's move to page 3 and discuss the financial highlights of the first quarter. Year over year, revenue increased 9%, with non-interest income up 10% and net interest income up 5%. Expenses increased 3%, primarily reflecting higher compensation, equipment and software, and employee benefit expense. The provision for credit losses was a credit of $4.5 million in the quarter, primarily reflecting a sustained improvement in the level of non-performing assets. Net income was 27% higher year over year.

Compared to last quarter, revenue was flat, with non-interest income up 1% and net interest income down 2%. Expenses increased 1% due primarily to higher employee benefit expense, business promotion, and equipment and software offset partially by lower outside services expense. Net income declined 5% sequentially, as the prior quarter included a $9.5 million income tax benefit. Excluding last quarter's income tax benefit, net income was 2% lower sequentially.

Page 4 -- let's look at the results in greater detail starting with revenue on page 4. First-quarter revenue on a fully taxable equivalent basis was approximately $1.1 billion, up 9% year over year and flat sequentially. Trust, investment, and other servicing fees, the largest component of revenue, were $728 million in the quarter, up 7% year over year and flat sequentially. Fees in our corporate and institutional services business increased 7% year over year and declined 1% sequentially, while fees in our wealth management business grew 7% year over year and were unchanged sequentially.

New business and higher equity markets were both drivers of growth, but currency translation, as I mentioned earlier, detracted from overall fee growth. The impact was approximately 2 percentage points year over year and one percentage point sequentially. Fee waivers were approximately $33 million in the first quarter, relatively unchanged both year over year and sequentially. I'll go into further detail on trust and investment fees shortly.

Foreign exchange trading income was $72 million in the first quarter, up 43% year over year and 18% sequentially. Currency volatility was higher in the first quarter. Client trading volumes were also higher both year over year and sequentially. Other non-interest income was $75 million in the first quarter, up 15% from last year and 3% lower sequentially. Within other non-interest income, securities commission and trading income was again strong at $20 million, as we continue to see strong demand for interest rate protection products from our personal clients.

Other operating income of $39 million in the quarter increased 2% year over year but declined 6% sequentially, reflecting lower income associated with a third-party servicing agreement which was modified in the fourth quarter. If you recall, we said last quarter about half of the income reported in the fourth quarter reflected the third-quarter impact of the modified agreement.

Net interest income, which I will also discuss in more detail later, was $267 million in the first quarter, up 5% year over year and down 2% sequentially.

With that backdrop, let's look at the components of our fee revenues on page 5. For our corporate and institutional services business, fees totaled $407 million in the first quarter, up 7% year over year and 1% lower sequentially. Custody and fund administration fees, the largest component of C&IS fees, were $277 million in the first quarter, up 10% year over year and down 2% sequentially. Assets under custody for C&IS clients were $5.6 trillion at quarter end, up 6% year over year and 2% sequentially. Growth in fees and assets primarily reflects new business and market conditions, including higher equity and bond markets offset partially by the impact of a stronger US dollar.

Investment management fees in C&IS of $76 million in the first quarter were up 2% year over year and down 2% sequentially. Assets under management for C&IS clients were $727 billion, up 4% year over year and 2% sequentially. The year-over-year increase in C&IS assets under management was due to higher equity and fixed-income markets partially offset by the impact of a stronger dollar on international assets.

In the sequential quarter comparison, modest improvement in equity markets and new business were both contributors to the increase. C&IS investment management fees were impacted by fee waivers on institutional money market mutual funds totaling $15 million.

Securities lending fees were $22 million in the first quarter, 5% lower than last year and 1% lower sequentially. Year-over-year results reflect lower spreads across asset classes, with the largest decline in US equities offsetting the impact of higher collateral levels. The sequential quarter decline reflects higher collateral levels offset by two fewer days in the first quarter. Securities lending collateral was $123 billion at quarter end, up 6% both year over year and sequentially.

Other fees in C&IS were $32 million in the first quarter, up 10% year over year and 13% sequentially due to higher sub-advisory fees. The sequential quarter increase also reflects seasonally higher revenue for benefit payment services.

