Northern Trust Corp (NTRS) — Q3 2023 Earnings Call Transcript

Thank you, Melissa, and good morning, everyone, and welcome to Northern Trust Corporation's Third Quarter 2023 Earnings Conference Call. Joining me on our call this morning is Mike O’Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Grace Higgins from our Investor Relations team. Our third 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 October 18 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 November 18. 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 on Page 12 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 today. Let me turn the call over to Mike O’Grady.

Thank you, Jennifer. Let me join in welcoming you to our third quarter 2023 earnings call. Our results for the third quarter reflect solid execution against the challenging phase of this interest rate cycle, particularly as rates appear close to be peaking. Third quarter deposit levels were generally in line with seasonal expectations, but funding costs were significantly higher, putting pressure on net interest income. We're focusing primarily on those areas of the business that are most under our control; namely, trust fees and expenses. In those two areas, we're pleased with our performance. Trust fee revenue was up both sequentially and year-over-year. Expenses were well controlled, and we improved our capital position. Our Wealth Management business grew trust fees on both a sequential and year-over-year basis. We saw ongoing strength in the higher wealth tiers and within our Global Family Office segment, where momentum outside the U.S. continues to be brisk. Families with large and complex structures continue to be an area where we excel. Activity with business owners also remains robust, helping them optimize their complex personal affairs while they attend to growing their businesses is a consistent theme. We're also seeing early success with various new marketing approaches and referral sources. In particular, during the third quarter, we had healthy new business generation with clients with assets over $50 million. In Asset Management, we saw positive flows into our institutional money market platform for the third consecutive quarter. Relative to benchmarks, our tax-advantaged equity product performance remained strong within the quarter cementing its one, three, and five-year track record of outperformance. Importantly, two recent large asset servicing wins contain asset management mandates for index fixed income and outsourced investment solutions, reinforcing our combined strength as One Northern. Within Asset Servicing, we had good momentum in core custody and fund administration, and our pipeline remains solidly within historical levels. Our front office solutions is resonating particularly well across regions and different client types. One notable front office solutions win in the third quarter was the $32 billion Abu Dhabi Pension Fund. Our ability to provide a comprehensive view across public and private assets was cited as a key differentiator. Importantly, we were also selected to provide global custody, liquidity management, performance analytics, and portfolio optimization. We also had good success in the U.S. asset owner space where we continue to take share. In closing, we entered the fourth quarter on solid footing. Our balance sheet continues to be very strong with ample capital and liquidity, and our credit quality remains excellent. New business momentum is healthy and our pipeline is robust. Expense growth has declined each quarter this year, and I'm confident that we'll continue to build on this discipline. We're well positioned to navigate the current uncertain environment, including the proposed regulatory changes related to capital and long-term debt and generate value for our stakeholders. I'll now turn the call over to Jason.

