Apr 21, 2015
Executives
Bev Fleming - IR Biff Bowman - CFO Jane Karpinski - Controller Allison Quaintance - IR Team
Analysts
Brennan Hawken - UBS Luke Montgomery - Bernstein Research Glenn Shor - Evercore ISI Ashley Serrao - Credit Suisse Brian Bedell - Deutsche Bank Alex Blostein - Goldman Sachs Betsy Graseck - Morgan Stanley Mike Mayo - CLSA Adam Beatty - Bank of America Gerard Cassidy - RBC Jeffrey Elliott - Autonomous Jeff Harte - Sandler O'Neil
Operator
Good day everyone and welcome to the Northern Trust Corporation First Quarter 2015 Earnings Conference Call. Today’s call is being recorded.
At this time, I would like to turn the call over to the Director of Investor Relations, Bev Fleming for opening remarks and introductions. Please go ahead.
Bev Fleming
Thank you, Casella, and good morning, everyone, and welcome to Northern Trust Corporation’s first quarter 2015 earnings conference call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Jane Karpinski, our Controller and Allison Quaintance from our Investor Relations team.
For those of you who did not receive our first quarter earnings press release or financial trends report by e-mail this morning they are both available on our Web site at northertrust.com. In addition, and also on our Web site, you will find our quarterly earnings review presentation which we will use to guide today’s conference call.
This April 21st call is being webcast live on northerntrust.com, the only authorized rebroadcast of this call is a replay that will be available on our Web site through May 19. Northern Trust disclaims any continuing accuracy of the information provided on this call after today.
Now for our Safe Harbor statement, what we say during today’s conference call may include forward looking statements which are Northern Trust’s current estimates and expectation of future events or future results. Actual results of course could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict.
I urge you to read our 2004 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. 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 allow as many people as possible the opportunity to ask questions as time permits. So, thank you again for joining us today.
Let me turn the call over to Biff Bowman.
Biff Bowman
Good morning, everyone. Let me join Bev in welcoming you to Northern Trust first quarter earnings conference call.
As is our customary practice, today I will review our results for the quarter after which Bev and I would be happy to answer your questions. Starting on Page 2, this morning we reported first quarter net income of $231 million, earnings per share were $0.94, 25% higher year-over-year.
Our return on equity was 11.3% in the quarter. Environmental factors which impact our businesses and our clients were mixed in the first quarter, a theme which has been ongoing for some time.
U.S. equity markets were higher year-over-year with the S&P 500 up 10%, but relatively flat sequentially.
International equities as measured by the MSCI EAFE Index were down approximately 3.5% year-over-year and up 4% sequentially and were negatively impacted in both comparisons by a stronger U.S. dollar.
In bond markets, the Barclays U.S. aggregate index was up 2% year-over-year and 1% sequentially.
Client assets under custody ended the quarter at 6.1 trillion, up 6% over last year and 2% versus last quarter, and assets under management ended at 960 billion, up 5% year-over-year and 3% sequentially. I’ll provide further details on asset trends later during this call.
Currency markets had multiple impacts this quarter. Currency volatility as measured by the G7 index was 33% higher than the first quarter of last year and 22% higher than last quarter.
Currency volatility influences our foreign exchange trading income as does the level of client activity. Currency rates which influence the translation of non U.S currencies to the U.S dollar impact client assets and our revenues and expenses.
The dollar was stronger both year-over-year and sequentially. Dollar strength tempered custody asset growth and related fee growth, but benefited expense growth.
Short-term interest rates rose slightly compared with the fourth quarter yet remained at very low levels, continuing to pressure our net interest margin and resulting in fee waivers on our money market mutual funds. Three month LIBOR and the fed funds effective rate both increased 2 basis point sequentially to 26 and 12 basis points respectively and the overnight repo rate increased 1 basis points to 15 basis points.
With those comments providing context on the environment, let’s move to Page 3 and discuss the financial highlights of the first quarter. Year-over-year revenue increased 9% with non-interest income up 10% and net interest income up 5%.
Expenses increased 3%, primarily reflecting higher compensation, equipment and software, and employee benefit expense. The provision for credit losses was a credit of 4.5 million in the quarter primarily reflecting a sustained improvement in the level of non-performing assets.
Net income was 27% higher year-over-year. Compared to last quarter revenue was flat with non-interest income up 1% and net interest income down 2%.
Expenses increased 1% due primarily to higher employee benefit expense, business promotion and equipment software offset partially by lower outside services expense. Net income declined 5% sequentially as the prior quarter included a 9.5 million income tax benefit.
Excluding last quarter's income tax benefit net income was 2% lower sequentially. Page 4 let's look at the result in greater details starting with revenue on page 4.