Moving to our wealth management business, trust, investment, and other servicing fees were $320 million in the first quarter, up 7% year over year reflecting higher equity markets and new business. Growth was relatively consistent across the regions and global family office. Wealth management fees were up slightly versus the prior quarter, as new business was largely offset by higher waived fees in money market mutual funds.

Assets under management for wealth management clients were $233 billion at quarter end, up 7% year over year and 4% sequentially. Money market mutual fund fee waivers in wealth management totaled $18 million in the current quarter, flat compared with last year but up $1 million compared to last quarter.

Moving to page 6, net interest income was $267 million in the quarter, up 5% year over year and up 2% compared to the fourth quarter. The year-over-year increase in net interest income was driven by a larger balance sheet, as clients -- as client deposits averaged $87 billion in the quarter, up 7% versus last year.

Partially offsetting the impact of a larger balance sheet was a lower net interest margin, which at 1.1% in the first quarter was down 2 basis points year over year. In the sequential comparison, net interest income was lower due to two fewer days in the quarter. A slight decline in earning assets was offset by a 2-basis-point increase in our net interest margin, which resulted from a favorable mix shift in earning assets.

We continue to see growth in our loan portfolio, with average loans and leases increasing 2% sequentially. And we've reallocated a portion of our short-term interest-bearing deposits into our securities portfolio, which was 7% higher sequentially.

The yield on the securities portfolio decreased 5 basis points sequentially. About 4 basis points of the decrease in yield was due to higher premium amortization in our mortgage-backed securities portfolio versus the prior quarter. Premium amortization in the fourth quarter was $10 million compared to $4 million in the year-ago quarter and $7 million in the fourth quarter. Loan balances averaged $32 billion in the first quarter, up 10%, or $2.9 billion year over year, and up 2%, or approximately $700 million sequentially.

We saw solid loan growth this quarter across commercial and institutional, private client and commercial real estate, partially offset by a lower level of residential real estate loans. The yield on the loan portfolio increased one basis point sequentially.

Turning to page 7, expenses were $789 million in the first quarter, 3% year over year and 1% sequentially. Compensation expense increased 4% year over year, primarily reflecting higher incentive compensation. The impact of staff growth and annual merit increases was largely offset by the favorable impact of movements in currency rates.

Staff levels increased approximately 5% year over year, with more than 75% of the growth emanating from our global operating centers in Bangalore, Manila, and Limerick.

On a sequential basis, compensation expense was essentially flat, as higher equity-based incentives, including the requirement to immediately expense options granted to retirement-eligible employees, were offset by the impact of movement and currency rates. Staff growth was 1%.

Employee benefit expense increased 9% year over year, primarily driven by higher pension and employee medical expense. On a sequential quarter basis, employee benefit expense increased 16% due to the higher pension expense, payroll taxes, and medical expense.

Outside services expenses were down 6% both year over year and sequentially, reflecting a lower level of expense in a number of categories including legal, consulting, and third-party advisor fees.

Equipment and software expense was up 9% year over year and 7% sequentially, reflecting higher software amortization as we continue to invest to support clients, improve our efficiency, and meet regulatory and compliance requirements.

Other operating expense increased 6% year over year, primarily driven by higher charitable donations and higher deferred amortization expense related to client onboarding. In the sequential comparison, other operating expense increased 3%, reflecting seasonally higher business promotion and marketing costs associated with the Northern Trust Open.

Turning to page 8, we continue to make progress on our goal to sustainably improve profitability and returns. The focused execution that I have highlighted this morning has resulted in continued improvement in the ratio of expenses to trust and investment fees from 113% in the first quarter of last year to 108% this quarter. This, combined with a slight moderation in the revenue headwinds that we have faced in recent years, including growth in foreign exchange trading and net interest income, produced meaningful operating leverage and resulted in improvements in our pre-tax margin to 31% and in our return on equity to 11.3%.

Turning to page 9, our capital ratios remained solid, with common equity tier 1 ratios of 10.5 and 11.8 (Sic-See presentation slide-9 �10.5% and 11.8%) respectively, calculated on a transition basis for both advanced and standardized. Both were lower when compared to prior periods. The decline in the transition basis advanced common equity tier 1 ratio was primarily due to higher risk-weighted assets given mix changes on the balance sheet as well as higher operational risk-weighted assets due to modeling refinements. The decline in the transition basis standardized common equity tier 1 ratio was primarily driven by the implementation effective January 1, 2015 of Basel III standardized risk-weighted assets.

