Participants

Jennifer Childe; Senior Vice President Director of Investor Relations; Northern Trust Corp

Michael O'Grady; Chairman of the Board, President, Chief Executive Officer; Northern Trust Corp

David Fox; Chief Financial Officer; Northern Trust Corp

Glenn Schorr; Analyst; Evercore ISI Institutional Equities

Brennan Hawken; Analyst; UBS Investment Bank

Betsy Graseck; Analyst; Morgan Stanley

Ebrahim Poonawala; Analyst; BofA Securities, Inc.

Alex Blostein; Analyst; Goldman Sachs Group, Inc.

David Smith; Analyst; Truist Securities

Brian Bedell; Analyst; Deutsche Bank Securities, Inc.

James Mitchell; Analyst; Seaport Research Partners

Steven Chubak; Analyst; Wolfe Research

Gerard Cassidy; Analyst; RBC Capital Markets

Presentation

Operator

Please stand by. Good day and welcome to the Northern Trust Corporation fourth quarter 2024 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Jennifer Childe

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's fourth quarter 2024 earnings conference call. Joining me on our call this morning is Michael O'Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team.
Our fourth quarter earnings press release and financial trends report 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 January 23 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through February 23.
Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our Safe Harbor Statement regarding forward-looking statements in the back of the accompanying presentation which will apply to our commentary on this call. 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 enable as many people as possible the opportunity to ask questions as time permits.
Thank you again for joining us. Let me turn the call over to Mike O'Grady.