First quarter revenue on a fully taxable equivalent basis was approximately 1.1 billion, up 9% year-over-year and flat sequentially. Trust, investment and other servicing fees the largest component of revenue were 728 million in the quarter, up 7% year-over-year and flat sequentially fees in our Corporate & Institutional Services business increased 7% year-over-year and declined 1% sequentially while fees in our wealth management business grew 7% year-over-year and were unchanged sequentially.
New business and higher equity market were both drivers of growth but currency translation as I mentioned earlier detracted from overall fee growth. The impact was approximately 2 percentage points year-over-year and 1 percentage point sequentially.
Fee waivers were approximately 33 million in the first quarter relatively unchanged both year-over-year and sequentially. I'll go into further detail on trust and investment fees shortly.
Foreign exchange trading income was 72 million in the first quarter up 43% year-over-year and 18% sequentially. Currency volatility was higher in the first quarter, client trading volumes were also higher both year-over-year and sequentially.
Other non-interest income was 75 million in the first quarter up 15% from last year and 3% lower sequentially. Within other non-interest income securities commission and trading income was again strong at 20 million as we continue to see strong demand for interest rate protection products from our personal clients.
Other operating income of 39 million in the quarter increased 2% year-over-year but declined 6% sequentially reflecting lower income associated with a third party servicing agreement which was modified in the fourth quarter. If you recall we said last quarter about half of the income recorded in the fourth quarter reflected the third quarter impact of the modified agreement.
Net interest income which I will also discuss in more detail later was $267 million in the first quarter, up 5% year-over-year and down 2% sequentially. With that backdrop, let’s look at the components of our fee revenues on Page 5.
For our corporate and instructional services business, fees totaled 407 million in the first quarter up 7% year-over-year and 1% lower sequentially. Custody and fund administration fees; the largest component of C&IS fees were 277 million in the first quarter, up 10% year-over-year and down 2% sequentially.
Assets under custody for C&IS clients were $5.6 trillion at quarter end up 6% year-over-year and 2% sequentially. Growth in fees and assets primarily reflects new business and market conditions including higher equity and bond markets offset partially by the impact of the stronger U.S.
dollar. Investment management fees in C&IS of 76 million in the first quarter were up 2% year-over-year and down 2% sequentially.
Assets under management for C&IS clients were 727 billion, up 4% year-over-year and 2% sequentially. The year-over-year increase in C&IS assets under management was due to higher equity and fixed income markets partially offset by the impact of the stronger dollar on international assets.
In the sequential quarter comparison, modest improvement in equity markets and new business were both contributors to the increase. C&IS investment management fees were impacted by fee waivers on institutional money market mutual funds totaling 15 million.
Securities lending fees were 22 million in the first quarter, 5% lower than last year and 1% lower sequentially. Year-over-year results reflect lower spreads across asset classes with the largest decline in U.S.
equities offsetting the impact of higher collateral levels. The sequential quarter decline reflects higher collateral levels offset by two fewer days in the first quarter.
Securities lending collateral was 123 billion at quarter end, up 6% both year-over-year and sequentially. Other fees in C&IS were 32 million in the first quarter, up 10% year-over-year and 13% sequentially due to higher sub advisory fees.
The sequential quarter increase also reflects seasonally higher revenue for benefit payment services. Moving to our wealth management business, trust, investment and other servicing fees were 320 million in the first quarter, up 7% year-over-year reflecting higher equity markets and new business.
Growth was relatively consistent across the regions and global family office. Wealth management fees were up slightly versus the prior quarter as new business was largely offset by higher waived fees in money market mutual funds.
Assets under management for wealth management clients were 233 billion at quarter end, up 7% year-over-year and 4% sequentially. Money market mutual fund fee waivers in wealth management totaled 18 million in the current quarter, flat compared with last year, but up 1 million compared to last quarter.
Moving to Page 6, net interest income was 267 million in the first quarter, 5% year-over-year and up 2% compared to the fourth quarter. The year-over-year increase in net interest income was driven by a larger balance sheet as client deposits averaged 87 billion in the quarter, up 7% versus last year.
Partially offsetting the impact of a larger balance sheet was a lower net interest margin, which at 1.1% in the first quarter was down 2 basis points year-over-year. In the sequential comparison, net interest income was lower due to two fewer days in the quarter, a slight decline in earning assets was offset by 2 basis point increase in our net interest margin, which resulted from a favorable mix-shift in earning assets.
We continue to see growth in our loan portfolio with average loans and leases increasing 2% sequentially and we reallocated a portion of our short-term interest bearing deposits into our securities portfolio which was 7% higher sequentially. The yield on the securities portfolio decreased 5 basis points sequentially, about 4 basis points of the decrease in yield was due to higher premium amortization in our mortgage back securities portfolio versus the prior quarter.
