Good day, and welcome to the Northern Trust Corporation First Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Director of Investor Relations, Ms. Jennifer Childe. Please go ahead.

Thank you, Maddie, and good morning, everyone. Welcome to Northern Trust Corporation's first quarter 2024 earnings conference call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; John Landers, our Controller; and Grace Higgins from our Investor Relations team. Our first 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 April 16th 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 May 17th. 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 first quarter 2024 earnings call. We're off to a good start for the year. Our results for the quarter reflect both strength in underlying equity markets and the solid progress we're making against our strategic priorities of optimizing growth, driving productivity, and strengthening resiliency. We generated organic growth relative to both the prior period and prior year and saw healthy momentum inflows across our businesses. Within Wealth Management, we continue to see solid growth in client advisory fees and product-level fees increase due to favorable markets. Our Global Family Office performed particularly well in the first quarter, adding several high-profile client relationships. The launch of our book, Secrets of Enterprising Families and the nationwide events created around it have generated significant client engagement and proven to be an attractive source of new lead flow. Asset Servicing generated solid new business growth at attractive margins in the first quarter. As we've discussed, our goal is to generate new business that is scalable. This means a greater proportion of new mandates that require lower levels of incremental costs. There were several notable wins in the quarter. Northern Trust was appointed to provide a full suite of asset servicing solutions to True Potential, a rapidly growing UK-based wealth management firm, supporting approximately $33 billion in assets under management. Our open architecture approach, derivatives expertise, and consultative manner were key factors in helping us secure this win. We were also appointed as the sole asset servicing provider for Sanlam Asset Management's $9 billion of funds domiciled in Ireland. The award builds upon an existing relationship with Sanlam Investments UK, an integrated trading solutions client. This win shows how increasingly our capital market solutions are becoming leading products for us, bringing new clients to the firm whose relationships then expand into core asset servicing and other ancillary products. The progress we're making and success we're seeing from our One Northern Trust strategy is most evident within asset management. By both enabling and encouraging teams to work in tight coordination, we're delivering clients the solutions and capabilities of the entire firm. More joint meetings between our asset management and asset servicing businesses is leading to more new business opportunities and wins. Asset management has also bolstered the internal team that coordinates with our wealth management business and recently completed a national roadshow meeting with wealth clients and advisors in 29 markets. This provided increased visibility into NTAM’s product leadership and performance, which should lead to increased flows from wealth clients over time. And in the first quarter, asset management also launched several new laddered muni products geared towards wealth clients and a proprietary offshore money market fund for Japanese institutional clients. Overall, asset management generated positive liquidity flows for the fifth consecutive quarter and continued to generate strong momentum within active fixed income and alternatives. In closing, we entered the second quarter with strong market tailwinds and positive new business momentum and are well-positioned to navigate the ongoing macroeconomic and market uncertainty. And with that, I'll turn it over to Jason to review our financial performance.

Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our first quarter 2024 earnings call. Let's dive into the financial results of the quarter starting on Page 4. This morning, we reported first-quarter net income of $215 million, earnings per share of $0.96, and our return on average common equity was 7.3%. As noted on the slide, our reported results included a $189 million loss on the sale of securities related to a repositioning of the portfolio we completed in January. They also included a $12.5 million FDIC special assessment, which is in addition to the $85 million we recognized in the fourth quarter. Our assets under custody and administration and assets under management were up sharply on both a sequential and year-over-year basis. Strong equity markets coupled with favorable client flows drove most of the improvement in both periods. Excluding notable items in all periods, revenue was up 6% on a sequential quarter basis and 5% on a year-over-year basis. Expenses were up 4% sequentially and up 6% over the prior year. Trust, investment and other servicing fees totaled $1.1 billion, a 5% sequential increase and a 7% increase compared to last year. Excluding notable items in both periods, all other non-interest income on an FTE basis was up 11% sequentially and up 16% over the prior year. We experienced good momentum in our capital markets businesses, particularly FX trading where we saw strong client volume levels. Bond underwriting referral fees were also unusually strong, recognized within securities commission and trading income. Net interest income on an FTE basis was $535 million, up 7% sequentially and down 2% from a year ago. Overall, credit quality remains very strong. Our allowance for credit losses declined 9%, reflecting a reserve release of $8.5 million and the impact of a $10 million charge-off during the quarter, largely due to a large commercial loan. Non-performing loan levels decreased from $64 million to $37 million, the lowest level since 2008. The non-performing loans as a percentage of total loans remain stable at 8 basis points. Turning to our asset servicing results on Page 5. Assets under custody and administration for asset servicing clients were $15.4 trillion at quarter end. Asset servicing fees totaled $640 million. Custody and fund administration fees were $437 million, up 6% year-over-year, reflecting the impact from strong underlying equity markets and new business activities. Other fees were up $6 million sequentially due to seasonally higher fees for benefit payment services and other year-end activities. Assets under management for asset servicing clients were $1.1 trillion. Investment management fees within asset servicing were $140 million, up a strong 11% year-over-year and 7% sequentially. Moving to our wealth management business on Page 6. Assets under management for our wealth management clients were $421 billion. Trust, investment and other servicing fees for wealth management clients were $503 million and up 9% year-over-year and 5% sequentially. Growth within our GFO business is particularly strong, up 11% year-over-year and 9% sequentially. Moving to Page 7, and our balance sheet and net interest income trends. Our average balance sheet increased 6% on a linked quarter basis, primarily due to higher deposit levels. It declined 2% compared to the prior year due to lower borrowings. Average deposits were $112 billion, up nearly $11 billion, or 11% from the fourth quarter, and were meaningfully better than our expectations. We experienced a stronger-than-expected surge in deposits late in the quarter, with an ending balance up $8 billion or 7%, to $124 billion. Despite significant leverage capacity, we reduced our average short-term borrowings by 11% relative to the fourth quarter and total borrowings by 6%. This translated to $535 million in net interest income and a net interest margin of 1.61%. Moving to the asset side of the balance sheet, following the securities sales completed in November and January related to our portfolio repositionings and the increase in deposits, average cash on our balance sheet increased by nearly $10 billion or 38%. The duration of our securities portfolio is now 1.7 years. Average loan balances were just below $42 billion, down 1% both sequentially and relative to the prior year. Our end-of-period loan balances were again elevated at $47 billion, reflecting market timing dynamics. Our loans have since returned to approximately $41 billion. The heightened activity at the end of the quarter did not have a material impact on net interest income in either the first or second quarters. The total balance sheet duration continues to be less than one year. Our average liquidity levels remain very strong, with highly liquid assets comprising 58% of our deposits and nearly 50% of total earning assets on average. Our net interest income is highly sensitive to deposit levels and will continue to be driven largely by client deposit behavior. Assuming a stable rate environment, minimal incremental pricing pressure and some variability in deposit volume, we currently expect a 3% to 5% sequential decline in NII. Turning to Page 8. As reported, non-interest expenses were $1.4 billion in the first quarter, down 2% sequentially and up 6% as compared to the prior year. Excluding notable items in both periods as listed on the slide, expenses in the first quarter were up 4% sequentially and up 6% year-over-year, translating to 145 basis points of year-over-year trust fee operating leverage in the quarter. Our expense to trust fee ratio, however, remained elevated at 118%. I'll hit on just a few highlights which exclude all notable items. Compensation expense was up a little over 5% versus the prior year and up 11% sequentially. The sequential increase reflected approximately $45 million in seasonal equity incentive payments and the impact of current-year incentives from higher profitability. Full-time equivalent headcount was essentially flat sequentially and down 800 or 3% over the prior year. Non-compensation expense was up 7% year-over-year, mostly due to increased depreciation and amortization expense within equipment and software as new projects continue to be put into service and growth in tech spend and other consulting areas within outside services. Market-related expenses such as market data, third-party advisory fees and costs associated with our supplemental pension plans, which are sensitive to underlying equity and fixed income movements were also up $13 million year-over-year, which added 100 basis points to our expense growth. Finally, we experienced favorability in the occupancy line, reflecting actions we took last year to rationalize our footprint. As we look out into the second quarter, I'll touch on our largest expense categories. Compensation expense will no longer contain the seasonal equity incentives from Q1, but will include the impact from last year's base pay adjustments of $65 million in the aggregate spread over the second, third, and fourth quarters. It also reflects modest employee headcount growth associated with growth in the underlying businesses. All in, this should translate to a sequential decrease of $35 million to $40 million. Within outside services, we could see as much as a $10 million to $15 million sequential lift, reflecting ongoing technology, including costs related to cybersecurity and other resiliency expenditures. We also expect to incur the lagged impact from various market-related fees. Within equipment and software, we also expect to see a $10 million to $15 million sequential increase, of which roughly half is incremental depreciation and amortization. Sequentially, growth was flat in the first quarter, so there's some timing-related impact, but we don't expect to see the same step up in the second half of the year. Our capital levels and regulatory ratios remain strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our Common Equity Tier 1 ratio under the standardized approach was flat with the prior quarter at 11.4% as capital accretion offset a modest increase in risk-weighted asset levels. This reflects a 440 basis point buffer above our regulatory requirements. Tier 1 leverage ratio was 7.8%, down 30 basis points from the prior quarter. In quarter end, our unrealized pretax loss on available-for-sale securities was $710 million. Overall, we returned $285 million to common shareholders in the quarter through cash dividends of $153 million and common stock repurchases of $132 million. And with that, Maddie, please open the line for questions.