Michael O'Grady

Thank you, Jennifer. Let me join welcoming you to our fourth quarter. 2024 earnings call. Our fourth quarter results cap off a solid year of progress executing against our strategic priorities. Relative to the prior year, fourth quarter trust fees were up 12% and net interest income grew 15%. Excluding notables in the prior year, revenue was up 13% and earnings per share grew by more than 50%. Importantly, we generated positive trust fee and total operating leverage for the second consecutive quarter while continuing to make significant investments in our business and infrastructure.
For the full year excluding notables, revenue was up 8% and we generated positive trust fee operating leverage and total operating leverage in excess of two points, which translated into EPS growth of 24%. We also returned more than $400 million to shareholders in the fourth quarter and $1.5 billion for the full year reflecting a five-year high. Our results benefited from strong market performance but also reflect continued progress implementing our One Northern Trust strategy.
Turning to slide 4. At the beginning of last year, we launched our One Northern Trust strategy, which serves as our road map to becoming a consistently high-performing company and producing meaningful value for all stakeholders. Our strategy is underpinned by three pillars: optimizing growth, strengthening resiliency and managing risk and driving productivity.
Turning to slide 5. We made significant progress across all three pillars in 2024. Let's begin with optimizing growth. Our organic growth trajectory improved across all three businesses with good momentum exiting 2024. Our One Northern Trust strategy places an emphasis on enhancing the client experience while driving sustainable, scalable organic growth.
Leveraging the capabilities of the entire firm, we deepened existing client relationships, adding products and services to meet their increasingly complex needs. We also embraced a more intentionally united focus for servicing our global client franchise, executing a joint calling program which resulted in over 140 new business opportunities.
As an example, NTAM, our asset management business, worked in close partnership with Our Global Family Office and asset servicing businesses, to develop a money market solution for a client seeking greater tax efficiency for its sizable cash investments. This turned out to be highly attractive to a number of our clients, and we experienced one of the fastest fundraises in NTAM history, raising nearly $3 billion over the course of six months with participation from 18 clients.
As we enter 2025, we will further institutionalize these approaches through enterprise-wide initiatives, aligning with meeting our clients' greatest needs and key industry trends such as alternative investment solutions, fan office services and liquidity solutions. We will also continue to prioritize growth in wealth and asset management and foster stronger collaboration between both businesses. Relative to strengthening resiliency and managing risk, critical to maintaining our reputation for strength and stability for regulators and the markets.
Last year, we designed and launched a multiyear effort to uplift our risk and control system and added new capabilities to strengthen resiliency. We invested in technology to eliminate legacy software applications, mature our cloud environment and bolster our cyber defenses. We also made steady progress automating processes and adopting additional artificial intelligence tools thereby reducing the number of manual processes meaningfully. In support of these initiatives, we created a new operating model and made a number of strategic hires.
In 2025, we will continue to prioritize investments to further strengthen our resiliency, including modernizing our core platform, accelerating our cloud adoption and pursuing additional opportunities to automate and deploy AI. We made meaningful progress driving productivity in 2024 and laid the groundwork to generate efficiencies in the coming years. We focused on key cross-functional areas in 2024, such as workforce and vendors. Ending the year with headcount 1% lower than two years ago, despite launching a number of growth initiatives and adding resources to support our resiliency efforts.
Within asset servicing, we've reduced headcount for seven consecutive quarters, translating to a more than 7% decrease relative to peak staffing levels. And importantly, many of the resiliency initiatives have also resulted in significant savings particularly from automation and digitization. Going forward, we will continue to enhance our productivity efforts, including leveraging the office of the Chief Operating Officer to implement more structural change to further centralize, standardize and automate operations and processes.
Turning to our business unit level performance, beginning with wealth management on slide 6. In 2024, we made foundational investments to deliver higher levels of organic growth on a more consistent basis. We grew our sales talent by nearly 20%, enhance our lead flow channels and grew our prospect pipeline materially. More recently, we transitioned our executive leadership and made important strategic hires across various markets and functions.
As a result of these efforts, we saw a steady improvement throughout the year in our organic growth trajectory with particular strength in GFO. We also increased wealth deposits by 9% and expanded our segment pretax margin by nearly 400 basis points relative to the prior year. And as a testament to the value proposition we provide to clients, we were awarded Best Private Bank in the US for the 13th time in the past 16 years by the Financial Times Group.
In 2025, Wealth Management will continue to maintain and strengthen our lead position in the upper wealth tiers. Within our Global Family Office business, we will continue to optimize existing client relationships, bolster investment advisory capabilities and expand into new markets, including international areas with significant potential.
By establishing a separate ultrahigh net worth practice, we will leverage our world-class Family Office platform to better serve wealthy families with more than $100 million in net worth whose needs differ from those of our core wealth clients. We also plan to deepen our penetration of select target markets in the US that have significant wealth and where we have an opportunity to increase our market share. To capitalize we'll add talent, invest in brand awareness and pursue market-specific growth opportunities. We will also expand our suite of alternative investment solutions for wealth clients.
Turning to Asset management on Slide 7. We refreshed our strategy in 2023 following the hiring of Daniel Gamba, our Asset management president. This included focusing on products where we have the clear right to win and more fully leveraging the full capabilities of the firm. We made meaningful progress in 2024 through investing in our platform and in core products.
We refined our go-to-market partnership with asset servicing, creating more comprehensive solutions for clients and prospects which resulted in more than 35 new client wins. Leveraging the success, we launched multiple products specifically geared towards the needs of our asset servicing, GFO and ultra high net worth wealth segments.
As a result, we realized positive inflows for the year, including 13% growth in liquidity, which surpassed $300 billion in AUM and generated positive long-term flows in the second half of the year. We also improved the trajectory of our organic fee growth meaningfully, all while delivering investment performance above our benchmarks. We aim to carry this momentum into 2025 by investing in areas of growth that are both aligned with secular trends in the industry and where we have the right to win. These include expanding our alternatives offerings, capturing growth in custom SMAs and broadening our ETF presence while simultaneously maintaining our focus on core strength in liquidity solutions, indexing, quant and fixed income.
Turning to asset servicing on Slide 8. Last year, we began to pivot the focus of our asset servicing business to pursue scalable growth in the core business, leveraging existing capabilities rather than bespoke build-outs to generate positive operating leverage and maximize our value to both clients and shareholders. To support this effort, we implemented disciplined criteria for new business generation to ensure that it is accretive, both at inception and on an ongoing basis.
As a result, we bid on fewer opportunities in 2024, yet saw no meaningful degradation to our win rate. We also prioritized growth within our highly scalable capital markets business which grew 17% in 2024, with roughly 50% of this growth coming from new clients. These new clients in turn became prospects for our core custody and fund administration services. As a result, we finished the year with improved organic growth and profitability and a solid pipeline of business to onboard.
In 2025, we will continue the momentum, investing in areas to support our clients' evolving needs and to capitalize on industry changes and asset flow trends. This includes sharpening our focus on global private markets and targeted asset owner clients and accelerating the growth of our banking and capital markets business. I hope these additional slides have given you a deeper understanding of our business and strategic objectives.
Let's turn to our medium-term financial targets on Slide 9. By focusing on driving organic growth and generating positive fee and total operating leverage, our medium-term targets are to achieve an expense to Trust fee ratio of 105% to 110%, pretax margins above 30% and an ROE at the upper half of our range of 10% to 15%, along with double-digit EPS growth and meaningful capital return to shareholders.
In conclusion, we're confident in our One Northern Trust strategy and determined to execute with discipline to be a consistently high-performing company for all our stakeholders. Our success couldn't be possible without the unwavering efforts of our more than 23,000 global partners. I'd like to thank them for their ongoing support of our clients with service, expertise and integrity. The enduring principles that underlie all that we do.
And with that, I'll turn it over to Dave to review the financials. Dave?