Premium amortization in the fourth quarter was $10 million, compared to 4 million in the year ago quarter and 7 million in the fourth quarter. Loan balances averaged 32 billion in the first quarter up 10% or 2.9 billion year-over-year and up 2% or approximately 700 million sequentially.
We saw solid loan growth this quarter across commercial and institutional, private client and commercial real estate, partially offset by a lower level of residential real estate loans. The yield on the loan portfolio increased 1 basis point sequentially.
Turning to Page 7, expenses were 789 million in the first quarter, up 3% year-over-year and 1% sequentially. Compensation expense increased 4% year-over-year primarily reflecting higher incentive compensation.
The impact of staff growth and annual merit increases was largely offset by the favorable impact of movements in currency rates. Staff levels increased approximately 5% year-over-year with more than 75% of the growth emanating from our global operating centers in Bangalore, Manila and Limerick.
On a sequential basis compensation expense was essentially flat as higher equity based incentives including the requirement to immediately expense options granted to retirement eligible employee were offset by the impact of movement in currency rates, staff growth was 1%. Employee benefit expense increased 9% year-over-year primarily driven by higher pension and employee medical expense.
On a sequential quarter basis, employee benefit expense increased 16% due to the higher pension expense, payroll taxes and medical expense. Outside services expenses were down 6% both year-over-year and sequentially, reflecting a lower level of expense in a number of categories including legal, consulting and third-party advisor fees.
Equipment and software expense was up 9% year-over-year and 7% sequentially reflecting higher software amortization as we continue to invest to support clients, improve our efficiency and meet regulatory and compliance requirements. Other operating expense increase 6% year-over-year, primarily driven by higher charitable donations and higher deferred amortization expense related to client on boarding.
In the sequential comparison other operating expense increased 3% reflecting seasonally higher business promotion and marketing cost associated with the Northern Trust open. Turning to page 8, we continue to make progress on our goal to sustainably improve profitability and returns the focused execution that I have highlighted this morning has resulted in continued improvement in the ratio of expenses to trust and investment fees from 113 in the first quarter of last year to 108% this quarter.
This combine with the slight moderation in the revenue headwinds that we have faced in recent year including growth and foreign exchange trading and net interest income produced meaningful operating leverage and resulted in improvements in our pre-tax margin to 31% and in our return on equity to 11.3%. Turning to page 9, our capital ratio remains solid with common equity Tier 1 ratios up 10.5 and 11.8 respectively, calculated on a transition basis for both advance and standardized.
Both were lower when compared to prior periods. The decline in the transition basis advanced common equity Tier 1 ratio was primarily due to higher risk weighted assets given mix changes on the sheet as well as higher operational risk weighted assets due to modeling refinement.
The decline in the transition basis standardized common equity Tier 1 ratio was primarily driven by the implementation effective January 1st 2015 of Basel III standardize risk weighted assets. On a fully phased in basis our common equity Tier 1 capital ratio under the advanced approach would be approximately 11.5% and under the standardized approach will be approximately 10.3%.
All of these ratios are well above the full phased in requirement of 7% which includes the capital conservation buffer. The supplementary leverage ratio at the corporation was 6.4% and at the bank was 5.6% both of which exceed the 3% requirement applicable to Northern Trust.
As Northern Trust progresses through fully phased in Basel III implementation there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules. As we announced in March our 2015 capital plan received no objection from the Federal Reserve.
In it we requested authority to increase our quarterly common dividend to $0.36 per share. And its regular meeting later today our board of directors will consider formal approval of the planned dividend increase which is expected to be payable July 1st.
In the first quarter we repurchased 1.6 million shares at a cost of 1.7 million. In addition, our 2015 capital plan provide for the repurchase of up to 675 million of common stock between April 2015 and June 2016.
With respect to the liquidity coverage ratio Northern Trust is above the 80% minimum requirement effective as of January 1st 2015, and is also above the 100% minimum requirement that will become effective of January 1st, 2017. In closing the first quarter demonstrated continued progress in driving our return on equity deeper into our target range of 10% to 15%.
Execution around both growth and efficiency priorities remain strong and is evidenced by meaningful operating leverage generated in the quarter. And our C&IS business momentum remain strong with announced wins such as the government employee Superannuation board of Australia and AutoCanada based [indiscernible] Trust as well as a robust pipeline of new opportunities.
New business was diverse both geographically and across products and clients segments. Our wealth management has solid new business results as well.
Record level of AUM and AUC coupled with strong loan growth helped to deliver positive results in the quarter. From a financial perspective, while we have moved our return on equity into our target range we remain focused on further enhancing profitability.