Thank you. We will take our first question from Alex Blostein with Goldman Sachs.

Good morning, Alex.

Good morning, Jason, Mike. I wanted to start with your guidance on net interest income, which is projected to decrease by 3% to 5% for the second quarter. It seems that the main factor influencing this is your expectations regarding deposits. Can you provide some insight into the current status of deposits and what contributed to any positive trends you observed during the quarter? Additionally, within that guidance, do you anticipate any advantages from the Visa proceeds, which I assume will likely be held in cash for the time being?

Sure. I'll discuss a few dynamics. First, reflecting on the first quarter, we saw a significant improvement in deposit levels across both asset servicing and wealth management. The overall base increased nicely, but at the end of the quarter, we reached $124 billion, driven by some large clients, which can lead to significant increases. This was particularly evident at the end of the quarter. We have noticed deposits decrease in the first couple of weeks of the new quarter. However, the increase we experienced at the end of the first quarter wasn't really reflected in the average, as it happened late in the period. Overall, the first quarter was good. As we move into the second quarter, it’s important to keep in mind that factors like the buildup in April for tax payments, which contributed to our quarter-end figures, will diminish as tax payments are made, leading to a decrease in deposits. This could mean we might already be at a peak for the quarter. Regarding Visa, there was no significant uplift from that this quarter. It's likely to remain parked in cash for the short term, and we have plans for it, but currently, it does not provide a significant boost. The impact is more about capital and leverage than net interest income in the short term. In general, predicting deposit levels has been particularly challenging. It’s not just our decisions affecting this; we’ve worked extensively with clients to ensure they understand our desire for deposits, and we feel we did a good job there, but this is the most unpredictable area of our income statement.

I got you. Yeah, and all makes sense. I guess as a follow-up to that, so we'll stick with the NII related questions. You guys saw a pretty meaningful pickup in cash as you highlighted, so $10-ish billion sequentially. How are you guys thinking about redeploying that over time? Should we generally expect the cash balances on the asset side of the balance sheet to remain fairly elevated, especially given the sort of uncertain rates backdrop and perhaps higher for longer or at what point do you feel comfortable extending that into securities?

