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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone. And welcome to the Northern Trust Corporation Fourth Quarter 2018 Earnings Conference. Today’s call is being recorded.
And now at this time, I would like to turn the conference over to the Director of Investor Relations, Mark Bette for opening remarks and introductions. Please go ahead.
Thank you, April. Good morning, everyone. And welcome to Northern Trust Corporation’s fourth quarter 2018 earnings conference. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Michael O’Grady, our Chairman and CEO; Aileen Blake, our Controller; and Kelly Lernihan from our Investor Relations team.
For those of you who did not receive our fourth quarter earnings press release and financial trends report via e-mail this morning, they are both available on our Web site at northerntrust.com. Also on our Web site, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This January 23rd call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our Web site through February 20th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor Statements, what we say during today’s conference call may include forward-looking statements, which are Northern Trust current estimates and expectations 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 2017 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 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 Biff Bowman.
Good morning, everyone. Let me join Mark in welcoming you to our fourth quarter 2018 earnings conference call.
Starting on Page 2 of our quarterly earnings review presentation, this morning, we reported fourth quarter net income of $409.9 million. Earnings per share were $1.80 and our return on common equity was 17%. As noted on the second page of our earnings release, this quarter’s results included $5.7 million of severance related and restructuring charges within expenses and $30 million in benefits for income taxes, primarily attributable to the adjustments recorded associated with the Tax Cuts and Job Act.
Before going through our results in detail, I would like to comment on some macro factors impacting our business during the quarter. Equity markets had a mixed impact on us during the quarter. End-of-period markets were unfavorable on a year-over-year basis with the S&P 500 and MSCI EAFE Indices declining 6.2% and 13.4% respectively. On a sequential basis, both indices also declined with the S&P 500 down 14% and the EAFE down 12.5%. Also on a sequential basis, the average daily market value of the S&P 500 was down 5.1%, while the EAFE declined 6.3%. However, as you will recall, some of our fees are based on lagged pricing and in the prior quarter, the S&P 500 was up 7.2%, while the EAFE was up 1.8%.
Short-term interest rates continued to increase during the quarter, driven by a rate hike from the Federal Reserve. Currency rates influenced the translation of non-U.S. currencies to the U.S. dollar and therefore impact client assets and certain revenues and expenses. The British pound and euro versus the U.S. dollar ended the quarter down 6% and 5% respectively compared to the prior year. The British pound and euro also declined sequentially. The year-over-year and sequential declines for the pound and euro against the U.S. dollar had an unfavorable impact to revenue and a favorable impact to expense.
Let’s move to Page 3 and review the financial highlights of the fourth quarter. Year-over-year revenue increased 5% with non-interest income up 4% and net interest income up 9%. Expenses increased 2% from last year. The provision for credit losses was a credit of $4 million compared to a credit of $13 million one year ago. Net income was 15% higher year-over-year.
In the sequential comparison, revenue increased 2% with non-interest income up 2% and net interest income up 3%. Expenses increased 2% compared to the prior quarter. Net income increased 9% sequentially. Return on average common equity was at 17% for the quarter, up from 15.1% in both the prior and prior year quarter. Assets under custody and administration up $10.1 trillion declined 6% compared to one year ago and were down 7% on a sequential basis. Assets under custody of $7.6 trillion also declined 6% compared to one year ago and were down 7% on a sequential basis. Both the year-over-year and sequential declines were primarily driven by lower equity markets and the impact of unfavorable moves in currency exchange rates, as well as the impact of one large domestic custody client transitioning out during the quarter.
Assets under management were $1.1 trillion, down 8% year-over-year and down 9% on a sequential basis. Both the year-over-year and sequential declines were driven by unfavorable equity markets outflows, which include the impact of lower period end security lending collateral and the impact of unfavorable moves in currency exchange rates.
Let's look at the results in greater detail, starting with revenue on Page 4. Fourth quarter revenue on a fully taxable equivalent basis was $1.5 billion, up 5% from last year and up 2% sequentially. Trust investment and other servicing fees represent the largest component of our revenue and were $934 million in the fourth quarter, up 3% year-over-year and down 1% from the prior quarter. Foreign exchange trading income was $78 million in the fourth quarter, up 24% year-over-year and up 9% sequentially. The year-over-year increase was primarily due to increased foreign exchange swap activity in our treasury function, as well as increased client volumes and higher volatility. The sequential increase was primarily driven by higher volatility.