Thank you, Mike, and let me join Jennifer and Mike in welcoming you to our third quarter 2023 earnings call. Let's dive into the financial results of the quarter, starting on Page 4. This morning, we reported third quarter net income of $328 million, earnings per share of $1.49, and our return on average common equity was 11.6%. Our assets under custody/administration and assets under management were down modestly on a sequential basis but up sharply on a year-over-year basis. Unfavorable markets and currency movements more than offset positive asset inflows relative to the prior period. Year-over-year levels benefited from favorable markets, currency improvements, and asset inflows. On a year-over-year basis, currency movements had an approximate 90 basis point favorable impact on revenue growth, largely within our Asset Services division, and a 100 basis point unfavorable impact on expenses. On a sequential basis, currency impacts were immaterial. Excluding notable items in all periods, revenue was down 2% on both a sequential quarter and year-over-year basis. Expenses were up 1% sequentially and up 5% over the prior year. This reflects an expense-to-trust fee ratio of 115%, down from 116% in the second quarter but higher than the 112% we posted in the third quarter of last year. Pre-tax income was up 1% sequentially but down 20% over the prior year. Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, a 1% sequential increase and a 3% increase compared to last year. All other noninterest income was up 6% sequentially but down 3% over the prior year. Net interest income on an FTE basis was $469 million, down 10% sequentially and down 11% from a year ago. Our provision for credit losses was $14 million in the third quarter. Overall, our credit quality remains very strong. We had small net recoveries for the quarter, and there was a modest increase in nonperforming loans. Turning to our asset servicing results on Page 5, assets under custody and administration for asset servicing clients were $13.2 trillion at quarter end, down 2% sequentially but up 10% year-over-year. Asset servicing fees totaled $626 million. Custody and fund administration fees, the largest component of fees in the business were $428 million. Sequential performance reflects favorable markets and new business activity, offset by weaker transaction volume. The year-over-year strength was due to solid new business activity and favorable market and currency impacts that were partially offset by lower transaction volume. Assets under management for asset servicing clients were $963 billion, down 3% sequentially but up 10% year-over-year. Similarly, because a significant portion of our fees are billed on a lagged basis, the sequential decline in AUM will impact our fourth quarter trust fees. Investment management fees within asset servicing were $137 million. Moving to our Wealth Management business on Page 6, assets under management for our wealth management clients were $370 billion. Trust administration and other servicing fees for wealth management clients were $486 million. Our average balance sheet decreased 4% on a linked quarter basis, primarily due to lower client deposits. Client liquidity was essentially flat during the third quarter. Average deposits were $102 billion, down $4 billion or 4% sequentially, in line with our expectations for this seasonally weaker quarter. The decline was seen largely in the interest-bearing channel as clients continue to reallocate cash positions. Noninterest-bearing deposits remained stable, down less than $1 billion sequentially, and the mix held steady at 17%. At quarter end, operational deposits remained at approximately two-thirds of institutional deposits and institutional deposits comprised 75% to 80% of the total mix. Shifting to the asset side of the balance sheet, the duration of the securities portfolio reduced slightly to 1.9 years. The total balance sheet duration continues to be less than a year. Loan balances averaged $42 billion and were flat sequentially. Our loan portfolio is well diversified across geographies, operating segments, and loan types. Approximately 70% of the loan portfolio is floating, and the overall duration is below one year. Our liquidity remains strong. Cash held at the Fed and other central banks was down, reflecting the absorption of the deposit decreases, but highly liquid assets comprise more than 55% of our deposits and nearly 50% of total earning assets. Net interest income on an FTE basis was $469 million for the quarter, down 10% sequentially and down 11% from the prior year. NII reflected the impact of several dynamics. We saw some continued client migration into higher-yielding cash alternatives, but the pace moderated as we expected. Deposit cost increases were a slightly bigger factor with funding costs up 46 basis points over the second quarter. Due to the competitive environment, we repriced a small number of meaningful products to ensure we're protecting deposit volumes. We're not price leaders, but we're vigorously defending our deposits with an eye toward playing the long game. We expect to benefit from this strategy when rates decline. Client engagement also led to a combination of specific repricing on existing accounts and a shift to higher-paying term deposits. There's no question that clients want to remain on our balance sheet. But sensing that the rate cycle is close to peaking, they've begun to stretch for duration. Our NII in the fourth quarter will continue to be driven by client behavior, which has been less predictable given the speed and extent of this cycle's rate hikes. Our average client deposits thus far in the quarter are $100 billion. Modest outflows are expected to continue, due in part to client efforts to optimize returns and some known outflows related to M&A activity and other corporate needs. Pricing should remain under pressure with further NIM compression possible. We currently expect fourth quarter NII to be in the range of $430 million to $440 million. Factors that could swing the outcome include the pace of further deposit outflows, the level of price pressure, the extent to which we see a shift in deposit mix, and the offsetting impact from the repricing of the securities portfolio. As we look out to 2024, there are a wide range of scenarios under which net interest income could trend. Deposit pricing pressure, our securities maturity schedule, investment outlook, and other factors provide upside that is not reflected in the current quarter. Turning to Page 8. As reported, noninterest expenses were $1.3 billion in the third quarter, down 4% sequentially, but up 4% as compared to the prior year. Excluding unusual items in both periods, including those noted on the slide, expenses in the third quarter were up 1% sequentially and up over 5% year-over-year. I'll hit on just a few highlights. Excluding unusual items, compensation expense was down 2% sequentially. This reflected reductions in incentive compensation and headcount actions taken year-to-date. The increase over the last year reflects 2023 base pay adjustments. Excluding unusual items in all periods, non-compensation expense was up 3% sequentially. Our expense-to-trust fee ratio improved 100 basis points sequentially to 115%, but remains higher than our targeted range of 105% to 110%. As a reminder, we began the year expecting to take at least 200 basis points off of our 2022 adjusted expense growth rate of 9%. Our first quarter adjusted results were meaningfully better, up 5.8% year-over-year. Our second quarter adjusted results were even better, up 5.3% year-over-year. And our third quarter results were in the same range despite unfavorable currency impacts. For the fourth quarter, we expect continued improvement. Compensation expense is expected to be up $5 million. Benefits expense should be our normal fourth quarter lift of $3 million to $5 million. Outside services likely to be up approximately $10 million. Equipment and software should be up approximately $10 million relative to adjusted third quarter levels. And occupancy is expected to increase a few million dollars above adjusted third quarter levels. Other operating expenses have many components, including market-driven categories that are not predictable, but it has tended to increase in the fourth quarter. All in, this would put our full year adjusted expense growth rate at approximately 5% or roughly 400 basis points lower than 2022 levels. Our financial model is based upon mid-single-digit trustee growth from a combination of organic growth and market appreciation. Against this backdrop, we hope to generate 100 to 200 basis points in trust fee operating leverage in normal macro environments. Our capital levels and ratios remained strong in the quarter. We continue to operate at levels well above our required regulatory minimum. Our common equity Tier 1 ratio under the standardized approach was up slightly from the prior quarter to 11.4% as capital accretion more than offset the unfavorable impact from higher rates on our securities portfolio. This reflects a 440 basis point buffer above our regulatory requirements. Our Tier 1 leverage ratio was 7.9%, up 50 basis points from the prior quarter. At quarter end, our AOCI was a negative $1.4 billion, a slight improvement over second quarter levels. We returned $159 million to common shareholders through cash dividends of $158 million and common stock repurchases of $1 million. We slowed our buyback activity in order to reserve for the anticipated FDIC special assessment. We're well positioned to meet the proposed regulatory requirements that Mike referenced without significant changes to our operating model. And with that, Melissa, please open the line for questions.