It's another aspect that connects to your first question. We have shortened the duration of our securities portfolio, and more importantly, the duration of the balance sheet is currently very short. This was a strategic decision, and a significant reason for the repositioning of the balance sheet. However, at some point, we may consider extending a little. Typically, the rate curve would make that beneficial, but in the current environment, it could mean losing a bit on net interest margin. You're correct that a considerable portion of cash is due to the uneven nature of some deposits, so we prefer to keep our position short. Also, we have strategically allowed many maturities to roll off, with the repositioning aimed at the shorter end of the yield curve. Currently, we are at a neutral phase regarding the yield curve, and depending on economic conditions, we might take the opportunity to extend.

I got you. All makes sense. Thanks very much, Jason.

Sure. Thanks.

We will take our next question from Ebrahim Poonawala.

Good morning, Ebrahim. How are you?

Good morning, Jason. How are you? So I guess maybe moving on expenses. I just want to make sure we heard you right. Compensation expense is down about 35% to 40% sequentially. And then I think you counted services and equipment and software both up 10% to 15% quarter-over-quarter?

That's right.

Does that suggest that expenses will remain relatively flat in the second quarter? My question is, can you provide some insight into the efforts being made to reduce expenses and keep growth below last year's 4.8%? I would like to know how confident you are in achieving those targets related to the expense to trust fee asset ratio.

Yeah. So first of all, that goal of 5% or below, that is still the goal. And secondly, it's early in the year. And we got through the first quarter a little bit above that. But at the same time, we're still working very hard to get expenses down. And the numbers that we gave in the opening give a sense of some of the bigger line items. But there are other areas where we're continuing to push and even on those items, we're continuing to push hard. We're constantly trying to find opportunities to get expenses down. Enormous focus inside the company. And you're right to confirm the numbers that we had there in things like outside services where we've got tech services and even cloud migration and consulting, those are all areas where we've seen some elevation, all for strategic reasons, but we've got to find productivity and make sure we're finding efficiencies to get expenses where we want them to be early in the year, and we're still pushing for that 5% or better.

Got it. And just I guess one follow-up to...

I apologize for interrupting, Ebrahim. As we consider the first quarter of the year, it's important to recognize how much the rise in markets has affected our expenses. This includes costs related to market data, third-party advisory fees, and sub-custody. Additionally, the impact of the markets on our supplemental benefit plans also significantly influences expenses. However, for that supplemental benefit plan expense, we see an offsetting increase in revenues, which means there is no effect on profitability. We should bear this in mind, especially as we've seen the S&P rise by 25% year-over-year and 10% to 12% on a sequential quarter basis, which also contributes to our expenses.

That's helpful. Thanks for that. And just one quick follow-up. I appreciate that it's very hard to sort of handicap deposit behavior, but just give us a sense of pricing competitively? Have things stabilized, gotten better today versus three or six months ago? Thank you.

We experienced a significant advantage this quarter as our pricing performed better than we had expected. We saw an increase in net interest margin, which we had previously anticipated would decline. Our consistent communication with clients and the addition of high-quality deposits played a crucial role in this outcome. It seems that the pricing pressure we faced, especially in the third quarter, has lessened, resulting in a more favorable situation now.

Got it. Thank you.

You bet.

We will take our next question from Ken Usdin with Jefferies.

Good morning, Ken. How are you doing? Ken, if you are talking, you are muted.

Hey guys, this is Mokshith on behalf of Ken. Could you just talk about your servicing pipelines and just your wealth management growth? Just some more color on that would be fantastic.

Sure.

Sure. I'll start off with wealth management. We experienced solid organic growth in the first quarter, and we anticipate this trend will continue moving forward. As noted earlier, I observe ongoing strength in advisory fees. Additionally, we've navigated several quarters where product-level fees in wealth management were negatively impacted due to flows in certain asset categories, but we noticed this decline easing in the first quarter. We expect this to contribute positively going forward. Our family office business also showed significant growth in the first quarter, especially in the ultra-high net worth segment, which are our primary focus areas. In asset servicing, growth has been broad-based, with notable strength observed among asset owners in North America and Europe. We also see positive developments outside of core asset servicing; the capital markets sector is increasingly being utilized for generating new relationships and expanding them further. Overall, I am optimistic about the breadth of the organic growth in that business as well.