Other non-interest income was $75 million in the fourth quarter, up 4% compared to one year ago and up 36% sequentially. The year-over-year increase was primarily due to a net gain on the sale of non-strategic leases in the current quarter, partially offset by lower treasury management fees and securities commission and trading income. The sequential increase was also due to the net gain from the lease sale, combined with an impairment recorded in the prior quarter, as well as a lower Visa related swap expense. Net interest income, which I will discuss in more detail later, was $430 million in the fourth quarter increasing 9% year-over-year and up 3% sequentially.
Let's look at the components of our Trust and investment fees on Page 5. For our corporate and institutional services business, fees totaled $536 million in the fourth quarter flat year-over-year and down 1% on a sequential basis. The translation impact of changes in currency rates reduced year-over-year C&IS fee growth by approximately 1.5% and the sequential growth by just under 1%. Custody and fund administration fees, the largest component of C&IS fee, were $376 million, up 2% compared to the prior year and flat on a sequential basis. Both the year-over-year and sequential performances were driven by new business, partially offset by the unfavorable impacts of currency exchange rates and markets.
Assets under custody and administration for C&IS fee clients were $9.5 trillion at quarter end, down 6% year-over-year and down 7% sequentially. Both the year-over-year and sequential declines were primarily driven by lower equity markets and the impact of unfavorable moves in currency exchange rates, as well as the impact of one large domestic custody client transitioning out during the quarter. Recall that lagged market factors value into the quarters fees with both quarter lag and month lag markets impacting our C&IS fee custody and fund and administration fees.
Investment management fees in C&IS fee was $105 million in the fourth quarter were down 1% year-over-year and down 3% sequentially. The year-over-year decline was primarily due to net outflows, partially offset by favorable markets and a change to gross revenue presentation. The sequential decline was primarily due to outflows. Assets under management for C&IS clients were $791 billion, down 9% year-over-year and down 10% sequentially. Both the year-over-year and sequential declines were driven by unfavorable equity markets outflows and unfavorable movements in foreign exchange rates.
Securities lending fees were $22 million in the fourth quarter, down 14% year-over-year and down 10% sequentially. Both the year-over-year and sequential performances were impacted by lower volumes, as well as lower spreads. Securities lending collateral was $150 billion at quarter-end and averaged $158 billion across the quarter. Average collateral levels declined 9% year-over-year and 7% sequentially.
Moving to our Wealth Management business. Trust, investment and other servicing fees were $398 million in the fourth quarter, up 6% year-over-year and flat sequentially. Within wealth management, the Global Family Office business fees increased 7% year-over-year and were up 2% sequentially. The year-over-year growth was driven by new business and favorable markets. The sequential performance reflects favorable markets and new business. Recall that our Global Family Office fees are impacted by quarter lag market values.
Within the regions, the year-over-year growth was driven by higher fees resulting from the adoption of the new revenue recognition standard, new business and favorable markets. Sequential performance within the regions was relatively flat as the unfavorable impact of lower equity markets was offset by new business. Assets under management for wealth management clients were $279 billion at quarter end, down 4% year-over-year and down 6% sequentially.
Moving to Page 6. Net interest income was $430 million in the fourth quarter, up 9% year-over-year. Earning assets averaged to $112 billion in the fourth quarter, down 1% from the prior year. Total deposits averaged $93 billion and were down 4% year-over-year. Interest-bearing deposits declined 2% from one year ago to $74 billion. Non-interest-bearing deposits, which averaged $19 billion during the fourth quarter, were down 10% from one year ago. Loan balances averaged $32 billion in the fourth quarter and were down 5% compared to one year ago. The net interest margin was 1.52% in the fourth quarter and was up 13 basis points from a year ago. The improvement in the net interest margin compared to the prior year primarily reflects the impact of higher short-term interest rates, partially offset by higher premium amortization and a balance sheet mix shift.
On a sequential quarter basis, net interest income was up $12 million or 3%. Average earning assets declined only slightly on a sequential basis as deposit levels were only slightly lower than the prior quarter. On a sequential basis, the net interest margin increased 5 basis points due to the favorable impact of higher short-term rates and a favorable balance sheet mix.