That was like the price is right. I like it. Okay. So I appreciate the range of outcomes for NII next year that you can control. So I'll leave that aside for a second. But you mentioned your expense-to-trust fee ratio, your target and what you can do in terms of operating leverage in a better environment or normalized. I'm curious just what's the overall approach towards expenses as you enter budget season next year within that mindset of what your goals are? And how do you approach it with that much uncertainty around things that you can't control?

As we approach this time of year, we are focusing on identifying our launch points. I've shared a financial model for you to consider, which suggests that over time we can expect support from the equity markets alongside low to mid-single-digit organic growth. Achieving an additional 100 to 200 basis points in fee operating leverage would position us favorably for good earnings per share growth, given our current pretax margin. This is one of the key metrics we monitor closely. We're still facing an inflationary environment, making it more difficult to gain that operating leverage, particularly in relation to fees, as expenses are high and we don’t see the advantages of elevated rates on the trust fee line. However, we've dedicated significant effort this year to reducing our year-over-year expense growth rates. Looking back to 2022, where we saw a 9% increase, we recognized the need to improve and have been working on reducing those rates quarter after quarter. Initially, we targeted labor costs, which represent our largest expense. We've reduced headcount, and another important aspect is technology expenses, including equipment, software, and outside services. Although growth rates in this area remain high compared to the rest of the company, we've made substantial progress and expect those rates to decline next year. We believe we can achieve another year of progress similar to this year by continuing to lower our year-over-year growth rates.