On a fully phased-in basis, our common equity tier 1 capital ratio under the advanced approach would be approximately 11.5% and under the standardized approach would be approximately 10.3%. All of these ratios are well above the fully phased-in requirement of 7%, which includes the capital conservation buffer.

The supplementary leverage ratio at the Corporation was 6.4% and at the bank was 5.6%, both of which exceed the 3% requirement applicable to Northern Trust.

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.

As we announced in March, our 2015 capital plan received no objection from the Federal Reserve. In it, we requested authority to increase our quarterly common dividend to $0.36 per share. At its regular meeting later today, our Board of Directors will consider formal approval of the planned dividend increase, which is expected to be payable July 1.

In the first quarter, we repurchased 1.6 million shares at a cost of $107 million. In addition, our 2015 capital plan provides for the repurchase of up to $675 million of common stock between April 2015 and June 2016.

With respect to the liquidity coverage ratio, Northern Trust is above the 80% minimum requirement effective as of January 1, 2015 and is also above the 100% minimum requirement that will become effective on January 1, 2017.

In closing, the first quarter demonstrated continued progress in driving our return on equity deeper into our target range of 10% to 15%. Execution around both growth and efficiency priorities remains strong and is evidenced by meaningful operating leverage generated in the quarter.

In our C&IS business, momentum remains strong, with announced wins such as the Government Employees Superannuation Board of Australia and Ottowa, Canada-based Nunavut Trust, as well as a robust pipeline of new opportunities.

New business was diverse both geographically and across products and client segments. Our wealth management business had solid new business results as well. Record levels of AUM and AUC coupled with strong loan growth helped deliver positive results in the quarter.

From a financial perspective, while we have moved our return on equity into our target range, we remain focused on further enhancing profitability.

Before I conclude, as is customary for our first-quarter earnings call, we will need to end today's call to allow sufficient time for all of us to get to our annual meeting, which begins at 10:30 Central time this morning. Please accept our apologies in the event that we have to close off the question-and-answer period earlier than our normal practice.

Thank you again for participating in Northern Trust's first-quarter earnings conference call today. Bev and I would be happy to answer your questions. Priscilla, please open the lines.

Brennan Hawken, UBS.

So the fully phased-in Basel III capital ratios declined quarter over quarter, about 30 bps for standardized and 40 bps for advanced. What drove those declines?

So there are a couple of factors that we should consider here. First is the phase-in to Basel III. So largely, it was a risk-weighted asset impact. The 2 points that you talk about, approximately 75% were driven by that conversion. And then 50% were driven -- 50 basis points were driven by the shift in asset mix on the balance sheet. So we have greater loans, and we moved items out of our fat deposits, if you will, into other earning assets.

And it's as expected. These are as we would've expected to move under the migration into Basel III and the shift mix, if you will, on the balance sheet into assets that drove the RWA up; again, about 50 of the basis points. And then 150 basis points is simply to move to the Basel III standardized.

Right, but I was actually asking on the fully phased basis. You are fully phased. As you guys reported it last quarter, standardized was 10.6%. This quarter, it's 10.3%, and the advanced was 11.9% and this quarter it's 11.5%. So does that mean that on a fully phased basis, it was purely based on asset mix on the balance sheet?

Yes. That's exactly right.

Okay, thanks. And then thinking about what you just referenced, the deposits with the Fed, what drove that shift quarter over quarter? They dropped to almost in half. It is that something that you expect to be sustainable? And is that some progress that you are making in decreasing non-operating deposits?

I don't know that the having is something that will continue. But we were just trying to put the balance sheet items to work. The asset mix, as you can see, shifted to the shorter end of the securities portfolio. So we have just put those items to a more effective use than 25-basis-point deposit at the Fed. I don't think you should anticipate a continued halving, though.

Sure, sure. Of course. And the other part of the question, does that mean -- is it right to infer that maybe non-operating deposits might have declined, too, which gives you the confidence to switch it over to securities?