David Fox

Thanks, Mike. Let me join Jennifer and Mike, in welcoming you to our fourth quarter 2024 earnings call. Let's discuss the financial results of the quarters starting on Page 11. This morning, we reported fourth quarter net income of $455 million. Earnings per share of $2.26, and our return on average common equity was 15.3%. Excluding notables, relative to the prior year, the stronger US dollar was immaterial to revenue growth, but favorably impacted our expense growth by approximately 50 basis points.
Excluding notables, relative to the prior quarter, currency impacts unfavorably impacted our fourth quarter revenue growth by approximately 50 basis points, largely within our asset servicing, Custody and Fund Administration segment and favorably impacted our expense growth also by approximately 50 basis points.
Trust, Investment and other Servicing fees totaled $1.2 billion, a 2% sequential increase and a 12% increase compared to last year. Net interest income on an FTE basis was $574 million, a new record up 1% sequentially and up 15% from a year ago. Our assets under Custody and Administration were down 4% sequentially, but up 9% as compared to the prior year.
Our assets under Management were down 1% sequentially, but up 12% year-over-year. And overall, our credit quality remains very strong. Excluding notable items in all periods, Other noninterest income was up 13% sequentially and up 17% over the prior year. Revenue was up 3% sequentially and up 13% on a year-over-year basis. Expenses were up 1.2% sequentially and up 5.5% over the prior year, and earnings per share increased by more than 50% as compared to the prior year.
Turning to our asset servicing results on Page 12. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up 20% and new business growth continues to be booked at attractive margins.
Assets under custody and administration for asset servicing clients were $15.6 trillion at quarter end, reflecting a 9% year-over-year increase due to strong market levels and client inflows, partially offset by unfavorable currency movements. They were down sequentially due to unfavorable currency movements and weaker markets, particularly bonds. Asset servicing fees totaled $676 million. Custody and Fund Administration fees were $457 million up 9% year-over-year, largely reflecting the impact from strong underlying equity markets and new business generation.
Both year-over-year and sequential comparisons were dampened by the client exits we discussed in the second quarter, which are now fully reflected in our run rate. Assets under management for asset servicing clients were $1.2 trillion, up 12% over the prior year. Investment management fees within asset servicing were $157 million, up a strong 20% year-over-year due to favorable markets and new business activities.
Moving to our wealth management business on Page 13. Wealth management also had a healthy quarter with particular strength in GFO. Assets under management for our Wealth Management clients were $451 billion at quarter end, up 12% year-over-year, including 5% growth in the global family office AUM. Trust investment in servicing fees for Wealth Management clients were $547 million, up 14% year-over-year due to strong equity markets and modestly higher flows.
Moving to Page 14 on our balance sheet net interest income trends. Our average earning assets were down 1% on a linked-quarter basis as an increase in loans and securities was offset by a decline in cash held at the Fed and other central banks. Duration of our acuities portfolio is 1.6 years, and the total balance sheet duration continues to be less than one year. Net interest income on an FTE basis was $574 million, up 1% relative to the third quarter, and our net interest margin was 1.71%. The strength was attributable to several factors.
First, the deposit mix came in modestly better than our expectations. Average deposits were $113 billion, flat with third quarter levels, but noninterest-bearing deposits increased 7% on a linked quarter basis and increased 100 basis points as a percentage of the total mix to 15.5%. Second, deposit pricing improved, as part of our focus on client liquidity management, we made certain pricing adjustments to be more aligned with current market conditions.
And as expected, we continue to realize a very strong deposit beta on institutional accounts relative to fourth quarter rate cuts. Third, we saw a pickup in loan activity. And fourth, we continue to have higher than trend quarterly contributions from transactional and other items, although not as strong as what we observed in the third quarter.
Turning to our expenses on Page 15. Noninterest expense was approximately $1.4 billion in the fourth quarter, up 1% sequentially but down 1% as compared to the prior year. Excluding notable items in the prior period as listed on the slide, expenses in the fourth quarter were up 1.2% sequentially and up 5.5% year-over-year.
Let's now go back and review our core expenses from the quarter. Compensation expense was up 5.5% over the prior year, reflecting the impact of this year's base pay adjustments, modest levels of hiring associated with our modernization initiative and underlying growth in the business. And outside services expenses increased 7% relative to the prior year period, largely due to incremental modernization and resiliency spend.
It was down 2% sequentially as we started to see some consulting expense shift into compensation expense as we made permanent hires to replace consultants. Equipment and Software expense increased 9% year-over-year, mostly related to higher depreciation and amortization expense and costs associated with our cloud journey. We generated over 600 basis points of trust fee operating leverage nearly 800 basis points of overall operating leverage, and our expense-to-trust fee ratio improved by 100 basis points on a linked-quarter basis to 113%.
Turning to the full year's results on Page 16. Trust fees were up 8% in 2024 due to both strong underlying markets and solid new business generation. We generated record NII, up 8% for the year, driven by sharply increasing deposits at the beginning of the year and stability over the remainder of the year. A healthy loan book and the multiple securities repositioning trades we completed. Total revenue on an FTE basis was up 22% for the full year, and excluding notables, it was up 8%. Reported expenses were up 6.6% for the full year. Excluding notables, they were up 6.1% which includes the impact from our midyear decision to accelerate certain modernization and resiliency expenditures to offset a portion of the gains we realized from the Visa monetization.
Turning to Page 17. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimum. Our common equity Tier 1 ratio under the standardized approach declined 20 basis points on a linked quarter basis to 12.4% as capital accretion was offset by a slight increase in RWA.
Our Tier one leverage ratio was 8.1%, flat with the prior quarter. At quarter end, our unrealized pretax loss on available-for-sale securities was $598 million. We returned $403 million to common shareholders in the quarter through cash dividends of $149 million and common stock repurchases of $254 million. And for the full year, we returned over $1.5 billion, reflecting a payout ratio of 78%, including share repurchases of $938 million, our highest level in five years. We continue to expect our total operating expense growth to be at or below 5% for the full year excluding notable items in both periods.
Turning to NII. For the first quarter, we expect NII to be approximately $555 million to $575 million. This assumes the current market implied forward curve, a flattish balance sheet on a dollar adjusted basis, with stable deposit levels, a relatively stable deposit mix, stable pricing and modest currency headwinds. For the full year, again, assuming the market implied forward curve, we're expecting NII to increase by low single digits on a percentage basis.
And with that, operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Glenn Schorr, Evercore.