Got it. Just another question on just the flow of client assets between cash and fee generating and where that stands?

Yeah. So the overall, the cash has been obviously a positive story, not just in deposits but also in our money market mutual fund complex, which is up meaningfully sequentially and year-over-year. And that complex is very important to us. It's highly profitable. It's large. So our most sophisticated clients see it as a good opportunity to invest there with good yield with the benefits of being in a collective fund but at the same time, not having significant concentration. And so the overall liquidity and cash in the investment management business, but also in the broader financial model has played very significantly into the strength of the quarter.

Thanks for taking my questions.

Of course.

We will take our next question from Betsy Graseck with Morgan Stanley.

Hi, good morning.

Good morning, Betsy. Nice to hear you. Welcome back.

Good, thanks. Just wanted to make sure you could hear me. So I have two questions. One is about capital. I understand that your business model requires significant capital. I would like to know how you approach capital levels and when you believe it would be the right time to increase buybacks given the surplus capital you currently possess.

The capital levels are indeed strong. Even with our current CET1 at 11.4%, I believe this figure is somewhat artificially low at the moment. We noted that loan volumes were elevated due to operational dynamics at the end of the quarter. We expect RWA to decrease as loan volumes return to more normal levels. Additionally, we have $700 million in AOCI, contributing positively, along with Visa and our solid operational returns. We appreciate maintaining strong capital levels while also achieving good returns. We also keep an eye on our peers to ensure our definition of strong capital is meaningful both absolutely and relatively. With Visa coming online, we can anticipate a positive impact on the trajectory of share repurchase. Although we won't make significant changes immediately, it fits into our capital framework and higher capital levels will clearly provide an upward lift, all else being equal.

Okay, great. I have a separate question about extending the duration in the securities book. Can you provide some context on how you're approaching that, considering that you usually maintain a very short duration? When you refer to a longer duration, what timeframe are you envisioning? Thanks.

That’s a great point, and everything is relative. We had extended our securities portfolio to about two years a couple of years ago, but now we’re significantly under one year, which gives us a better sense of the range. It’s also crucial to recognize that recent trends in the banking sector have shown that deposits have a shorter duration than expected. Therefore, we are planning to maintain a shorter duration compared to historical norms, and we are currently quite short. With deposits appearing to stabilize and become more predictable, we see this as an opportunity to gain more confidence. We need to evaluate whether there are good investment opportunities and if the yield curve suggests it’s worthwhile to extend our duration. This is why we have been leaning towards shorter durations. Over the past year, we believed being positioned at the short end of the curve was more beneficial, which led to our repositioning efforts. Although the changes won't be dramatic, the current shape of the yield curve allows for some safety against substantial declines in short-term rates while sacrificing a bit in short-term net interest income.

Yeah, got it. Okay. Thank you. That's very clear.

Great.

We will take our next question from Brennan Hawken with UBS.

Good morning, Brennan.

Good morning. Thanks for taking my questions. Hey, how are you, Jason? Got a couple of follow-ups. One on the deposit front. Jason, you commented how deposits have declined, but it seemed like you were commenting more on an EOP basis than versus the average. We saw the average balances of above that $100 million to $110 million range that you had previously talked about, we saw some stability in non-interest bearing. So when we think about the go forward on an average basis, have we hit a level where now things should be relatively stable comparing it to where we were on an average basis? I appreciate that you said this is the hardest part of the balance sheet to predict. So I recognize I'm asking a challenging question.

I think I mentioned that it's been really difficult to predict our overall financial results. You're right to point out that my comments were in relation to the $124 million. We've seen balances decrease, which typically happens in the first few weeks of the quarter. The dynamic of tax payments can also affect our situation. Furthermore, clients might be considering reallocating cash into various types of securities or possibly investing in treasuries. This also influences our situation, as clients may choose to move into money market funds for shorter durations. All these factors have a downward effect on average deposits. We just want to ensure we're ready for that as we consider different scenarios. We're trying to provide a thoughtful estimate of the potential outcomes we foresee. However, having deposits significantly down this quarter aligns with our expectations of what might occur.