As we have discussed in our most recent quarters, we do continue to see the opportunity for foreign-exchange swap activity within our treasury function. This activity has the impact of reducing our interest income relating to Central Bank deposits as we swap out of U.S. dollars, but increase our level of foreign exchange trading income. For this quarter, we saw additional foreign-exchange trading income of $17 million, offset by $14 million less in net interest income. Looking at the currency mix of our balance sheet for the fourth quarter, U.S. dollar deposits represented 70% of our total deposits. This is equal to one year ago and up from 69% in the prior quarter.
Turning to Page 7, expenses were $1 billion in the fourth quarter and were 2% higher than both the prior and prior year quarter. As previously mentioned, the current quarter included $5.7 million in expense associated with severance and other charges. For comparative purposes, note that one year ago our results included severance and other charges of $17.6 million, as well as $12.9 million expenses related to special one-time cash bonuses paid in connection with the Tax Cuts and Jobs Act. The prior quarter included $2.7 million in severance and other related charges. Excluding the called out charges, expense for the quarter was up 5% from one year ago.
With respect to the remaining increases in year-over-year expense growth, the following items were key drivers within the categories. Compensation was higher primarily driven by increased incentive compensation and this year's base pay adjustments, which were effective in April. The impact of staff growth on salaries was more than offset by staff actions and our ongoing location strategy efforts. Employee benefits were higher, primarily due to an increase in retirement plan expenses and higher payroll tax withholding, partially offset by lower medical expenses compared to the prior year.
Outside service costs were higher, driven primarily by higher third-party advisor fees and increased technical service cost expense, partially offset by lower consulting expense. There was a corresponding increase to Trust investment and other servicing fees as a result of the higher third-party advisor fees due to the change to gross revenue presentation.
Equipment and software expense was up year-over-year due to a software related charge, higher software amortization and higher equipment related costs. Occupancy-related costs were lower compared to the prior year, primarily relating to non-recurring lease adjustments recorded in the prior year. Other operating expenses were down from the prior year, primarily due to lower FDIC expense and staff-related costs, partially offset by higher costs associated with account servicing activities.
Shifting to the sequential expense view. Excluding the expense charges in both the current and prior quarter, expenses were up 2% from the prior quarter. Compensation expense increased sequentially due to higher costs associated with performance-based incentives, salaries and other compensation costs. Employee benefits expense increased primarily due to medical costs. Outside services increased sequentially due to higher legal and consulting costs and higher technical services expense, partially offset by lower sub-custody and third party advisor fees. The sequential increase in equipment and software was primarily attributable to a software related charge.
Other operating expense declined $8 million from the prior period, driven by lower business promotional spending due to the timing of the Northern Trust sponsored golf tournament during the prior quarter and lower FDIC costs, partially offset by various other miscellaneous expense categories, including costs associated with account servicing activity. Staff levels increased approximately 4% year-over-year and 1% sequentially. The staff growth was all attributable to staff increases in lower cost locations, which include India, Manila, Limerick, Ireland and Tempe, Arizona, partially offset by reductions within our higher cost locations.
Turning to Page 8, as we have discussed on previous calls through our value per spend initiative, we are realigning our expense base with the goal of realizing $250 million in expense run rate savings by 2020. And currently, we are embedding a sustainable expense management approach. We expect these efforts to slow our expense growth to be more closely aligned with our organic fee growth. Our fourth quarter results reflect approximately $36 million in expense savings, reducing the year-over-year expense growth by approximately 3 point. This would equate to approximately $145 million on an annualized basis against the $250 million goal. We continue to cultivate a healthy pipeline of opportunities.
Turning to the full-year, our results in 2018 are summarized on Page 9. Net income was $1.6 billion, up 30% compared with 2017 and earnings per share were $6.64, up 35% compared with the prior year. On the right margin of this page, we outlined a non-recurring impact that we called out for both years. We achieved a return on equity for the year of 16.2% compared to 12.6% in 2017.
Full year revenue and expense trends are outlined on Page 10. Trust investment and other servicing fees grew 9% in 2018. The growth during the year was primarily driven by new business, favorable markets, the acquisition of UBS Fund Administration businesses in Luxembourg and Switzerland, and the impact of revenue recognition. Foreign exchange trading income increased 46%, driven by an increase in swap activity within our treasury team and also growth from the client driven trading.
