For the second quarter of 2014, Northern Trust’s assets under custody shot up 20% to break the $6 trillion mark, which also measures 4% higher than last quarter, through a combination of new business and the favorable impact of equity markets and foreign exchange rates.
Based on these factors, the banks’s custody and administration fees within Corporate & Institutional Services (C&IS) rose 11% since last year and 4% since last quarter to $261.1 million.
Securities lending revenue within C&IS dropped 4% year over year to $30 million, due to lower spreads, though revenue rose 32% over the last quarter primarily due to higher spreads from the international dividend season during the quarter.
Other fees within C&IS increased 8% year over year, mainly due to new business in investment risk and analytical services, though these fees fell 9% since last quarter due to seasonally lower revenue from benefit payment services, says Northern Trust.
As custodians face new regulatory demands, Northern Trust’s expenses have gone up, which is partially accountable for the fact that while total revenue rose 6% over last year, earnings were down 5%. The bank increased its equipment and software expense by 26% since last year to a total of $116.1 million for the quarter, which includes $9.5 million of pre-tax write-offs of replaced or eliminated software, indicating the bank’s need for updated systems.
In terms of staffing, Northern Trust plans to cut approximately 200 positions, which resulted in a charge this quarter of $28.5 million in severance and associated costs. However, the company did note that headcount is increasing in markets such as Australia, and overall, the workforce expanded by 4% year over year to approximately 15,100. About half of the staff additions has been to support the growth of global fund services in C&IS, while most of the remaining hires came in the operations, technology and risk management group. The company says it has been following a strategy of investing internally to handle regulatory changes rather than increase consulting expenses.
Many of the increased expenses such as the software write-offs and severance pay will ultimately lead to an expected $25 million in annual ongoing savings, says Northern Trust’s CFO Mike O’Grady, who will assume the role as head of C&IS in September. O’Grady also notes that the run-up to AIFMD has resulted in increased expenses, but the company expects to start seeing revenue from AIFMD-related services in the second half of the year.
Going forward, Northern Trust plans to complete its substantial project of onboarding Bridgewater for fund administration and middle- and back-office services. The bank also plans to open an operational center in Phoenix in 2015.
Lastly, the bank remains well capitalized with a Tier 1 ratio of 12.9% measured under the standard approach, down slightly from the 13% mark last quarter. Under the transitional advanced approach, the Tier 1 ratio also measured 12.9%.
Northern Trust Passes $6 Trillion in AUC, Invests in Technology Changes
For the second quarter of 2014, Northern Trust’s assets under custody shot up 20% to break the $6 trillion mark, which also measures 4% higher than last quarter, through a combination of new business and the favorable impact of equity markets and foreign exchange rates.