Before I conclude as its customary for our first quarter earnings call we will need to end today's call to allow sufficient time for all of us to get to our annual begin which began at 10:30 central time this morning. Please accept our apologies in the event that we have to close off the question and answer period earlier than our normal practice.
Thank you again for participating in Northern Trust's first quarter earnings conference call today. Bev and I will be happy to answer your questions.
Casella, please open the line.
Operator
[Operator Instruction] We’ll take our first question from Brennan Hawken with UBS. Your line is open.
Brennan Hawken
So the fully phased in Basel III capital ratios declined quarter-over-quarter in about 30 bps for standardized and 40 for advanced, what drove those declines?
Biff Bowman
So there are a couple of factors that we need to consider here; first is the phase to Basel III. So largely it was a risk weighted asset impact.
The two point that you talk about approximately 75% were driven by that conversion and then 50% were driven -- up to 50 basis points were driven by the shift in asset mix on the balance sheet. So we have greater loans and we moved items out of our fed deposits if you will into other earning assets.
And is as expected we -- these are as we would have expected to move under the migration into Basel III and the shift-mix if you will on the balance sheet into assets that draw the RWA up again about 50 of the basis points and then 150 basis points is simply to move to the Basel III standardize.
Brennan Hawken
But I was actually asking on the fully phased basis, your fully phased as you guys reported last quarter, standardized 10.6, this quarter at 10.3 and the advanced was 11.9 and this quarter to 11.5. So does that mean that on the fully phased basis it was purely based on asset mix on the balance sheet?
Biff Bowman
Yes, that’s exactly right.
Brennan Hawken
Okay thanks. And then thinking about -- what you just referenced the deposits with fed, what drove that shift quarter-over-quarter?
They dropped almost in half, is that something that you expect to be sustainable and is that some progress that you're making in decreasing non-operating deposits?
Biff Bowman
I don’t know that the halfing is something that we’ll continue, but we’re just trying to put the balance sheet items to work. The asset mix as you can see shifted to the shorter end of the securities portfolio, so we have just put those items to a more effective use than 25 basis point deposit at the fed.
I don’t think you should anticipate a half -- continued halfing though.
Brennan Hawken
No, sure, sure of course, I just -- and the other part of the question does that mean is it right to infer that maybe non-operating deposits might have decline too, which gives you the confidence to switch it over to securities?
Biff Bowman
No I don’t think you can make that inference.
Operator
Thank you. We’ll move now to Luke Montgomery with Bernstein Research.
Your line is open.
Luke Montgomery
So just a question on the base line fee rates for which we estimate a fee waivers. I think some investors are concerned that the fee waiver disclosures, maybe not just for you, but for the industry are calculated on fee rates that haven’t been negotiate for a long time and clearly your yields on those funds could be primarily lower.
In the past, I think you’ve discussed you're recapture expectation and the possibility of how competition might play into that, but more fundamentally in providing those disclosures, is your basic assumption that fee rates are roughly what they were about six years ago?
Biff Bowman
So, we’ve reprised some of our money market fee assets more recently than that, I think 2012 was the most recent reprising in a portion of our money market fee asset. So it's not fair to say that some of those aren’t current, but we are revisiting in light of the money market reform and all the other acts, we are constantly revisiting if you will our bulk of product offerings and capabilities as well as the competitive pricing landscape in that space.
Luke Montgomery
And then on sec lending in February, you said a couple of pair of class action lawsuits for about; I think it was three quarters worth of sec lending revenue. So could you just remind us are there other suits outstanding of a similar nature or is this issue pretty much put to bed and then had that already been accrued for in prior earnings or was there an impact in the P&L this quarter?
Biff Bowman
As we previously disclosed we did agree to settle the alleged class action claims arising out of the client investments in the Northern Trust index funds that experienced losses from securities lending during the financial crisis. We took the 19.2 million pre-tax charge in the fourth quarter of 2013.
The parties obtained preliminary court approval for the class wide settlement during the first quarter of 2015 and the final approval hearing has been schedule for August of 2015. So there are still some items that we are reviewing in the process the best sort of the most recent update we have on our securities lending.
Operator
(Operator Instructions) We’ll move next to Glenn Shor with Evercore ISI. Your line is open.
Glenn Shor
A NIM question if I could on the yield front, so yields on the loan -- so I think 22 basis points year-on-year they fell double that on the debt front which is helping support [indiscernible] among other things. So the question is, is the drop end loans -- how do you attribute to rates versus pricing versus mix of products and on the debt front?
I’m assuming there is a component of rolling off high [cost] debt, could you talk about maybe the year ahead and in terms of what's rolling off and can we still expect to same year-on-year trends?
Biff Bowman
If you will on the loan mix and if you will -- the lessening of the yield. The mix of products there has moved from, as we talked about residential real estate into what we would call investment secured loans.