I'm looking for clarity. You have substantial capital and generate a lot as well. However, I'm interested in how some of the large banks perceive the impact of risk-weighted assets. At first glance, what kind of impact are we discussing? You've mentioned that it doesn't disrupt your model, which I agree with. I'm just wondering if you can help us understand the potential impact in concrete terms.

Sure. I'm going to provide a broad estimate of 5% to 15% in risk-weighted assets. This will be influenced by several factors. One advantage we have is the diversification of our business model. The custody business does involve significant operational risk, which is the main factor driving changes. However, we anticipate some benefits from the way certain loans are treated, considering the nature of our underlying loans. There are also additional dynamics that should positively affect our risk-weighted assets. At this point, we expect it could range anywhere from 5% to 15%. We are confident in our CET1 levels and our liquidity. We will monitor the performance of our peers and what is happening in the business, but we also have flexibility in other areas to manage this situation effectively.

Good morning, everyone. So I guess I wanted to start on the custody and fund admin fees. They were essentially flat quarter-over-quarter, I guess, a little bit softer than we expected. What are some of the key drivers that played out this quarter. And as you noted, the lower market levels present a bit of a headwind here for the fourth quarter, but you did talk about some positive dynamics on the new business front. So what are the puts and takes that we should think about over the fourth quarter and then heading into next year?

Sure. If we look at the custody and fund administration line, we noted that currency on a sequential basis was largely unchanged year-over-year, contributing roughly 1.5% to 2%. When we examine the quarter sequentially, the net new business in custody and fund administration fees was slightly positive, although in low single digits. Transaction volumes remained light, and we are beginning to see this as a potential long-term trend, with clients favoring indexing over active management. This shift leads to decreased trading activity, reporting, and transitions. Consequently, we continue to experience a lower level of transaction-related activity. However, the overall business remains strong, with a positive net new business outlook, and as Mike mentioned, our pipeline appears robust.

Okay. And then if we just change gears to the deposit side, it sounds like the pressure there still remains. Could you just maybe unpack some of those underlying dynamics by client type and maybe just touch on where the pressure is perhaps the greatest and maybe where there's a bit less of a challenge. And are you seeing some elements of the deposit base that are seeing stabilization here? Or is it really kind of across the board?

It definitely seems to have stabilized in many respects. However, predicting its future direction is challenging, as it has been a volatile environment and clients are trying to determine their next steps. Many clients are extending their deposits, particularly in the wealth management sector, where we saw a notable rise in term deposits. Clients are viewing this as an opportunity to shift funds from checking accounts into CDs. This trend reflects the nature of our clients, who typically hold substantial deposits, allowing them to allocate some of their funds strategically instead of solely for everyday liquidity needs. Interestingly, on the wealth side, deposits have increased slightly, indicating that our pricing strategies have been effective. Clients appreciate the strength of Northern Trust's balance sheet and are confident in keeping their deposits there. However, on the institutional side, we experienced some declines in average deposits as clients shifted to longer-duration or higher-yielding liquidity solutions. Overall, liquidity remained stable across the company, with clients continuing to trust Northern as their preferred financial partner, moving between different liquidity options. Looking ahead, it's notable that balances so far this quarter have remained just above $100 billion, which is higher than we anticipated at this stage. To provide some context, we expect net interest margins to remain relatively flat, with deposits likely needing to decrease to the $93 billion to $95 billion range for us to reach our anticipated earnings of $430 million to $440 million. However, deposits are currently holding higher than that level just two weeks into this 13-week quarter.

So just another one around deposits. you guys seem to have been a bit surprised, I guess, by this latest move in terms of kind of the catch up that you played there you articulated at the conference in September and obviously today. Do you feel like you caught up to where institutional pricing is? Or do you still think there might be incremental migration or kind of the need to increase price more? And then again, on the institutional side of things, is there a particular client base or channel internationally that's driving this pickup? Or is that fairly broad-based? Because your competitor set there is fairly limited, right? I mean we know there is three or four. And at the end of the day, that's where you compete on the custody side. So I'm just kind of curious where we are in that process?