No, I don't think you can make that inference. So --.

Okay. Thanks for taking my questions, Biff.

Luke Montgomery, Bernstein Research.

Just a question on the baseline fee rates for which you estimate the fee waivers. I think some investors are concerned that the fee waiver disclosures, maybe not just for you but for the industry, are calculated on fee rates that haven't been negotiated for a long time. And clearly the yields on those funds could be permanently lower. In the past, I think you've discussed your recapture expectations and the possibility of how competition might play into that. But more fundamentally in providing those disclosures, is your basic assumption that fee rates are roughly what they were about six years ago?

We've repriced some of our money market fee assets more recently than that. I think 2012 was the most recent repricing in a portion of our money market fee assets. So it's not fair to say that some of those aren't current. But we are revisiting -- in light of the money market reform and all the other acts, we are constantly revisiting, if you will, both our product offerings and capabilities as well as the competitive pricing landscape in that space.

Okay. And then on the SEC lending in February, you settled a couple of -- a pair of class-action lawsuits for about I think it was three-quarters worth of SEC lending revenue. So could you just remind us, are there other suits outstanding of a similar nature? Or is this issue pretty much put to bed? And then had that already been accrued for on prior earnings, or was there an impact in the P&L this quarter?

As we previously disclosed, we did agree to settle the alleged class-action claims arising out of the client investments in the Northern Trust index funds that experienced losses from securities lending during the financial crisis. We took the $19.2 million pre-tax charge in the fourth quarter of 2013.

The parties obtained preliminary court approval for the class-wide settlement during the first quarter of 2015, and a final approval hearing has been scheduled for August of 2015. So there are still items that we are reviewing in the process. But that's the most recent update we have on our securities lending.

Okay, great. Thanks for taking my questions.

And as a reminder, in an effort to give everyone an opportunity to ask a question, we do ask that you ask one question plus one relevant follow-up.

Glenn Schorr, Evercore ISI.

A NIM question, if I could, on the yield front. So, yields on the loans fell, I think, 22 basis points year on year. They fell double that on the debt front, which is helping support your NIM among other things. So the question is, is the drop in loans -- how do you attribute to rates versus pricing versus mix of products? And on the debt front, I'm assuming there is a component of rolling off of high-cost debt. Could you talk about maybe the year ahead in terms of what's rolling off, and can we still expect the same year-on-year trends?

Okay. I'll get both of those. Thank you. If you will, on the loan mix and, if you will, the lessening of the yield, the mix of products there has moved from, as we talked about, residential real estate into what we would call investment-secured loans. Those have a lower yield but they are very well secured and high credit quality. So the mix shift there has driven a lot of that change, if you will, in rate in terms of the first part of your question in the loan mix. So the areas we are growing our loans in have a slightly higher lower yield than the traditional residential real estate and others.

So that has driven most of the loan mix down.

In terms of the debt, we did have last year $500 million worth of senior notes, and then in the first quarter of this year we had GBP125 million note, which was used to finance the Barings acquisition about a decade ago roll off in the first quarter. And then as far as the rest of the year, we, along with the treasurer and the outcome committee of the firm, look at our debt structure on an ongoing basis to determine what type of debt structures we will have for that roll-off.

Okay, but nothing imminent scheduled?

Correct.

I know you are short on time. You can move on. Thank you.

Ashley Serrao, Credit Suisse.

Just a broader question on expenses in general. You are off to a good start in the first quarter. As we think about the balance of the year, what are some of the puts and takes that we should be mindful of in terms of reinvestment and maybe any other efficiency gains on the horizon?

Well, as we have discussed before, we have many ongoing expense initiatives around the firm. I've talked about our location strategy, for instance. And we gave some numbers in our talking points where last year, a little north of 75% of our hires were in our locations that we would call operating centers in tier 2 and tier 3 locations. That will continue ongoing, and et cetera.

We've done a great job of managing our consulting and legal expenses that we've talked about that are other drivers on the expense front. Those can be episodic; particularly legal can be episodic. But some of the disciplines we've put in place around there have aided us in the expense measures that you see here and in the expense performance that you see here.