Glenn Schorr

Hi, thanks very much. Quick follow-up on and thank you for the NII guide. I'm just curious on the durability of some of the underlying trends, meaning the 7% growth in noninterest-bearing deposits in the quarter. Like was there some parking of cash by clients that naturally flows out? And then if you could just clarify when you talked about made pricing decisions in line with market conditions, is that just rates came down and you lowered some deposit pricing on clients? Thanks.

David Fox

Yeah, Thanks for that question. I think noninterest-bearing deposits were up over $1 billion. I think that's probably higher than other quarters. And my guess would be that there's some seasonality to that number. And certainly, we welcome it. But ultimately, it's not out of step with what we've seen in the past. In terms of the pricing adjustments, and we've talked about this before, we really have put a lot of effort behind our overall liquidity management, balance sheet management as it relates to deposits.
And so when we think about our pricing adjustments, it's more than just a normal course of business type of pricing adjustment. It's really taking a look at all the multiple currencies that we do manage on our deposit base and having a much more fulsome review of everything we're doing and making sure those betas are consistent with what we think they should be.

Glenn Schorr

Okay. I appreciate it. The other one I want to talk on is alternatives were a big part of your objectives across each of the Wealth asset management, asset servicing objectives. So my question is, a, are things accelerating? And then maybe you could talk about what is already built, what needs to be built. And then I think we're all curious on some specifics, like what product? What asset classes are seeing the most demand in?

Michael O'Grady

Glenn, I'll take that. And you're right that alternative investment solutions is something that cuts across each of the 3 businesses. And I think the way to think about it is instead of necessarily the businesses, but think about the solutions that we're providing. So from an investor perspective, whether that's our wealth clients and the segments within that or institutional clients, can we bring a broader set of solutions to them on this front for private market solutions. And so right now, we offer that through 50 South Capital, which is a part of our asset management business, and that's in a -- largely a fund-to-fund structure. We've seen great success with that, we raised over $1 billion that we closed on this year for that. So that's one of the solutions for a subset of the investors.
But in addition to that, we also have a platform that has other private capital managers on it. So different funds. And at this point, to your point, it's built out, if you will, but we think that we can offer more options on that platform. So that's another way to build it out. And also when you talk about what needs to be done, we want to make sure that all of our portfolio managers are fully versed in the various types of private capital alternatives. And so you have, I'll call it, that education and training part of it to make sure that, that is in place.
And then as I mentioned, institutional as well, with our asset servicing business, not only can we offer it through the vehicles that I talked about there, like 50 South, but also we can offer it in an advisory capacity. And so working with larger institutions that will then want us to provide advisory services on their -- the portion of their portfolio that's in alternatives. So that's on the investor side.
When you think about the private capital firms on that front, there's a lot that we can provide to them as well. Certainly, capital call facilities, but also banking solutions for the entities themselves and then very much so on the administration front. And there, I would say, if you think about specific areas in Europe, for example, where semi liquids are growing at a very high rate whether that's the structures that are in the UK, like the Long-term Asset Funds or LTAP or in Europe with a similar type structure they're growing at a high rate, and we have a very strong position in that. So providing services to the firms.
And then finally, I would say also to the principles of these firms. If we're working with them on the two fronts that I talked about there, we want to make them wealth management clients as well and have done that but look to grow that part of the business as well.

Glenn Schorr

I appreciate all that. Thank you.

Operator

Brennan Hawken, UBS.

Brennan Hawken

Good morning. Thanks for taking my question. Love to start out maybe a bit granular. In the past, you guys have spoken to targeting keeping, the expense growth in 2025 at 5% or better. Dave, you had some comments made in December industry conference where it seemed as though there was a little bit of uncertainty around that. Could you maybe clarify, is that a reasonable level to expect for 2025? And if not, what are the variables that we should watch?

David Fox

Yeah, thanks for that question. I was in the chair maybe 1.5 months or 2 months when I was asked that question. And now that I've been in the chair for four months and have gone through our planning period for '25, I have very strong conviction around the 5% or below number. So we can take that issue off the table, if you will. And obviously, what we try to do is in putting that number out, we don't put it out in isolation.
So our North Star is obviously what Mike talked about earlier, which is positive operating leverage. But at the end of the day, we know that the markets were pretty buoyant in 2024, and we want to prepare ourselves to have a resilient business model. And the only way to do that is to keep driving expense curve down.

