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Northern Trust program to cut expense run rate by $250M

While news of Northern Trust Corp.'s CEO succession somewhat overshadowed its third-quarter earnings, the company also announced it is embarking on an initiative that it expects will significantly reduce its expense run rate by 2020.

Northern Trust announced late Oct. 17 that Chairman and CEO Frederick Waddell will be stepping down as CEO, and that Michael O'Grady, who became president at the start of 2017, will assume the role Jan. 1, 2018. On the Oct. 18 call, Waddell said O'Grady will bring a "fresh set of eyes," and is "different for all the right reasons."

"The announcement reflects what I can assure you is a robust and deliberate succession planning process that was undertaken by our board of directors," Waddell said. "Personally, I've been thinking about this transition for 10 years because I think it's extraordinarily important for the CEO of any company to develop a management team and a group of successors to take his or her place."

Credit Suisse analyst Susan Roth Katzke wrote the transition is an "expected outcome of a deliberate succession planning process," and that it should be well received. Keefe Bruyette & Woods' Brian Kleinhanzl called O'Grady the "heir apparent" to Waddell, and said that the "timing of the transition was the only unknown."

"Mike's solid track record in key leadership roles throughout the firm, coupled with what appears to be a well-designed transition plan, leave us feeling good about the company's succession plan," the analyst wrote.

Northern Trust reported third-quarter results Oct. 18. The company's net income climbed to $298.4 million, or $1.20 per share, from net income of $257.6 million, or $1.08 per share, a year earlier. The S&P Capital IQ consensus mean estimate for third-quarter normalized EPS was $1.13.

Total noninterest expenses increased 11% year over year, and were flat from the second quarter of 2017. Under the company's new "Value for Spend" initiative, Northern Trust expects to realize $250 million in expense run-rate savings by 2020, on a pretax annualized basis. CFO S. Biff Bowman said the program will better align expense growth with organic growth. The company said it will use process optimization, strategic sourcing and organizational alignment to achieve the savings.

"What this initiative allows us to do is to increase the profitable growth trajectory of our firm," Bowman said. "But we still are doing this to ensure that we can invest in those targeted areas of our franchise that we think generate the best return and the best return on equity to our shareholders."

Raymond James analyst David Long wrote that while expenses were higher than expected, partially due to a weaker dollar, the expense rationalization initiative "should be viewed positively by the Street."

Elsewhere on the earnings front, net interest margin, at 1.25%, was the same as the prior quarter, but up from 1.12% a year ago. Executives said the margin was buoyed by an increase in short-term interest rates, and partially offset by a shift in the mix of its balance sheet. Net interest income increased 4% quarter of quarter, and 17% from a year ago. Long wrote the increase was due to a "wider-than-expected" margin and a larger balance sheet.

Bowman alluded to some pressure on deposit pricing. He said while Northern Trust's retail deposit beta is still relatively low, it "moved up modestly quarter over quarter."