Those have a lower yield but they are well secured in high credit quality. So the mix shift there has driven a lot of that change if you will in rate, in terms of the first part of your question in the loan mix.
So the areas we are growing our loans in have a slightly higher lower yield then the traditional residential real estate and others. So that is driven most of the loan mix down.
In terms of the debt we did have last year 500 million of senior notes and then in the first quarter of this year we had 125 million sterling note which was used financed the bearings acquisition about a decade ago roll off in the first quarter. And then as far as the rest of the year we along with the treasure in the [indiscernible] committee of the firm look at our debt structure on an ongoing basis to determine what type of debt structures we will have over that roll off.
Glenn Shor
Okay, nothing imminent schedule?
Biff Bowman
Nothing.
Glenn Shor
I know you're sure on time, go ahead you can move on. Thank you.
Operator
We’ll take our next question from Ashley Serrao with Credit Suisse. Your line is open.
Ashley Serrao
Just a boarder question, expenses in general. You are off to a good start in the first quarter, as we think about the balance of the year what are some of the puts and takes which we should mindful of in terms of reinvestment and maybe any other efficiency gains in the horizon?
Biff Bowman
So as we've discussed before we have many ongoing expense initiatives around the firm. I talked about our location strategy for instance and we gave some numbers in our talking points were last year a little north of 75% of our higher were in our locations that we would call Operating Centers in Tier 2 and Tier 3 locations.
That will continue ongoing and we've done a great job of managing our consulting and legal expenses that we've talked about that are other drivers on the expense front. Those can be episodic, particularly legal can be episodic but some of the disciplines that we put in place around there have aided us in the expense measures that you see here and in the expense performance that you see here.
In essence it's a business as usual on the expense product, we've embedded some of the disciplines around the expense to trust fees that we talk about is been embedded into our businesses and people are gearing their expense growth rates to be in line with our trust fee growth rates.
Ashley Serrao
And just a quick follow up. Just in FX if you look at the cumulative pre-tax impact was this last quarter or a year ago what was it?
Bev Fleming
Are you talking about the impact of the currency rates?
Ashley Serrao
Yes, the exchanges rates.
Biff Bowman
If you're talking about the impacts on the P&L for us, to give some indication if you look at revenues sequentially we would have had 7% on trust fees -- excuse me $7 million of trust fees were impacted negatively. And then if you looked at it on a year-over-year basis that would have been about 15 million negatively impacted by the strengthening dollar, that’s an important line.
On the expense side if I look at [indiscernible] largest expense line it was $14 million impact year-over-year and sequentially also 7 million. Just trying to give you some idea of our two main expenses.
Operator
We'll move on to Brian Bedell with Deutsche Bank. Your line is open.
Brian Bedell
Maybe just go back to expenses very good cost control in the quarter. I was just trying to understand a little bit more granularly some of the what you would identify as seasonally high or first quarter and then some of the -- as mentioned I think the lower consulting and legal fees.
Just trying to isolate that as well.
Biff Bowman
So we do have some seasonality in our expense as you noted. We have the Northern Trust open and then we have certain compensation related expenses particularly with option expense for retirement eligible individuals that are seasonal.
I think if you look probably historically you'll be able to see the spike particularly in our business promotions and other lines in your analysis to see. We felt pretty good about our ability to absorb that increase in expense in the first quarter and still maintained expense growth rates at you saw in our earnings release.
As for things like legal and consulting, the disciplines we put in place around the use and the contracts, and the rate cards with those individuals, I think will allow us to create some permanent savings, but take legal for instance there is -- there can be episodic situations where we need to utilize outside law firms for situations and we continue to manage the cost of the rate cards, but if we have to use legal firms more for entities going forward or consultants for needs going forward it could move that needle around. I think most of the other expenses again are very much in line with the expense-to-trust fee ratio that we talk about and people are embedding that into their allowable growth rates in their businesses.
Brian Bedell
And then just maybe on the outside services, do you view that run rate as a sustainable run rate borrowing anything unforeseen in the first quarter?
Biff Bowman
I am hesitate to say that that’s a run rate because of the episodic nature of some of it, but I think there is a portion of that that is permanent, but there is also the episodic need. So I am not sure I am willing to concede.
Operator
Thank you. We’ll take our next question from Alex Blostein with Goldman Sachs.
Your line is open.
Alex Blostein
Question on the asset management business and the I guess the organic growth, I know you guys don’t give that to us here and that’s sort of a wish, but broadly speaking if I look at the AUM growth up 4% quarter-over-quarter it’s up quite nicely despite the FX headwinds in the market helped to some extent, but I am assuming that’s not all of it. So just got a curiosity here where the growth is coming from?
We’ve definitely seem a lot of incremental growth in the past with strategy seeing that, predominantly what’s driving that and maybe what the pipeline looks there?