Brennan Hawken

Got it. That's very clear. And then taking a step back, you guys provided some good details here in your strategic update, laying out the progress. But I'd like to maybe lay out a question that I get from investors a lot, which is the ROE targets. Do you think that the ROE targets are ambitious enough? The lower end of the range doesn't really suggest a ton of improvement from recent levels. And why is it that we haven't seen those ROE targets move higher, particularly as we've seen maybe some of the growth rates begin to swell?

Michael O'Grady

So we've had, to your point, the 10% to 15% range for some time. And that does cover different market environments and also different capital requirements as those regulations have changed over time. And we've seen even in the, call it, past couple of years here where there was the expectation there was going to be more capital, now we may be in a different environment where those requirements are not going to be as high. So that's what it would take into account.
To your question of why not hire per se, certainly, we're driving to higher returns on capital, but we're also trying to drive to growth. And so if you just said, could you hit a higher ROE? You could, but you might be detracting from your ability to grow the business, which we think it's the combination that you want over time. As I mentioned in my comments earlier, Brennan, we're certainly shooting for the top half of that range. And in fact, in this quarter, as you saw, we were over the top end of the range. So it's not to say we're trying to constrict the returns. It's just saying we want the optimal combination between growth and returns.

Operator

Betsy Graseck, Morgan Stanley.

Betsy Graseck

Hi, good morning.

Michael O'Grady

Good morning.

Betsy Graseck

During the prepared remarks, you were talking about how you've been able to get some of the expense improvements from asset servicing business lines, in addition to others, obviously. But in the asset servicing piece, with some headcount reduction, if I heard you correctly. And the reason I'm asking the question is Northern Trust has a long history of excellent quality service, right?
Service quality is the other North Star that you've got for yourself, if I could borrow that phrase, and I'm wondering how have you been able to reduce headcount and keep that service quality high. In the past, it's been this friction point that's kept, I think, the organization from executing the kind of efficiencies that you're seeing now.
And could you help us understand what is it that you're doing differently that's enabling this headcount reduction while maintaining the service quality? Is it something to do with where technology is today? Is it the AI? Is it something totally different, how you're organized?

Michael O'Grady

Let me start and then Dave may want to add. But Betsy, you're right, and you can say that service quality is another North Star, if you will, for us, because it is something that we look to differentiate ourselves. And to your point, what we're trying to do is maintain that but also gain much greater efficiency and how we provide those services.
And so just one thing I would say that we've done that's fundamentally different here is how we've organized our activities, how we've organized the company. And going back to kind of a little past midway in 2024, we created the Chief Operating Officer role with Pete Cherecwich and moved the operations into that group, that's so that we can gain much greater efficiency out of the operational aspect of that business.
So we can get greater centralization, standardization, automation. And when we do that, our view is that make those services better that we'll get greater resiliency from doing that, but also just ease of use. And a lot of that does come with investments in technology to be able to do that but we believe that as the business more scalable as well. So that's the way we can, I believe, maintain both.

Betsy Graseck

Okay. And how do you see the forward look here? How many more years of this do you feel that you have to be able to leverage the new structure?

Michael O'Grady

Yeah, I would say that it does take some time to gain the full benefits of what we're talking about here. So the way we've looked at some of the things we're doing here is these are -- we say multiyear, but that means kind of two to three years where you're really getting, I'll say, the greatest benefit. But then importantly, we're trying to set it up in such a way that it's sustainable as well. And so you continue to get additional benefits over time. But you're right, you're going to capture more in the first kind of two to three years of it before it reaches that level.

Betsy Graseck

Thanks so much.

Operator

Ebrahim Poonawala, Bank of America.

Ebrahim Poonawala

Good morning. I just wanted to follow up on the Global Family Office piece. Looking at sort of Slide 13, just talk to us, it was a priority in '24, I'm assuming it remains a big area of focus. When we think about the revenue growth, whether or not that should be sort of leading the way going forward, on a year-over-year basis, pretty strong growth in revenues within the GFO segment. It sort of plateaued out over the last few quarters. If you can talk to how we should think about revenue growth within GFO given the investments you made, given just the secular growth in that segment would be helpful.

David Fox

Sure, I'm happy to do that. What I would say is GFO probably had its strongest year than it's ever had in terms of organic growth was exceptional, very high single-digit organic growth. And we've also been reaching out more to international markets as well. And so from that perspective, it was a great year.
Also keep in mind that our assets under management in the fourth quarter were up 5%. And I think there is a lag effect there, right? So depending on when you bring that business in, you'll see it in your numbers. And so there's that issue as well. So I wouldn't say that it actually has plateaued. What I would tell you is the pipeline looks -- the GFO pipeline actually looks more robust going into '25 than it did in '24.

Ebrahim Poonawala

Understood. And maybe just a separate question. So I heard you on the NII guide. How should we think about the gearing of the balance sheet? One, do you think that we are at a point where if the Fed were not to do anything, rates stay more or less same, NII and deposit balances should grow from here, all else equal?