So in essence, it's a business as usual on the expense front. I think we've embedded some of the disciplines around the expense to trustees that we talk about is being embedded into our businesses, and people are gearing their expense growth rates to be in line with our trustee growth rates.

Great. And just a quick follow-up, just on FX. If you look at the cumulative pre-tax impact versus last quarter or a year ago, what was it?

Are you talking about the impact of the currency rates?

Yes, the exchange rates. Yes.

I was going to say if you are talking about the impacts on the P&L for us, to give you some indication, if you look at our revenue sequentially, we would've had 7% on trust fees. Excuse me -- $7 million of trust fees were impacted negatively. And then, if you looked at it on a year-over-year basis, that would have been about $15 million negatively impacted by the strengthening dollar. That's an important line.

On the expense side, if I look at comp and [then] our largest expense line, it was a $14 million impact year over year; and sequentially, also $7 million. I was trying to give you some idea of two main expense lines.

Okay. Thank you for taking my questions.

Brian Bedell, Deutsche Bank.

Maybe just to go back to expenses, very good cost control in the quarter. I'm just trying to understand a little bit more granularly some of the what you would identify as seasonally high or -- seasonally high expenses in the first quarter and then some of the -- you mentioned I think lower consulting and legal fees. Just trying to isolate that as well.

We do have some seasonality in our expenses, as you noted. We have the Northern Trust Open, and then we have certain compensation-related expenses, particularly with option expense for retirement-eligible individuals that are seasonal. I think if you look probably historically, you'll be able to see the spike, particularly in our business promotion and other lines in your analysis to see.

We felt pretty good about our ability to absorb that increase in expenses in the first quarter and still maintain expense growth rates that you saw in our earnings release.

As for things like legal and consulting, the disciplines we put in place around the use and the contracts and the rate cards with those individuals, I think, will allow us to create some permanent savings. But take legal, for instance; there can be episodic situations where we need to utilize outside law firms for situations. And we continue to manage the cost of the rate cards, but if we have to use legal firms more for entities going forward or consultants for needs going forward, it could move that needle around.

I think most of the other expenses, again, are very much in line with the expense-to-trustee ratio that we talk about, and people are embedding that into their allowable growth rates in their businesses.

Great. And then just maybe on the outside services, do you view that run rate as a sustainable run rate barring anything unforeseen in the first quarter?

I'm hesitant to say that that's a run rate because of the episodic nature of some of it. But I think there is a portion of that that is permanent, but there is also the episodic need. So I'm not sure I'm willing to concede the new run rate.

Fair enough. Thanks very much.

Alex Blostein, Goldman Sachs.

A question on the asset management business and the, I guess, the organic growth. I know you guys don't give that to us yet, and that's still a wish. But broadly speaking, if I look at the AUM growth of 4% quarter over quarter -- so up quite nicely despite the FX headwinds in the market helped to some extent, but I'm assuming that's not all of it. Just kind of curious to hear where the growth is coming from. We've definitely seen a lot of incremental growth in the passive strategies. Is that predominantly what's driving that and maybe what the pipeline looks like there.

So if we look at our growth in our AUM and our asset management business in general, we did see growth in our cash funds in the quarter. We've seen growth in our OCIO business, our outsourced chief investment officer business, very much. We've seen growth in our enhanced equities strategy. Our three areas where we have seen growth, our ETF business also has continued to grow as well. So we've had -- and it's been -- I would also say it's been global as well. That growth has been both domestically here in the US and particularly in Europe and in the Middle East, we've seen significant growth in our AUM.

Got you. Then just my follow-up as to business. You mentioned the cash business. Given the fact that the bigger banks continue to see pressure on the balance sheet side and more cash continues to move off to the sidelines, given your role in the cash management world, both on the money market fund side but also I guess some of the balance sheet capacity since you guys are not asset-law constrained like your peers. Just curious to think about how you guys think about that opportunity relative to some of your peers, given the fact that there still feels like a lot of cash in the system that needs a home and nobody wants it.