It seems like we reached our expectations. We anticipated a decrease of about 5% in net interest income but ended up with a 10% decline. We noticed this mid-quarter and identified the issue around August when the market was generally increasing deposit pricing. We responded accordingly, as we're not setting prices but rather adjusting to market conditions. As a result, deposit activity has shown signs of stabilization, which explains the flat trends. Moving forward, we expect stabilization at levels we had initially hoped would be higher. The crucial takeaway is that pricing appears to be appropriate for clients to balance activities. The pricing adjustments we made were minimal in number but significant in terms of large accounts. Regarding geography, most of our significant actions took place in the U.S. custody sector on the institutional side and in the money market deposit accounts within wealth management. We adopted a focused strategy to increase those prices, and early indicators suggest we executed that well.

Understood. Let's change the topic a bit. You've shared positive insights regarding the new business over the past few quarters. As you know, translating net figures into fees can be challenging and somewhat unclear. Can you provide some perspective on the fee backlog and how we might see that reflected in revenues over the next year? Do you believe the business has enough scale to handle larger mandates, considering a significant increase in expenses? To clarify Glenn's point, it seems your goal is an expense growth of around 3% to 4% in 2024. Is that achievable with additional net new business?

We didn't specify a figure for expense growth, but we aim to improve over this year's performance. The increase in the asset servicing business has come with higher expenses, and it's less scalable compared to the wealth sector, which is highly scalable. Nevertheless, this year, we focused not only on revenue growth but also on managing the kind of business we accept. We concentrated heavily on headcount and compensation, and moving forward, we will scrutinize the expenses associated with new business. The team is committed to being diligent in identifying which businesses to pursue.

Yes. And Alex, I would just add to what Jason is saying there is that's why we're driving so hard on productivity as well. is because we have to have the capacity to invest in the foundation of the business and what we're building out, the investments we need to make. But then also, to your point, if you're going to bring on new business that has resources, you have to be able to offset a portion of that as well.

Got it. Okay. That all makes sense. And so I mean to put words in your mouth on the 3% to 4%. It just sounds like less than 5%. So maybe you’re thinking, okay.

I would like to clarify something because it seems you outlined some of the underlying assumptions for the $430 million to $440 million expectation for the fourth quarter. It sounded like you indicated that this is based on a deposit base of 93% to 95% and flat net interest margin. Did I understand that correctly? Does this imply that you are preparing for further declines in deposits, even though they have been stable so far this quarter?

I want to clarify my earlier statements. I noted that this implies a slight increase in NIM, and your observations about deposit levels are correct. Last quarter, we anticipated a 5% decline, but the market turned out to be more competitive than expected, requiring us to adjust our approach based on market conditions. As we entered this quarter, we did prepare for a potential further decrease in deposits, which remains a possibility. However, the initial data for this quarter suggests that deposit levels are actually higher. Looking ahead to next year, we don't view the $430 million to $440 million as a fixed run rate; we believe there are reasons to expect an increase in NII from that point. For instance, the runoff in our securities portfolio and our current trading yields suggest positive reinvestment options. We've managed our balance sheet very defensively given the deposit decline and stress in the banking sector observed in the spring and summer. We've positioned ourselves to be cautious based on our balance sheet strength. While we can keep our duration short without aggressively pursuing NII, we can utilize non-HQLA capacity as we gain confidence in deposit stability and the overall industry. We have various strategies to enhance NII. While we're sharing insights about the fourth quarter, please don't interpret this as something that should be directly projected for 2024.

Okay. That's reasonable. The outcome for 2024 will be influenced by the competition for deposits, so we will monitor that. As a follow-up, I noticed you mentioned a Visa gain in the press release, but I didn't catch the specific details in the commentary. Could you provide a quantification of that impact?

Yes, it's up $10 million to $15 million compared to the second quarter, which experienced a slight loss, while this quarter shows a slight gain. This change is related to a derivative linked to part of our Visa position. As our outlook on the duration of that swap changes, it affects the mark-to-market value. Recently, Visa announced a shareholder proposal to release half of their shares, which shortens the duration of that swap and alters the mark from what it typically would have been.