David Fox

Yeah, I mean, we're still anticipating a certain number of rate cuts, at least a couple this year in the US. And then globally, there's a lot of other potential rate cuts that are in our numbers as well. Keep in mind, our deposits aren't all in dollars. So we obviously did some pricing adjustments, which help on the NII front as well. We also have a pickup in loan activity, which we think could continue into next year. So there's a lot of different puts and takes when you get to the NII number apart from just the various cuts and interest rate cycles.

Ebrahim Poonawala

But rate cuts alone, would that be incrementally positive or negative given the bad balance sheet mix?

David Fox

No. We think, obviously, if there are less rate cuts, that's better.

Ebrahim Poonawala

Okay, got it. Thank you.

Operator

Alex Blostein, Goldman Sachs.

Alex Blostein

Hey Mike. Hey, good morning, everybody. I wanted to ask you guys a question around expenses again. So I heard you loud and clear on the at or below the 5% number. I guess in the past, the revenue base or rather the expense base, sorry, used to flex a little bit more up and down with revenues.
So I just want to understand a little better, has that changed at all, meaning that if you are in a sort of better fee environment in 2025 versus what you're contemplating? Are you still kind of committing to the 5% as the upper end of that? And maybe a better way to ultimately calibrate this is to talk about the expense to fee ratio that you expect for the full year 2025.

Michael O'Grady

Yeah, so I'll start on that, Alex. And to your point, there's always going to be a relationship between the expenses and the revenues, even with the market impact or rate impact, I'll call it, on NII and even the capital markets activities. So just take capital markets as an example because we don't talk about that as much.
We had a lot of success with capital markets this year and saw double-digit growth on the revenue side. There are certain expenses that come with that. If you think about just clearing expenses and things like that. The same thing with asset management. where depending on how the asset management products are distributed, there are some costs that go with that though.
And so we had, again, a successful year with asset management, Capital Markets, both of those very scalable products for us, which is good, there is going to be some expense that comes with the additional growth. So that's just the, I'll call it, the relationships there. That said, we believe that we're trying to get less of that flex, if you will. And so if you look at the fourth quarter here, obviously, strong revenues and expenses still at a level that's higher than we think it should be and that what we're aiming for, but it created a significant amount of operating leverage on that front.
Now as the revenue growth goes down, that's where we have to push that down faster and harder. So we're trying to hold it down even when revenues are more robust. And then when it's much tighter, ensuring that we keep them much more under control.

Alex Blostein

Got you. I know that all makes sense, like, obviously, ultimately, higher revenue comes with higher expenses, and that's a high cost problem. But I guess as you think about the expense to fee ratio, which would kind of normalize for that flex, so to speak, what do you guys are aiming for 2025?

Michael O'Grady

Yeah, So without putting a pin in on a number for 2025, definitely looking for positive fee operating leverage, which will drive that down, we're at 115 for the year, we were at 113 for the quarter. So you can see the trajectory. And the reason why we use that ratio, as you know, Alex, is because that essentially is trying to say, how do we take some of that flex out of the financial model, if you will.
And so we've identified the 105 to 110 as a level that says that's the right level of efficiency that we're able to maintain in providing those services and having them at the right level of service but also to the extent that you do see revenues come down, your expenses are not too high, if you will, and therefore, you've essentially taken some of that, again, flex out of it on the downside. So no specific target for this year other than continued progress into that range.

Alex Blostein

Got it. Okay. That's perfect. Thank you, guys.

Michael O'Grady

Yeah.

Operator

David Smith, Truist Securities.

David Smith

Your capital levels are still pretty elevated versus your closest peers at 12.4% CET1. Can you talk about how you expect to use your capital in the near term and where you might want to bring your capital levels to over the next year or so?

Michael O'Grady

Sure, I would agree. We have very strong capital levels right now, and that's a result of both the strong income generation, but also the benefit of the Visa gain that we had earlier this year. That's enabled us to repurchase stock at a higher level, and that's how we think about that lever is the share repurchases can flex up and down depending on our capital levels.
So we would expect as we go into 2025 to continue at this pace, were, as I mentioned, very comfortable at the current capital levels, but also would be comfortable moving them down somewhat. We have a target range to be above some of our closest peers when it comes to capital but the level that we're at right now is very comfortable and gives us the room to be able to do more. Dave mentioned for this year, if you exclude the notables, our total payout ratio was in the area of about 78% and we would expect to be at that level or higher as we go into 2025.

David Smith

Thank you. And then separately on NII. If I just take the midpoints of your 1Q and full year NII guide, it would suggest NII staying pretty consistent throughout the year, at least on average. Is there anything that we should be considering in terms of the cadence there across the cuts, in the forward curve as well as your expectations for loan growth or balance sheet shifts?

David Fox

No, I mean one thing to keep in mind with us as it relates to NII is that we are a very liability-driven institution. And so -- and that's why, to Mike's point about capital, that's why we keep this excess capital. And so for example, we saw a very large pickup in our loan activity over the last quarter. And so we want to make sure our balance sheet is there for our clients.
We can't always predict when that's going to be, when they're going to want to put deposits on or take loans out or things of that nature. So we've guided still for deposit for the NII to be up over the course of the entire year, but low single digits. But at the end of the day, trying to land on the head of a pin as to exactly when that's going to happen quarter-by-quarter is going to be difficult to do for the entire year.