And, Brennan, it's Mike. Just to add at a very macro level, if you just look at deposits starting back pre-pandemic and then quantitative easing obviously had a very meaningful impact on those deposit levels going up. And then we saw the reverse with quantitative tightening. And so some of this will depend on just the broader macro impact of tightening and when the Fed and other central banks decide to stop bringing down the size of their balance sheet. And I think then we'll reach a new level of normalization of deposit levels. And right now, we're, I would say, well above the pre-pandemic quantitative easing levels. So to the extent that we're closer to the end of quantitative tightening, the expectation would be that we start to settle out somewhere in this neighborhood.

We will take our next question from Brian Bedell with Deutsche Bank.

Good morning, Brian.

Great. Thanks. Good morning, good morning. If I can ask my first question on NII. So just looking at the second half and of course, everything is difficult to predict with deposits and everything. But if you can just talk about how Visa might work its way, I think there's a couple of stages of deployment, so it's more of a 3Q and 4Q lift versus 2Q. I think you said it was pretty minimal for the 2Q guide. Maybe just talk about the timing of that? And then I guess, do you see a scenario in which you might actually have positive net interest revenue growth in '24 versus '23 given the really strong start to the year?

Sure, regarding the timing of Visa, you're correct that we will complete some of it in the second quarter, but part of it will extend into the third quarter. When considering the impact on net interest income, it won't have a significant lift due to this timing. However, there will be some benefits. The main advantage of Visa lies in its capital and our liquidity. If we consider the basic aspect of allocating those funds at the Federal Reserve at interest on excess reserves or interest on reserve balances, the gain won't be substantial, similar to what would happen with a $0.5 billion or $700 million deposit. While there's no cost associated, the overall impact is not dramatic. The real benefit will be longer-term as we explore strategic ways to utilize those funds and ensure we achieve a solid return. We're keeping various options available. It's important to note that this represents only half of the position we're discussing this year, with another half expected next year, some of which may extend further.

And then on the possibility for NII growth in '24, given the start?

I think it's too early in the year to make predictions about future outcomes. We're still experiencing some benefits from various components of maturities and other factors. While we do have some favorable conditions, it's challenging to forecast so far ahead.

Yes. Regarding expenses in the second quarter, based on the numbers you provided, it appears that the largest categories align with the guidance you shared, excluding other factors. Could you confirm that this is correct? Additionally, considering your remarks about being more diligent with expenses and possibly experiencing seasonal increases earlier in the year, should we expect less of a rise in expenses in the second half compared to the second quarter, which is normally characterized by seasonal growth? Furthermore, while you are aiming for positive operating leverage on fees, if we have a favorable net interest income backdrop, could we actually see positive operating leverage when we factor in net interest income, affecting total revenue?

Sure. I'll address the second and third parts of your question, as I didn't quite catch the first part. You're correct about the increase in expenses for the second quarter, which is significant. We're experiencing substantial rises in outside services, equipment, and software, but we don't anticipate seeing those types of increases in the second half. While I’m not saying expenses will be flat, the likelihood of that trajectory is low. We're actively working to enhance productivity, and there's still more to be done this year. Regarding fee operating leverage, that’s our main focus. Net Interest Income is unpredictable and not closely tied to management expenses. Our real emphasis is on fee operating leverage, and that shapes our financial model, ensuring we remain disciplined about expenses relative to our revenue growth. Mike mentioned our efforts to bring in more scalable business opportunities, which could enhance our chances of achieving good fee operating leverage. However, I won't comment on the overall operating leverage due to the volatility and unpredictability of NII. Now, please let me know what I missed in your initial question.

It was just a technical question about the guidance you provided for the second quarter. I think it suggests a decrease in expenses by about $10 million to $15 million compared to the first quarter, based on the categories you mentioned and the three different ranges you presented. I just want to confirm that this is accurate.

