Northern Trust is the latest financial firm to report its Q3'26 earnings, and the company discusses digital assets, deposits and liquidity. Chairman and CEO Mike O'Grady comments, "In digital assets, our role is to help clients connect traditional and digital financial markets with the institutional standards of control, servicing, and risk management they expect. Demand is translating into mandates across tokenization, digital settlement infrastructure, and stablecoin-related solutions, with momentum in asset servicing building in the third quarter. We also expanded our digital liquidity capabilities with the launch of the Northern Institutional Funds Stablecoin Cash Reserves Portfolio, a money market fund that helps stablecoin issuers meet their reserve needs through high quality, short-term U.S. government assets. Separately, earlier this year, we introduced a tokenized share class of our Treasury Instruments Portfolio. Together, these launches demonstrate our continued focus on product innovation and help ensure we're well-positioned to meet client needs as the digital ecosystem evolves. Digital assets remains an emerging business for us, and we will continue to build our capabilities thoughtfully."
He also says, "In the U.S., where asset managers increasingly want a single provider to support both mutual funds and ETFs, we are meeting that need through the launch of our ETF servicing platform. In asset management, NTAM continued to execute across its priority growth areas: ETFs, tax alpha, alternatives, and quantitative equities. We achieved our sixth consecutive quarter of positive ETF flows and launched 10 new ETFs, expanding our fixed income capabilities and broadening the range of tax-efficient solutions available to clients. Our intermediary business also delivered its strongest quarter of long-term flows in three years. Looking ahead, we plan to convert six Northern Funds, representing approximately $33 billion in assets, into ETFs during the first quarter of 2027."
The Northern chief explains, "Our assets under custody and administration were $20 trillion, down 1% sequentially and up 9% year-over-year. Our assets under management were $2 trillion, flat sequentially and up 11% year-over-year. Moderate equity market appreciation in the third quarter was offset by lower fixed income market values and outflows from short duration strategies.... Average deposits within wealth management were $27.5 billion, up 3% sequentially, while average loans were $36.4 billion, up 2% sequentially."
He tells us, "Assets under management for asset servicing clients were $1.4 trillion, up 11% year over year. Investment management fees were $176 million, up 10% from the prior year quarter. The increase was driven largely by favorable markets and year over year benefit of higher liquidity assets, partially offset by price compression and select index mandates. Average deposits were $96 billion, down 5% sequentially, while average loans were $5.3 billion, down 8% sequentially. The sequential decline in deposits largely reflected typical third quarter seasonality and was consistent with our expectations.... Our average earning assets were $148 billion, down 2% sequentially as lower deposit balances drove a decline in money market assets."
O'Grady continues, "Average deposits were $123 billion, down 3% sequentially, largely reflecting the typical third quarter seasonality discussed earlier. Within the deposit base, interest-bearing deposits decreased 3% sequentially, and non-interest-bearing deposits decreased 5%, representing 15% of the overall mix.... NII declined modestly as lower deposit balances more than offset the benefit of higher securities yields, including the impact of late second quarter securities repositioning, as well as one additional day in the quarter."
Asked about price compression, CFO Dave Fox replies, "I think what I was talking about specifically on some price compression for the quarter was the liquidity mandates that we had. We had to do a repricing of our money market fund related to our wealth management business of roughly 10 basis points, and that's about $2 million a month or $6 million a quarter. So that's what I was talking about in terms of the price compression, more importantly. One of the things where we had some distortion was when deposits go down, we obviously invest in money market funds, and those money market funds are attractive yields, and so those are the things that you will get out of. So that will drive your yield down."
He states, "We also had in the first couple of quarters of the year some elevated levels of deposits due to some client actions, whether it was restructuring or whether it was a fund that was returning its cash to their investors or things of that nature. We had some idiosyncratic bump up in the deposit balances in the first 2 quarters of the year. So if you take those out, it would normalize back to what we think is pretty normal deposit growth during the course of the year. We're up 6% year-over-year, and so that’s consistent with the underlying fundamental business that we have coming into the company."
O'Grady adds, "In addition to the growth of the company and the client base, there is the backdrop of liquidity, and it's an incredibly important aspect of what we do for our clients. So both on the balance sheet with deposits, but also through our liquidity funds, we've seen more broadly that there's been more liquidity in the market, if you will. I would say this is kind of the first quarter where we've seen some of that come down just overall, the backdrop on that front. I think some of that is just redeployment on the part of our client base, right, moving out of whether it's deposits or money market funds into fixed income as a part of their investing activities. So I would just take that backdrop into account. It's been very robust, if you will, for the last few years here and not likely to continue at that same backdrop pace.
In related news, BNY also released Q3 earnings last week. CEO Robin Vince comments, "In July, we announced the launch of our global Digital Transfer Agency capabilities, which extend our leading position in traditional fund servicing to the on-chain world, enabling a unified client servicing experience and ultimately growth into new asset classes and technologies. In the spirit of 'build it once, use it many,' enabled by BNY Digital TA, we ourselves now offer a new digitally native money market fund through BNY Dreyfus with our new BLIQUID tokens representing shares in the fund on-chain. Baillie Gifford co-designed its recent on-chain offering with us and has already launched a fully native U.K.-regulated tokenized fund, and BlackRock is using our capabilities for a recently launched tokenized share class of one of their existing money market funds."
He says, "I talked about the drivers for the year-over-year increase earlier. Sequentially, the decrease was primarily driven by seasonally lower deposit balances in the third quarter, partially offset by reinvestment of investment securities at higher yields. Average deposit balances decreased by 1% sequentially, including a 1% decrease in interest-bearing deposits and a 3% decrease in non-interest-bearing deposits. Average interest-earning assets were flat sequentially."
Asked about Treasury Clearing, Vince responds, "The last question first, central clearing. We believe we're going to earn our way through that, and so far we've seen that because you see more volume on the platform as a result of the initiative. Actually, we don't see that in the near-term, medium-term, long-term as a particular headwind. Also, [there's been] a lot of rate volatility this year, but that has encouraged a lot of volume. The more volume and people trading Treasuries and debt issuance, you kind of see that coming onto our platform. We're very pleased with the volume that has supported the platform this year."
He adds, "The last thing I would say on the collateral side, people are always looking for funding. [We have] $8.3 trillion of balances on the collateral platform. It's a record for us. Clients are coming to us for funding needs. We're developing new solutions, different ways of doing things, using new technologies, new products. There's a certain element of a halo effect of clients wanting to do more with BNY in this space."