Biff Bowman
So if we look at our growth in our AUM and our asset management business in general, we did see growth in our cash funds in the quarter, we’ve seen growth in our OCIO business, our outsourced Chief Investment Officer business, very much we’ve seen growth in our enhanced equities strategy. Our three areas where we’ve seen growth are ETF business also has continued to grow as well.
So, we’ve had -- and it's been -- I would also say it's been global as well, that growth has been both domestically here in the U.S. and particularly in Europe and in the Middle East we’ve seen significant growth in our AUM.
Alex Blostein
And then just my follow-ups to business initiative, the cash business, given the fact that the bigger banks continue to seek pressure on the balance sheet size and more cash continues to move off to the sidelines. Given your roll in the cash management world both on the money market fund side, but also I guess some of the balance sheet capacity since you guys are not, that’s a lot of constrained like your peers.
Just curious to think about how you guys think about that opportunity relative to some of your peers given the fact that there is still -- feels like a lot of cash in the systems that needs home and nobody sort of wants it?
Biff Bowman
We’ve assembled a cross business unit project team which would as you describe encompass both professionals from our asset management business and our treasury team to look really in servicing the liquidity needs of our clients and in some cases that liquidity needed is balance sheet and in some cases that is in some form of money market fund or some other type of cash vehicle. There is a cross Northern Trust wide team looking at that, working with clients to understand their solution needs and it’s very active and moving forward at a pace as you might imagine, in conjunction with the money market reform that you see on the asset management side but also in relation to other financial institutions that have taken a very different tact around large deposits and we -- right now we view each of those on an individual basis, but we’re looking at that as I said across the business with a real holistic approach to client liquidity needs.
Operator
[indiscernible] with Jefferies.
Unidentified Analyst
A little bit on the securities lending business, you mentioned that the spreads look like they continue to be under pressure, you had okay period in collateral growth and we did see little bit disconnect between LIBOR and sec funds this quarter. So can you talk through to some of the underlying dynamics and if anything is just changing fundamentally inside the security lending business or if it was just some anomaly from this quarter?
Biff Bowman
On volumes we did see a pickup in borrower demand particularly in U.S. equities and U.S.
corporate bonds, our sequential volume growth was impacted -- we have sequential volume growth. However it was essentially offset by two fewer days in the first quarter versus the fourth quarter and I know you're asking from macro trends as well.
We also saw sort of for us a mix shift in the impacted fee splits so our clients with different fees split were more in the market than those with perhaps more favorable to Northern fees splits. And so the clients having those less favorable fee arrangements represented a larger portion of our revenue in this quarter.
Fundamentally though I don’t think we saw any other macro level issues that we would call out on the call. I would note in the second quarter we get our dividend fees and ramp up in security funding so we anticipate that in the quarter.
Unidentified Analyst
And then my follow up is just on the same topic. So historically securities lending spread, did you tend to widen when we get an advance of that rate cycle.
But I'm just wondering this time do we actually have to wait for the administer grade to change. Or should we anticipate that as dead funds in LIBOR go up in advanced of the actual fed cycle.
How would you expect that dynamic to work this cycle if any different form prior.
Biff Bowman
I don’t know that I can answer that, if you want to be all candor. I'm not sure that I’ll have a good answer for you on that.
Unidentified Analyst
I'll follow up offline.
Operator
We'll go now to Betsy Graseck with Morgan Stanley. Your line is open.
Betsy Graseck
Couple of questions on wealth management. We've seen some headlines on some of the neutrals that are coming out of the West Coast they're known as robo advisors.
I'm not asking if, if you’re going down that road, but is there something in the technology that you could use to leverage that kind of concept and get even more efficient, freeing up some of your folks to spend more of their time on client acquisition or enhance there wallet in using some of these tools?
Biff Bowman
We are -- our product team insight is actively looking at if you will the capabilities that those type of robo advisors if you will bring to the market. And if you will considering the technology that would enable our client situations more effectively and it is an emerging trend, our president of our wealth management business spends significant amount of time on the West Coast meeting with individuals to further understand the technologies if you will that are driving the wealth management business forward.
So you're right, there is technology there, it today doesn’t target our typical client as you might suspect. But I think the nuances and the capability under penning the technology there is of interest to us to continue to evaluate.
Betsy Graseck
And the follow up is just on the fiduciary standard language that came out of departmental [liberalizing] was last week. I'm sure you had took the time to look through that just wondering if there is any change in how you approach the marketing of your clients given that language come of the DOL.
Biff Bowman
We believe our wealth management remains very well positioned versus others vis-à-vis the new fiduciary standards. A brief overview from a financial perspective we would expect minimal negative impact because our model is a fee based model, other have commission oriented models with different compensation structures.