So just in thinking through the puts and takes to NII, you mentioned taking securities yielding to and reinvesting at $5 million here's update us on how much AFS and HTM roll-off you're expecting per quarter going forward. And as those securities mature, are you mostly reinvesting that into cash?

I want to make sure I got the question fully. Can you repeat it for me? You just can't throw a little soft. I want to make sure I got it.

Yes. So as you as you're reinvesting securities from 2 into 5, could you let us know just how much AFS and HTM roll off you're expecting per quarter? And are you reinvesting that into cash?

A significant portion of the recent reinvestment has been in cash. However, as I mentioned earlier, this is not necessarily the direction we will continue to take. Looking at our schedule, we expect an average runoff of about 2%, particularly regarding U.S. dollar-denominated amounts. Overall, there is roughly a little over $1 billion maturing each quarter across all currencies, which is what we are reinvesting.

Just one clarification on the other income of $68 million this quarter compared to $55 million in the second quarter. Should we consider that $55 million as a more normalized run rate given the fluctuations related to the Visa swap gain?

Yes, I believe that Visa will eventually see the current noise in that line item diminish. Visa announced they are not making this announcement, which should influence the swap at some time. Therefore, I think it shouldn't continue to be a negative, and that negativity will fade. The prior run rates are likely too low, while the current run rate might be excessive. This is the best way to consider it.

Okay, fair enough on that. Just to clarify the NII guide for the range of $430 million to $440 million, is that for FTE? Let me ask that first. That's for FTE, correct?

Yes.

As we approach 2024, there are many potential scenarios to consider. Regarding competition, it seems to have been somewhat sporadic in the third quarter, but it has been addressed. I'm curious about your thoughts on whether this competition might arise again, even though it's difficult to predict. Given that you've been able to maintain deposits despite higher rates, does that create a deterrent for other institutions trying to attract those deposits without success? Also, how would you assess the level of deposits that could be vulnerable to competitive pressures within the custody and wealth management sectors?

In the institutional business, many deposits are used by clients for processing payments. These clients have end-of-day deposit requirements as well as intra-day needs, and they must consider their liquidity throughout the day. We handle a significant volume of payments across the system. This is why we emphasize not just the traditional operational aspects but also the volume and speed of transactions in our asset servicing business, which is substantial. Larger clients, who are more sensitive to interest rates, tend to make choices about where to keep large sums of money, often leading to negotiations. This represents the higher end of our clientele but also comes with narrower spreads. On the wealth management side, clients make decisions based on product options, shifting between term treasuries, money market funds, and standard checking accounts. We have observed growth in all areas outside of checking accounts during this cycle, with CDs rising from under $1 billion to nearly $4 billion. This shift has significant implications, as transferring from a standard checking account to a market rate CD reflects a difference of hundreds of basis points. To provide some perspective, 75% of our overall deposits are in institutional accounts, while 25% are in wealth management. Consequently, a movement of $2 billion to $4 billion from a base of $20 billion to $30 billion can be quite significant. The positive news is that these deposits have remained stable with us, and we have effectively retained them. Overall, deposits have increased this past quarter, and the business has remained steady from one quarter to the next.

I'm a bit unclear about the NII guidance. You're expecting a decrease of 6% to 8% in the fourth quarter to a range of $430 million to $440 million, but you mentioned not to interpret that as a run rate. What run rate do you anticipate? It seems you're projecting a 20% year-over-year decline in NII for the fourth quarter. How much of that do you think you can recover by shifting from 2% securities to 5%, along with your other strategies? Will the fourth quarter be the lowest point, or will the NII turnaround happen later? I would appreciate any additional details you could provide.

Sure. The fourth quarter might be a low point, especially considering what we discussed earlier. Just from the securities runoff, we're looking at an increase of over $10 million to $13 million per quarter, solely from securities maturing and reinvesting in similar durations and credit profiles, without taking any additional actions. As our clients evaluate the yield in the overall rate cycle, we do the same. We've positioned our balance sheet defensively, which gives us a chance to consider different strategies. The maturity schedule, by itself, contributes around $50 million in annualized gains, and that's just one of the tools we have at our disposal.