David Smith

Understood. Thanks.

Operator

Brian Bedell, Deutsche Bank.

Brian Bedell

Hi, good morning, folks. Thanks for taking my question. Maybe just on the NII line and then correlate that with expenses because clearly, you're what you can manage more -- with more certainty is the expense to Trust fee ratio. I guess the question is, to the extent NII oxalates around that sort of range to say if it is lower. Are you still keeping a target of generating total operating leverage on total revenue, not just fees, but combined with NII? Or would you just really just focus on the fee side?

David Fox

So here's what I would say. So we're trying to build a sustainable financial model that can last through all cycles. So at the end of the day, the cost curve has to go down regardless of markets, right? We can't rely on things we don't control. And so when we look at what we're trying to do over time is really get that expense line to stand up and not be dependent on a particular market dynamic.
And so to the earlier comments that we made around the growth in expenses, that's market-driven, that doesn't mean that all the other expenses, if we have a great year in NII are going to go up sequentially, right? We've got to keep a lid on all the other stuff that's not market-driven. And that's going to be a goal regardless of the NII number.

Brian Bedell

Yes. That's good color. And then maybe just shifting over to the Wealth Management business and sort of the mission of improving the penetration within that channel Northern Trust Managed products, good success the last couple of quarters with the cash product that you mentioned Mike, which we can see in the results.
How are you envisioning that over the next year, one to two years in longer-term product? Back several years ago, you -- I think that the mix of NTAM product within the channel was in the north of 40%. It's in the high 30s now. Do you see that getting back to the mid say, low to mid-40s over time? And then how do you think about the incremental revenue pickup from doing that? Or is that kind of neutral?

Michael O'Grady

No. We see it as a positive. And we say that in the sense that we really have the asset management business and Wealth Management business working closely together. We made some fundamental organizational changes going back over a year ago to better align the, I'll call it, the coverage of Wealth Management by asset management, the wealth client group. And in the past year, we've seen the benefits. It's still, I would say, in the early days as to how that will flow through.
But the idea is by better covering them, if you will, understanding what the needs are of Wealth Management, we can provide a broader set of alternatives that are aligned with what the needs are of our Wealth Management clients. So that's been a real positive.
In addition, I would say, what we've seen is the opportunity to further segment the solutions that we're providing on behalf of NTAM to the Wealth Management business. So my point being, the needs of our GFO clients from an asset management perspective are different than those for, let's say, our core wealth group. And so how do we differentiate that offering.
And then importantly, when we talk about the ultra high net worth segment, so think about $100 million plus, but not full Family Office, that's where we see further opportunity to tailor what we're providing to them. Some of that will be through alternatives, which I talked about earlier but it's a broader set of capabilities as well. You heard about ETFs, for example, we're going to look to provide more ETFs that fit with the core needs of the wealth client base. So we see opportunity with the businesses working closely together going forward.

Brian Bedell

Great, great. Thank you. Sure.

Operator

Jim Mitchell, Seaport Global Securities.

James Mitchell

Hey, good morning. Maybe just on asset servicing. So you guys obviously have narrowed your focus to more back-office custody. So it seems like the pipeline is still pretty solid. But how do you think about the organic growth from here, the trade-off between that and the improving incremental margins? And then secondly, how do you think -- it sounds like a lot of your larger peers are attempting the same strategy. So have you seen pricing pressure or competition increase for pure custody deals? Thanks.

Michael O'Grady

Sure. So our business at this point is relatively balanced in -- between what we do for asset owners globally and what we do for Asset Managers. So we feel good about that mix. And so going forward, we would look for the growth rates to be similar, the organic growth rates. That has not necessarily been the case over the last 5, 10-plus years where we were growing out the asset manager side of the business.
By its nature and what we do on that front, the asset owner side is a more scalable business for us. So by having that balance, that's why when we talk about optimized growth and scalable growth in this business. It aligns with bringing on new business that is less, I'll say, resource intensive. But not to say that in any way, we're carving back or pulling back from a particular market or a service that we're providing.
To your point, as we go forward here, we see strong business on both fronts. And frankly, improvements in, I'll say, the pricing conditions in the market is very favorable, whether it's favorable for ourselves and our competitors, that's fine as well. In 2024, there are a number of situations where we declined to participate in providing a bid or participating in the RFPs because we didn't see pricing that reflected what we're trying to do for the business overall. We'll see how that plays out this year. But I think to the extent that it's favorable conditions, it certainly benefits us.

James Mitchell

Okay. Just to clarify, so pricing, you feel has been better as companies just focus more on margins. Is that the takeaway?

Michael O'Grady

I think I can only speak specifically for us, but I would say, absolutely. We've already seen that in the I'll call it, the portfolio of new business for 2024, which, again, transitions over essentially the next kind of 12 to 18 months but it is a higher margin business for us because we are very intentional about that.

James Mitchell

Right, great. Thanks for that.

Operator

Steven Chubak, Wolfe Research.