Net interest income increased 13%. The growth in net interest income was primarily driven by higher short-term interest rates coupled with earning asset growth. The net result was 11% growth in overall revenue on a reported basis in 2018. On a reported basis, expenses were up 7% from the prior year. Adjusting for the expense charges in both '16 and '17 that are on the prior page, expenses were up 8% from 2017, reflecting the UBS acquisition, the underlying growth within our business and the impact of revenue recognition.
Turning to Page 11, a key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we have made in recent years to improve the expense to fee ratio, pretax margin and ultimately our return on equity. The ratio of expenses to fees is a particularly important measure of our progress as it addresses what we can most directly control. Reducing this measure from where it was previously as high as 131% in 2011 to the levels we see today is a key contributor to the improvement in our pretax margin and ultimately our return on equity.
Turning to Page 12, our capital ratios remained strong with our common equity tier 1 ratio of 13.7% under the advanced approach and 12.9% under the standardized approach. The supplementary leverage ratio at the corporation was 7% and at the Bank was 6.4%, both of which exceeded the 3% requirement, became applicable to Northern Trust effective at the start of 2018.
With respect to the liquidity coverage ratio, Northern Trust is above the applicable 100% minimum requirement. As Northern Trust progresses through fully phased in Basel III implementation, there could be additional enhancements to our model and further guidance from the regulators on the implementation with final rule, which could change the calculation of our regulatory ratios under the final Basel III ruling. Yesterday, we announced the $0.05 increase to our quarterly dividend from $0.55 to $0.60. This represents a 9% sequential increase and an increase of 43% on a year-over-year basis. During the fourth quarter, we also repurchased 2.5 million shares of common stock at a cost of $235 million.
Now, I would like to turn the call over to Mike for some closing comments.
Thanks Biff. Good morning, everyone. Before we open up the call for questions, I want to offer some closing comments regarding 2018. The three primary objectives for our strategies are to continuously enhance client service, improve our productivity and grow profitably. In 2018, we executed multiple initiatives and made significant investments in order to make meaningful progress on all three objectives.
For example, we executed on an important initiative to realign some of our operations and technology functions in order to enhance the client experience by better aligning ourselves and our activities with client needs and our business strategies. We can see early benefits of this realignment as we can effectively and efficiently serve clients end to end and be more nimble in this rapidly changing environment. As Biff highlighted, we've made considerable progress towards our value for spend goal of achieving expense run rate savings of $250 million by 2020. Throughout the company, we have made a commitment to making a value-oriented mindset on ongoing aspect of how we conduct our business.
We are investing meaningfully in technology and our talent. In wealth management, we are expanding the capabilities of our goals driven wealth management platform and we continue to hire talent in focused growth areas. In asset management, we expanded our product offerings, including the development of new ETS and alternatives products. And in C&IS in conjunction with the integration of the UBS asset servicing acquisition in Europe, we are investing heavily in building a future state fund services platform and we strengthened our technology capabilities by acquiring or making investments in BECS, Lumin, Parallax and C Tech.
Our shareholders benefited from the execution of our strategy through the company's financial performance and return on to capital in 2018. As we began 2019, we are excited about our competitive positioning within each of our businesses. We remain focused on providing clients with exceptional service, improving our productivity and driving profitable growth.
Thank you again for participating in Northern Trust's fourth quarter earnings conference call today. Biff, Mark and I would be happy to answer your questions. April, you can open up the lines.
[Operator Instructions] And we will first hear from Michael Carrier of Bank of America.
Biff, maybe first one is just for you. You mentioned some of the lagging pricing on some of the assets and just given the period end just wanted to get maybe an update on how you are thinking about the expense outlook for 2019 and beyond? You gave the update on the value per spend. But just how maybe the lower revenue environment can you just dial areas back versus what you are going to remain in investment mode for longer term growth?
Mike, maybe it would be helpful on the call if I walked through the lag and the lag impacts first and then we will talk about the expense reactions to that, because I think there is some important information here. First if you look at our fees as a firm if I look at our C&IS business first I'll start there, approximately 60% of the fees are equity market sensitive or sensitive to the asset -- they are asset sensitive, they move with markets, and so 40%. If you look at our custody and fund administration line and for those that are sensitive, about 70% to 75% of our fees are on a month lag basis. That means 25% to 30% are on a quarter lag basis. In the past, I know we have talked more about 50%-50% in that lag but our mix has shifted between our global fund service business that are traditional and IIG businesses as we call institutional investor businesses. And so that is more of a 75% -- 70% to 75% is on a month lag and 25% or so percent is on a quarter lag in our custody and fund administration fees.