We've assembled a cross-business unit project team which would, as you described, encompass both professionals from our asset management business and our treasury team to look really at servicing the liquidity needs of our clients. And in some cases, that liquidity need is balance sheet, and in some cases that is in some form of money market fund or some other type of cash vehicle.

There is a cross Northern Trust-wide team looking at that, working with clients to understand their solution needs. And it's a very active and moving forward at a pace, as you might imagine, in conjunction with the money market reform that you see on the asset management side but also in relation to other financial institutions that have taken a very different tact around large deposits. And we -- right now, we do each of those on an individual basis, but we are looking at that, as I said, across the business with a real holistic approach. Just client liquidity needs.

Got it. That's good color. Thanks, guys.

Ken Usdin, Jefferies.

(technical difficulty) I mean a little bit on the securities lending business. You mentioned that the spreads look like they continue to be under pressure. You had okay period-end collateral growth. And we did see a little bit disconnect between LIBOR and fed funds this quarter. So can you talk through just some of the underlying dynamics and if anything is just changing fundamentally inside the securities lending business or if it was just some anomaly from this quarter?

On volumes, we did see a pick-up in borrower demand, particularly in US equities and US corporate bonds. Our sequential volume growth was impacted -- or we had sequential volume growth, however it was essentially offset by two fewer days in the first quarter versus the fourth quarter. And I know you are asking for macro trends as well.

We also saw, for us, a mix shift in the impacted fee split. So our clients with different fee splits were more in the market than those with perhaps more favorable to Northern fee splits. And so the clients having those less favorable fee arrangements represented a larger portion of our revenue in this quarter.

Fundamentally though, I don't think we saw any other macro-level issues that we would call out on the call. I would note, in the second quarter we get our dividend season ramp-up in securities lending, so we anticipate that in the quarter.

Great. Then my follow-up, just on the same topic, so historically, securities lending spreads do tend to widen when we get in advance of that rate cycle. But I'm just wondering, this time do we actually have to wait for the administered rate to change, or should we anticipate that as fed funds and LIBOR go up in advance of the actual fed cycle? Just how would you expect that dynamic to work this cycle if any different from prior?

I don't know that I can answer that, if you want to be in all candor. I'm not sure that I have a good answer for you on that. How is that -- that's not a good answer.

I can follow-up off-line. Thanks.

Betsy Graseck, Morgan Stanley.

A couple of questions on wealth management. We've seen some headlines on some of the new tools that are coming out of the West Coast. You know, they are known as robo-advisors. I'm not asking if you're going to go down that route. But is there something in the technology that you could use to leverage that kind of concept and get even more efficient, freeing up some of your folks to spend more of their time on client acquisition or enhance their wallet in using some of these tools?

We are -- and our product team inside is actively looking at, if you will, the capabilities that those type of robo-advisors, if you will, bring to the market. And, if you will, considering the technology that would enable our clients situations more effectively. And it is an emerging trend. Our President of our wealth management business spends significant amount of time on the West Coast meeting with individuals to further understand the technologies, if you will, that are driving the wealth management business forward.

So you are right; there is technology there. It today doesn't target our typical client, as you might suspect. But I think the nuances and the capability underpinning the technologies there is of interest to us to continue to evaluate.

Okay. And then the follow-up is just on the fiduciary standard language that came out of the Department of Labor, I think it was last week. I'm sure you took the time to look through that. I'm just wondering if there is any change in how you approach the market and your clients given that language that came out of the DOL?

We believe our wealth management remains very well positioned versus others, vis-a-vis the new fiduciary standards. A brief overview from a financial perspective -- we would expect minimal negative impact because our model is a fee-based model. Others have commission-oriented models with different compensation structures. Ours are largely discretionary structures, which don't lend themselves to some of the issues the Department of Labor has opined on.

Our -- if you think about the discretionary incentive awards for our individuals, the factors that drive them are really based on client satisfaction, client retention, and risk management. They are not driven by product placement and some of the other elements that the Department of Labor is concerned about.

And then lastly, I would say this. For 125 years, the firm has been driven by fiduciary responsibility, and we don't think some of these new requirements the Department of Labor is talking about here is new news for us in that space.

So, opportunity for potential market share gain as the DOL has heightened people's awareness around the need for fiduciary responsibility. Maybe there's a marketing effort that will bring a little bit more clearly in people's minds.