Steven Chubak

Hi, good morning.
So I wanted to start off with a question just given the strong performance and better organic growth, that was cited for Wealth and asset servicing, looking given the favorable trends that were cited, I was hoping you could speak to what drove the more subdued AUM and AUC growth relative to peers in 4Q? And are there any future plans to maybe include organic fee or asset growth targets in addition to the medium-term targets that you just unveiled?

David Fox

Yeah. Thanks for that question. Looking at asset servicing in particular, just take one issue off the table. It was not a result of any client losses. Our client activity was very good in the quarter. It's important to note that currency movements were about 80% of the sequential decline. We also have a pretty high exposure to certain markets like fixed income that were lower and the broader international markets also had some issues as well. So it was really more of that than anything else.

Steven Chubak

And regarding any potential plans to include future organic fee or asset growth targets as part of like the range of targets that you guys just revealed?

Michael O'Grady

Not at this point. And part of it is just the, I'll call it, the calculation and determination of organic growth does involve estimates for the impacts of markets and currencies and things like that. So it's a great metric in KPI for us to drive the business at a granular level for us. But it's not, if you will, kind of a reportable number. And therefore, that's why we talk about it in the terms that we do.

Steven Chubak

Understood. And if I could squeeze one more, similar line of questioning to what Brennan asked on the medium-term targets. I actually want to drill down into pretax margin target, given you already achieved a 30% profitability level in the back half of this year, I heard along on this call about the commitment to drive better efficiency from here. I was hoping to get some perspective or context as to what informed the decision to set the bar at 30 and not something higher in terms of the longer-term objectives?

Michael O'Grady

So to your point, we hit 30% for the quarter, but we didn't hit 30% for the year. So we're still working our way into that range, which over extended time periods, we've been in the 30-plus percent pretax margin range. And the rationale is similar to what I mentioned with Brennan's question, which is we're trying to drive the combination of growth and returns.
So getting the margin up to some very high level, if you will, but doing so by essentially cutting off growth is not going to produce the greatest value for shareholders. And so we think that, that right combination is in that kind of 30-plus range. So if you said low 30s, that's the area we've seen where we can have that best combination of growth and returns.

Steven Chubak

Understood. Thanks so much for taking my questions.

Michael O'Grady

Sure.

Operator

Gerard Cassidy, RBC.

Michael O'Grady

Good morning.

Gerard Cassidy

David, when you mentioned in response to one of the questions about Northern is focused on building a sustainable financial model. Can you through the cycles, can you define what that sustainable financial model is from your viewpoint?

David Fox

Yeah, I mean obviously, it means you can't rely on factors you don't control, right? So when you think about expenses, that's obviously a huge focus, and you think about organic growth. Those are the two things you can spend a lot of your time making sure you control those elements. And so you're always going to get buffeted by external events.
There's nothing you can do about that. But you certainly can't predict it, and you definitely don't control it. So the more organic growth you've got built into your model, the more resiliency you've got in your financial model and that's sustainable through time. So that is the overall goal is to get that expense curve down and get the organic growth up so that we can weather the storm if there is one going forward.

Gerard Cassidy

Very good. And then a more macro question for Mike and you, David. What are some of the optimism many investors, we all seem to be sharing this optimism about the outlook for your business as well as the markets in general for 2025?
The economy, we have a new administration coming in, as we all know. What are the risks that you guys keep your eyes on aside from the geopolitical global risks, which we all know about? But when you guys sit around at the end of the day and the outlook, again, appears to be optimistic, but what are the risks that you talk about and always keep your eyes on?

Michael O'Grady

Sure. So it's interesting, Gerard, because it's basically, I'll say, the opposite of what Dave just said, right, which is we focus on the things we can control, and then I'll say, we worry about all these things that we can't control. And that's the nature of I'll say, the business we're in for our clients so that we are resilient, we are trying to look forward but also just being a market participant and trying to generate, obviously, financial returns as well.
And so the things that we focus on or are concerned about do relate to the macro environment and what could happen to the extent that markets are down significantly. How are we prepared for that? Again, not just financially, but also for our clients. Or to the extent that there are, I'll say, like operational risk in the environment that come as a result of greater volatility. How are we prepared for surge volumes in different parts of our business? So it's those types of things that are the greatest concern.
Certainly, central bank activity has a big impact on our business because it can affect the level of liquidity in the market, and it can also affect the rates that are earned and we're carrying, obviously, a large balance sheet. And when you think about time periods where we've had zero interest rates, or negative in parts of the globe, that puts a lot of pressure, again, not only on our clients, but on our financial model. And then when you see rates spike up, you get a different impact. So it's those types of things where it's less about, I'll say, predicting what's going to happen and more about just being prepared for what could happen.

Gerard Cassidy

Very good. Thank you, Michael.

Operator

Yeah, thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Jennifer Childe, Director of Investor Relations.

Jennifer Childe

Thank you, operator, and thanks everyone for joining us today. We look forward to speaking with you again the future.

Operator

Thank you. And that does conclude today's conference call. We do thank you for your participation. Have an excellent day.