Given the additional challenges, do you plan to tighten expenses further? I know you mentioned no additional expense plans, but it seems you've adjusted the cost curve this year. What are your thoughts on reducing expenses even more?

Yes. The productivity office, we launched just in this year from kind of a standing start, and we're going to get over $100 million within this $100 million of savings in this year, most of those are on a recurring basis. And so you see a lot of that reflected in the actions we took from a compensation perspective, but negotiations with consulting firms, how we're looking at demand for technology consumption, how we're managing real estate, and so we've pulled a lot of levers there and it couldn't have a higher sense of urgency on what we're thinking about from a productivity perspective. but we should be getting above 2% a year in helping from productivity. And not going to stop uncovering opportunities and having difficult conversations about what we can stop doing or how we can be thinking about things differently.

My definitely continued focus on productivity, as Jason is saying. So I just want to emphasize that point. There are still plenty of opportunities to functionalize, automate, and centralize a number of different, I'll call it, more fundamental structural things that we're doing already, but just have longer time frames to implement them in order to get those savings longer term and a lot around technology that enables that. So it absolutely has been a focus, but will continue to be a focus, particularly as the environment is so uncertain and not necessarily knowing what the direction of whether it's rates or markets are going to be.

Can we take a moment to reflect on the situation? We're getting caught up in the quarter-to-quarter details for the banks, which is understandable. However, if we consider the past 14 years since the financial crisis, we’ve been in a period of very low interest rates, with a slight increase in 2018. Now, if we're entering a new phase where short-term rates remain above 3% or even 4% or 5% for an uncertain period, how might that change the way you’ve been managing the business in a 0% rate environment? Will it impact your operational strategies?

Gerard, it's Mike. I appreciate the question. And the answer is yes. It does alter the way that we have to look at the business. And just starting with some of your comments there just around low interest rate environment, higher interest rate environment, what aspects of that are cyclical versus maybe permanent changes. Jason mentioned some of the shifts in the way institutional investors invest and the implications on transaction volumes that may come with that. And as a result, beyond looking at the productivity of the business, which I think we've emphasized here, we also have to look at the pricing side of the business to ensure that we are being appropriately compensated for all the high value-added services that we're providing, I'll take it to all our clients because it really isn't specific to just institutional clients or wealth clients. But if there was an expectation that you were managing a certain level of deposits as a part of an overall relationship, that was a part of the value you were receiving for all the services you're providing. If that's going to be different for some time period, then you have to be compensated in different ways. Now you know our model well enough to know it's not a consumer product or something where you change the pricing daily or even monthly. So it's something that you have to work through the longer-term way that your services are priced and the way relationships work. I mean we're always looking to retain relationships, but also very focused on expanding them. And the more we can do with the clients, the better the overall economics. So my point, which I think you're on to it, is we do and have been looking at this holistically, both on the revenue side and on the expense side so that we can continue to look at meeting the financial targets that we have.

Very good, Jason. As you approach your budgeting season, I'm not expecting you to share specific details just yet. However, could you reflect on what the budgeting process was like around this time last year for 2023? You've mentioned that you've made strides in reducing the expense growth rate. Can you outline the external factors you faced last year, such as wage inflation or general inflation, in comparison to today? Is it easier now, or are the external challenges still significant, making it a tough environment for budgeting?

Last year, we were in a heavy, heavy inflationary environment that was hitting us in not just our labor costs, but also we were defending we were defending from others trying to take our talent a lot was one of the talking points that we had at the time. That had implications and we were just spending time on that as well. And then we were seeing inflation come in technology costs in a lot of different ways. So every budget year is really, really difficult. I have to say that the macro headwinds last year, I feel were heavier than they are this year.

Thanks, Melissa. We'd like to thank everyone for joining us today, and we look forward to speaking with you again soon.