Ours are largely discretionary structures which don’t lend themselves to some of the issues the department of LIBOR has timed on. If you think about the discretionary incentive awards for our individuals, the factors that drive them are really based on client satisfaction, client retention and risk management and not driven by product placement and some of the other elements that the department of LIBOR is concerned about.
And then lastly I would say this for 125 year the firm has been driven by fiduciary responsibility and we don’t some of these new requirement that department of LIBOR is talking about here is new news for us in that space.
Betsy Graseck
So opportunity for potential mortgage or gain as the DOL has tightened people awareness around the need for fiduciary responsibility. And maybe there is a marketing effort that will ring little bit more clearly in people minds.
Biff Bowman
We hope so.
Operator
We'll move next to Mike Mayo from CLSA. Your line is open.
Mike Mayo
Foreign exchange is up about one fifth quarter-over-quarter and about two fifth year-over-year. How much that is sustainable?
How should we think about that?
Biff Bowman
So it is highly links to volatility and volumes. So it's very links to the volatility that you saw.
We have taken -- as we discussed we have taken efforts to look at our e-commerce platforms and other solutions for clients that has modestly driven up our client volumes and our client share. But still the lion share of this is driven by the volatility that we see.
We're hoping to further through products and capabilities and solutions, have more that is sustainable as you describe, but it's partially linked to volatility.
Mike Mayo
And what are the key drivers of that volatility when you do the analysis and is that continuing into the second quarter?
Biff Bowman
Well we used probably the same things that you do to looking at the JP Morgan, G7 currency volatility or the emerging market volatility index in the [seats], we have into April seen the same types of volatilities that we’ve seen and I -- we believe that you have the possibility of Central Bank divergence on monitory policy it could continue to create at least the need for more volatility or create volatility in the foreign exchange system.
Operator
Thank you. We’ll move next to Adam Beatty with Bank of America.
Your line is open.
Adam Beatty
On asset management just interested in any differences that you're seeing between your overseas and domestic clients, whether that’s in C&IS or wealth management just in terms of the level of new business or asset allocation and whether maybe currencies effecting that? Thanks.
Biff Bowman
If you look at our business and our asset management business globally, in the U.S. it has a strong balance between our asset, our wealth management business and our corporate institutional businesses.
Outside of the U.S. that becomes largely an institutional base for our AUM and it has a significant position in our passive products if you will and particularly to large sovereign wealth funds those are meaningful clients across the globe outside the U.S.
So there is obviously substantial pools of assets there and they need those kinds of index products. And in U.S.
in the domestic product market, we have a wide arrays of suite of products in our asset management that are attractive to our clients from alternatives to ETFs, to mutual funds, to cash products, to active equity, et cetera. So it's a much broader spectrum.
Institutionally, in the U.S. we also have a broader array, it still has a heavily cash and index component on the institutional side, but we do have an array.
But on the wealth side it's a much broader mix product capabilities.
Adam Beatty
Thank you, really appreciate the detail and then just a quick follow-up on the OCIO business, how much synergy is there between that and custody and asset servicing, do you look for cross selling there or is it more of a stand alone? Thanks.
Biff Bowman
Tremendous synergies and if you think it from a -- we may be providing the custodial services and as part of a solution set to that client, they need help or they’re seeking help, or they’re seeking to outsource some of the pension responsibilities or the investment responsibilities, we become a fairly natural solution for them and there is synergies in the ability to bundle that product and service together.
Operator
Thank you. We’ll take our next question from Gerard Cassidy with RBC.
Your line is open.
Gerard Cassidy
Biff, can you share with us an update on the funding over in the European markets where there are negative interest rates and you’ve passed on the cost to some of your customers, what’s been the reaction by the customers? And also what percentage of those deposits are actually being -- that cost is being passed on them, in the markets where there are negative rates?
Biff Bowman
So we do have several markets, you're correct where we have a negative rate environment. We have the Euro, we have the Danish krona, we have the Swiss franc, our three areas where we have gone negative if you will with our clients.
In terms of the spread if you will on that it's interesting in some cases it depends on the reinvestment possibilities that we have in those. So we -- in some cases we have seen the spread erosion occur where the spread is narrowed and in others we’ve been able to maintain that if you will that spread even with negative rates.
I will say that we on a continuous and an active basis we monitor the markets, we understand where we’re able to reinvest and we have active dialogues with our clients about in some cases perhaps the need to press further negative into the rate environment where Central Bank’s continue to take more aggressive negative rate stances.