We hope so.

Okay. Thank you.

Mike Mayo, CLSA.

So foreign exchange is up about 1/5 quarter over quarter and about 2/5 year over year. How much of that is sustainable? How should we think about that?

So it is highly linked to volatility and volumes. So it's very linked to the volatility that you saw. We have taken -- as we discussed, we have taken efforts to look at our e-commerce platforms and other solutions for clients that has modestly driven up our client volumes and our client share. But still the lion's share of this is driven by the volatility that we see.

We are hoping to further, through products and capabilities and solutions, have more that is sustainable, as you described, but is largely linked to volatility.

And what are the key drivers of that volatility when you do the analysis? And is that continuing into the second quarter?

Well, we use probably the same things that you do -- the looking at the JPMorgan G7 currency volatility or the emerging market volatility indices. We have into April seen the same types of volatilities that we've seen. And we believe that as you have the possibility of central-bank divergence on monetary policy, it could continue to create at least the need for more volatility or create volatility in the foreign exchange system.

All right. Thank you.

Adam Beatty, Bank of America.

On asset management, just interested in any differences you are seeing between your overseas and domestic clients, whether that's in C&IS or wealth management, just in terms of the level of new business or asset allocation and whether maybe currency is affecting that. Thanks.

Thanks. Our -- if you look at our business and our asset management business globally in the US, it has a strong balance between our asset -- our wealth management business and our corporate institutional businesses. Outside of the US, that becomes largely an institutional base for our AUM. And it has a significant position in our passive products, if you will, and particularly to large sovereign wealth funds. Those are meaningful clients across the globe outside the US. So there's obviously substantial pools of assets there, and they need those kinds of index products.

In the US, in the domestic market, we have a wide array of suite of products in our asset management that are attractive to our clients from alternatives to ETFs to mutual funds to cash products to active equity, et cetera. So it's a much broader spectrum.

Institutionally in the US, we also have a broader array. It's still has a heavily cash and index component on the institutional side, but we do have an array. But on the wealth side, it's a much broader mix of product capabilities.

Thank you. Really appreciate the detail. And then just a quick follow-up on the OCIO business. How much synergy is there between that and custody and asset servicing? Do you look for cross-selling there, or is it more of a standalone? Thanks.

Tremendous synergies. And if you think of it from a -- we may be providing the custodial services, and as part of a solution set to that client they need help or they are seeking help or they are seeking to outsource some of the pension responsibilities or the investment responsibilities. We become a fairly natural solution for them. And there is synergies in the ability to bundle that product and service together.

Great. Thank you for taking my questions.

Gerard Cassidy, RBC.

Biff, can you share with us an update on the funding over in the European markets, where there are negative interest rates and you've passed on the cost to some of your customers? What's been the reaction by the customers? And also, what percentage of those deposits are actually being -- that cost is being passed on to them in the markets where there are negative rates?

Yes, so we do have several markets. You are correct where we have a negative rate environment. We have the euro. We have the Danish kroner. We have the Swiss franc. Our three areas where we have gone negative, if you will, with our clients. In terms of the spread, if you will, on that, it's interesting. In some cases, it depends on the reinvestment possibilities that we have in those. So in some cases we have seen the spread erosion occur where the spread has narrowed, and in others we've been able to maintain that spread even with negative rates.

I will say that we -- on a continuous and an active basis, we monitor the markets. We understand where we are able to reinvest. And we have active dialogues with our clients about, in some cases, perhaps the need to press further negative into the rate environment where central banks continue to take more aggressive negative rate stances.

Gerard, one thing that I would add to that is that of the three currencies where we are currently charging negative rates, the one that is really the most significant for us from a client balance perspective is the euro. And I think we had mentioned last quarter that while we had seen a run-up in our euro balances when our rate was not negative, we did see that come down. We went from about $4 billion yearly to about $3 billion. Kind of stabilized at that level in line with what our expectations had been. And I guess after that initial response, we have seen those balances drift up but just modestly. In terms of the Swiss franc and the Danish kroner, the balance is there from clients that are really quite small.