In C&IS investment management fees, which about 40% of the fees are sensitive to equity markets, about 50% is daily but the vast majority of that is in cash funds. About 40% is quarter lagged but more heavily exposed to equity and than 10% or so is on a month lag basis. If you go to our wealth management business, it's more aligned with where we traditionally talked it has not moved as much, but roughly, if you look at our Global Family Office about 65% to 70% of the fees are quarter lagged, 25% of those percent are daily -- 25% is daily and 5% to 10% is in a month lag. And then if you look at our wealth management regions, about 70% are on a month lag basis, 20% are on a daily basis and 10% are on a quarter lag basis.
I hope that's important for everyone so they can understand the lag nature of our business for fees to give you some color. I think the rest of your question was really been around with that backdrop, what can we do from an expense standpoint. And I'll take a quick stat and Mike might have a few comments that he wants to add as well. From an expense standpoint, the first thing I'd say is we continue to focus as a firm on the organic trajectory of our businesses. So that's important to us what we think we can grow organically and what we can grow our expenses organically. But we're not immune from considering the macro factors in our expense run rate as well.
The way we look at it is this, we have certain inflationary pressures on our expense base, but we think about generating productivity through things like value per spend or other forms of productivity that has to at least offset that inflation in our model. That leaves us with expenses in our view that are there to support the organic growth rates that I talked about and/or to invest in our businesses. And we calibrate those so that we generate organic leverage from what we think we will get on the organic growth rate. So that's the framework we think about expenses and we do think that if we get that right, we drive the productivity and drive the productivity as hard as we can that we can still create that leverage even in an environment where we do see some volatility on the fee line or volatility in the markets.
Yes, I would just add to what Biff said that overtime we have the financial model that Biff described there, and so it's important that we continue to execute on that overtime. Having said that, you also have to navigate the environment that you are in at that particular point in time. And clearly, the environment right now is more volatile than it was say a year ago, and so that does means being very careful in thinking about how we manage the expense base for the business as we go through this market environment. So being relatively tight if you will as we go through that and focusing on these longer term productivity initiatives that we've had in place.
Importantly, as Biff talked about a year ago or before that, the environment was relatively strong and that’s when we launched into value per spend. And the point is that we didn’t want to wait for a more challenging environment to say okay now we need to come up with ways to reduce the expense base. So it's both through cycles if you will, but then also trying to be mindful of the environment that you are in.
And then maybe just a quick follow up. Just on your organic growth outlook, I think you guys have been in that call it 4% to 5% range over time. Given what you're seeing in terms of the investment opportunities and maybe some of the competitive dynamics in the industry. Are you still comfortable with that type of outlook just given some of the dynamics in the industry? Has anything I guess changed from that perspective?
So from an organic growth perspective, we still are targeting the range that you talked about there and I would say right now in the past year, we were towards the low end of that range. And there's a number of dynamics around that and maybe just to break it down a little bit by our businesses. Starting with asset management, I don’t need to go through all the dynamics facing that business, but that's a business that has seen its organic growth rate come down. And in the past year, basically we were flat as far as organic growth in the business. So a little bit negative on flows and picked up a little bit on fee realization through mix. But essentially at flat that's going to dilute the overall organic growth rate for us.
If you look at the asset servicing part of the business, which has been growing at a higher organic growth rate, it continues to grow at the same level that it's been at. In 2018, it was again towards the lower end of that range. But if you think about that as being roughly half of the fees and the range for them being 5% to 6% over time and towards the lower end, still a healthy rate for that business. And I would be glad to break that down further as to what we saw in 2018.
And then the wealth management business again different set of dynamics, which I won't go through but has been at a lower organic growth rate. And so even separating out the impact of asset management products in that business, the organic fee growth rate has been more in 2% to 3% range for that and we were roughly in that range for the year. So when you do the weighted average of that that's where you come out to again towards the lower end of what you're talking about. But if you say strategically what are we trying to do, well, we are trying to execute on strategies and target markets where we think that we have an opportunity to maintain that growth rate.