Allison Quaintance
Gerard, one thing that I would add to that is that of the three currencies where we’re currently charging negative rates, the one that is really the most significant for us from a client balance perspective as the euro and I think we had mentioned last quarter that while we had seen a run up in our Euro balances when our rates was not negative, we did see that come down we went from about €4 billion to about 3 billion, kind of stabilized at that level in line with what our expectations had been and I guess after that initial response, we have seen those balances drift up, but just modestly. In terms of the Swiss franc and the Danish krona is about the balances is there from client, they’re really quite small.
Gerard Cassidy
And about what percentage of customers are being passed on this cost? Is it half of the deposit base or a third or all?
Allison Quaintance
A vast majority.
Biff Bowman
A vast majority.
Gerard Cassidy
And then second, there has been some evidence of loans that are tie to Euro bar, that when the Euro bar rate has gone negative the variable rate loan, the spread over the loan is also pushing the loan yield negative meaning the bank is being forced to pay the borrowers. Do you guys have any loans tied to these negative rates where you could be at risk, where you would be forced to pay the borrower?
Biff Bowman
We don’t as of our last asset liability committee meeting because we walked through this scenario. But we keep our eyes very closely pealed to I know what you're describing and to date we don’t have that situation.
But we're continuing to stay close with the negative movement in the rate. Most of our lending is domestic in this dollar based; in fact I believe all of our lending is dollar base.
Operator
And we'll move now to Jeffrey Elliott with Autonomous. Your line is open.
Jeffrey Elliott
On the 20 million or so year-on-year increase in foreign exchange trading income. Can you give us sense of what if, any expenses all attached to that incremental income or does it all just drop through to pretax?
Biff Bowman
There are some but they are relatively modest level of expenses. There is compensation related expenses that would move with that success in the foreign exchange trading market.
But there is not much else in way of incremental expense that moves with that.
Operator
We'll move next to Brian [indiscernible] with KBW. Your line is open.
Unidentified Analyst
I just have a quick question on the wealth management specifically looking at the East region. I know you have been seeing growth there relative to all the other reasons but look like for the last four quarters revenues kind of plateaued and I know in the past you kind of talk about a j-curve when you are in certain markets.
Kind of outline where you are at on that j-curve in the market? When you kind of expect to see enhance growth in that market again?
Biff Bowman
So I would take a step back and say that our east region is very broad geographically, it goes from Miami Florida to Boston. So I think you need to sort of peel back into market by market type analysis which we don’t have in here.
So we've got markets within there that have stronger growth trajectories than what you see here overall. We are -- and continue to have very large market share and meaningful presence in the Florida coast and we're building out that presence from what I would say the Washington D.C.
quarter. We have meaningful presence in New York but continue to work on increasing our presence and penetration in that market all the way up to Boston.
So I don’t know that I can specifically make a comment on generically about the East because it's made up of so many markets along the Eastern sea board. So some with great growth dynamics and some where we continuing to invest and want to deliver more.
Unidentified Analyst
Would say that the investment in the North East is going to pick up year-over-year than in 2015?
Biff Bowman
It continues to be a growth initiative for our wealth management area and we continue to invest both marketing and probably more important talent [dollars] into the region to facilitate that growth.
Operator
We'll take our final question today from Jeff Harte with Sandler O'Neil. Your line is open.
Jeff Harte
Looking at assets under custody the growth has been consistently impressive and the market share gain opportunity is pretty clear with 6 trillion versus some peers north of 30. Can you talk a little bit about what is actually driving the market share gain you're seeing there?
Is it a better product offering than competitors? Is it simply entering new markets and winning your share of bids?
What's actually driving that logistically?
Biff Bowman
I'll answer that with a few points. One is we had success in regions where we've grown quickly.
So let me highlight Australia and we highlighted an Australian wins. So there is an example where the regionality and our strength in that region has helped drive that market share growth, that’s one area where we've seen net growth.
Most notably has been our success in our servicing asset manager or our global fund services business. We've seen really substantial double digit growth in that business over the last three or four years and our ability to compete against our primary competitors in there and be successful has grown remarkably over the time.
And then I would end with product and capabilities, technologies like what we have -- from in our hedge fund services, the Omnium acquisition and other elements of technology. The combination of technology, regional strength and growth particularly in our GFS business have allowed to market share gains.
Jeff Harte
Is GFS; is that a function of operating it to new markets where maybe you hadn’t been before?
Jeff Harte
In some cases geographic markets, in some cases its product and capabilities. So it's a combination of both.
And then the scale that we've achieved in that business makes us competitive force.
Operator
And this does conclude our Q&A for today. I’ll turn the call back to our speakers for any closing remarks.
Bev Fleming
Thank you, Biff and thank you everyone for joining us today. Allison and I would be happy to take additional questions as the rest of this week unfolds and we look forward to speaking with you on our second quarter call in July.
Have a good day. Thank you.
Operator
And that does conclude today’s conference. You may disconnect at any time.