About what percentage of customers are being passed on this cost? Is it half of the deposit base or a third or all?

The vast majority, I believe.

The vast majority. Yes.

Okay. Yes. And then second, the -- there's been some evidence of loans that are tied to euro bar that when the euro bar rate has gone negative, the variable-rate loan, the spread over the loan is also pushing the loan yield negative, meaning the bank is being forced to pay the borrower. Do you guys have any loans tied to these negative rates where you could be at risk where you would be forced to pay the borrower?

We don't as of our last asset and liability committee meeting because we walked through this scenario. But we keep our eyes very closely peeled to -- I know what you're describing, and to date we don't have that situation, but we are continuing to stay close with the negative movements in the rates.

Most of our lending is domestic, so it's dollar based. In fact, I believe all of our lending is dollar based.

Thank you.

Geoffrey Elliott, Autonomous.

On the $20 million or so year on year increase in foreign exchange trading income, can you give a sense of what if any expenses are attached to that incremental income? Or does it all just drop through to pretax?

Yes, thank you. There are some, but they are relatively modest level of expenses. There is compensation-related expenses that would move with that success in the foreign exchange trading market. But there is not much else in the way of incremental expense that moves with that.

Great. Thank you.

Brian Kleinhanzl, KBW.

I just had a quick question on the wealth management, specifically looking at the East region. You have been seeing growth there relative to all the other regions, but it looks like over the last four quarters revenues have kind of plateaued. And I know in the past you've kind of talked about A J-curve when you are in certain markets. Kind of outline where you are at on that J curve in the market and when you could kind of expect to see enhanced growth in that market again?

I would take a step back and say that our East region is very broad geographically. It goes from Miami, Florida, to Boston. So I think you need to sort of peel back into market-by-market type analysis, which we don't have in here. So we've got markets within there that have stronger growth trajectories than what you see here overall. We are and continue to have very large market share and meaningful presence in the Florida coast, and we're building out that presence from what I would say the Washington, DC, corner. We have meaningful presence in New York but continue to work on increasing our presence and penetration in that market and all the way up to Boston.

So I don't know that I can specifically make a comment generically about the East because it's made up of so many markets along the eastern seaboard. So some with great growth dynamics and some where we are continuing to invest and want to deliver more.

Would you say that the investment in the Northeast is going to pick up year over year, then, in 2015?

It continues to be a growth initiative for our wealth management area, and we continue to invest both marketing and, probably more important, talent dollars into the region to facilitate that growth.

Okay, great. Thank you.

Jeff Harte, Sandler O'Neill.

Looking at assets under custody, the growth has been consistently impressive. The market share gain opportunity is pretty clear with $6 trillion versus some peers north of $30 trillion. Can you talk a little bit about what is actually driving the market share gain you are seeing there? I mean, is it a better product offering than competitors? Is it simply entering new markets and winning your share of bids? What's actually driving that logistically?

I'll answer that with a few points. One is, we have had success in regions where we've grown quickly. So let me highlight Australia. And we highlighted an Australian win, so there is an example where the regionality and our strength in that region has helped drive that market share growth. That's one area where we've seen that growth.

Most notably has been our success in our servicing asset managers or our global fund services business. We've seen really substantial double-digit growth in that business over the last three or four years. And our ability to compete against our primary competitors in there and be successful has grown markedly over the time.

And then I would end with product and capabilities. Technologies like what we have from in our hedge fund services, the Omnium acquisition and other elements of technology. The combination of technology, regional strength, and growth, particularly in our GFS business, have allowed for market share gains.

And is GFS -- is that a function of offering it to new markets where maybe you hadn't been before?

In some cases it's geographic markets; in some cases it's product and capability. So it's a combination of both. And then, the scale that we've achieved in that business makes us a competitive force.

Okay. Thank you.

And this does conclude our Q&A for today. I'll turn the call back to our speakers for any closing remarks.

Thank you, Priscilla, and thank you, everyone, for joining us today. Allison and I would be happy to take additional questions as the rest of this week unfolds. And we look forward to speaking with you on our second-quarter call in July. Have a good day. Thank you.

And this does conclude today's conference. You may disconnect at any time.