Sure. I can quickly go over the points we discussed. This would suggest that compensation could decrease by $35 million to $40 million, while equipment, software, and outside services each might increase by $10 million to $15 million.

Yep. Okay, great. Thank you very much.

You bet.

We will take the next question from David Smith with Autonomous Research.

Hey, David.

Good morning. Just speaking a bit more about balance sheet positioning, setting aside the somewhat artificial nature of the 10-K asset sensitivity disclosures everyone has, can you give us your best real-world guess right now for the incremental NII impact of more versus fewer Fed cuts, putting both pricing and balance sheet volume dynamics together?

It's true that the supplemental disclosures indicate the sensitivities involved. However, if we consider scenarios where rates increase by 100 to 200 basis points, it becomes challenging to evaluate the situation when thinking about potential rate cuts. Looking at the likelihood of a 25 or 50 basis points decline, predicting the outcome is quite tough. We'll be monitoring the market closely to see how things unfold. There are situations where banks may prioritize retaining deposits over maintaining their margins. During the previous rate increases, the effect wasn't straightforward for us. In the beginning, betas were quite low, but by the end of that cycle, they had risen significantly, in some cases exceeding 100%. Therefore, right now, making accurate predictions is difficult, and even within our team, we have ongoing discussions about the potential impacts of the initial rate cuts.

Okay. And then one other NII follow-up. Do you think you're done with securities repositioning at this point? Or could we see another one later in the year?

It is unlikely that we will see another securities repositioning. We have already moved a significant portion of the low-yielding securities. Additionally, this process has provided real capital benefits, allowing us to take some securities with negative risk-weighted asset treatment and reinvest them in cash at a point in the yield curve that aligns strategically and financially with our goals. Each time we have executed this trade, its impact has diminished. Therefore, given the current yield curve and our outlook on the economic environment, another repositioning is much less likely.

And lastly, anything you can do to help us think about using the Visa proceeds for organic versus inorganic investment opportunities?

We are actively exploring ways to invest internally to achieve growth at attractive capital levels. Our return on capital targets range from 10% to 15%, and we are implementing a similar framework as we receive capital. The best strategy for us is to expand within our existing businesses and client base. Historically, we have not faced capital shortages, meaning there are opportunities we could pursue without financial constraints. Therefore, we aim to be both prudent and patient while being ready to act in line with our capital framework, which currently suggests a tendency towards share repurchase, all else being equal.

That's helpful. Thank you.

Sure.

We will take our next question from Steven Chubak with Wolfe Research.

Hey, good morning. This is actually Sharon Leung filling in for Steven this morning. Just a quick follow-up on non-interest bearing deposits. They seem to have stabilized this quarter and are now about 15% of the total. Do you think that this is kind of like a good trough level, even if you see continued deposit pressures related to QT, et cetera?

It has definitely stabilized in terms of the percentage decline, even though we saw an overall increase in deposits. Non-interest bearing deposits performed better than we anticipated and appear to have plateaued. They did not grow as much as the rest of the deposits but showed solid performance during the period. We are not forecasting a significant decrease at this time.

Okay, great. And then just to follow up on AUM and AUC growth, saw healthy expansion, but can you talk about what maybe drove some of the pressure on fee rates across your business this quarter?

I want to emphasize that when we talk about fee rates, it's important to consider how they relate to our asset levels, whether that be assets under management or assets under custody. Only about half of our business is directly linked to asset levels, while many of our contracts are based on transaction volumes, and there's a considerable shift in mix. For instance, our family office business tends to have a lower yield on assets compared to certain regions in wealth management. Other components in asset servicing show similar trends. As we analyze the quarter or the year, we don't prioritize those rate changes as the main indicators of business performance. Instead, we focus more on the specifics of our clients, the mix of different products, and developments in various regions, including the family office segment.

Great. Thank you.

Sure.

We do not have any further questions. I would like to turn the call back over to Jennifer Childe for closing remarks.

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

This concludes today's call. Thank you for your participation. You may now disconnect.