Next we will hear from Brennan Hawken of UBS.
You spoke to the lag effect, which is helpful to get a refresher on in great depth, thanks for that Biff. Just curious if you could comment on the fee rate. So we saw it rebound from the third quarter where you had some transactional headwinds. Thinking about that looking forward how should we consider fee rate in each of your businesses. Might the lag effect that you walk through not only have an impact on the calculation of the AUC dynamics and AUM dynamics but also the fee rate, and how should we calibrate that as we move into 2019? Both considering the drop in 4Q and then the rebound here quarter to-date that we've seen in March.
Brennan, its Mark. I'll take a first shot at that. Part of it would be the -- when you're doing the true averages of September 30th to December 31st AUCA or even AUM and wealth management, you are picking-up end of period number that’s going to be lower for the assets, even though the fees haven't fully reflected that yet. We did see in the fund administration -- the custody and fund administration, we did see a little bit of a pick-up from transactions that would help there as well. Moving forward and as we've talked about that it's a really is that the custody and fund admin is a tough one to look at fee rates just because of the mix of businesses that you bring on and that every asset is not equal. So it's really about bringing on services, doing as much as you can for every dollar of asset.
On the wealth side, I would say as we have talked about before if you look at the regions within wealth management split let's say roughly evenly between product asset management and the advisory fees, the advisory component has actually held-up pretty well and we look to stay competitive in that area. And then on the product side, we haven't can quite seen the declines that we've been seen if you went back 18 months ago or so. But overall I think part of the fee realization might be the fact that the assets are fully reflecting the fourth quarter markets whereas the fees don't quite maybe has that yet.
So maybe we're going to be looking at some fee rate pressure that's subject to a lag, seems like that's what you're saying there, Mark thanks for that. And then I wanted to circle back on the expense question. Mike, it seemed as though you had said that and it seems like this is bit of a different approach than what we've heard from northern in years past. Is that while you guys came up with your values for spend program, making hey when the sun was shining, so to speak. As you enter into a period where you have a potentially more volatile equity market environment, maybe less helpful, better tailwinds. You are going to be diligent in investments and the expense line so as to adjust for potential headwinds that might come through. Is that a fair conclusion there or am I reading too much into what you said?
Well, I'm not suggesting that you read more into it than what I'm saying. Having said that, I do think that's a fair characterization. So we recognize the importance as I said of just continually improving our productivity. So it's not a good market bad market thing. And that's why we wanted to put more, I would say structure and focus around value per spend going back a year plus ago. In addition to that though when we enter an environment like this, just as you said and I think it's a good point. There are other expenses that are discretionary, if you will, so the level of "investment spending" that you're making. Theoretically, you can say, well, we're just going to flat-out invest through the cycle. We're not pulling anything back. And on the other side, you can say we're going to completely pull back on our investment in order to just get the expense growth rate down. And I think you hit on it when you said, yes, we can look at those categories and say not just whether we're going to do them but what is the pacing for that? Do we need to see a little bit more into 2019 before we continue on certain investments? And there is -- sorry for the express, but there is no such thing as the free lunch. If you delay on something, you are delaying on something. And if you don't make that investment, well, then you are taking the risk for future revenue. So those are the type of decisions that we have to make but it is acknowledging that we do have discretion around those. So let's try to manage those for the environment that we are in as well.
Next we will hear from Alex Blostein of Goldman Sachs.
Question for you guys around pricing trends in the servicing business, obviously, I'm sure as you heard from last week, it sounds like the pressure has accelerated on a bunch of parts of the ecosystem here. So curious what you guys are seeing in terms of pricing and institutional servicing? There has always been -- obviously the mix is different and also there has always been some element of pricing pressure. But really just trying to get a sense of whether or not you are seeing any acceleration and pricing degradation here? And then separately, can you help us get a flavor for the makeup of your customer base within C&IS between U.S. non-U.S. asset managers, hedge funds, et cetera?
Alex, its Mike, I'll start off. So the way I would characterize the environment that we have been in and I think we are still in is an environment where there is more activity. And what I mean by that is whether it's asset owners or asset managers for different reasons are definitely looking at what they're doing and how they're doing it and there are implications from that. So what does that mean? On the asset owner side of the equation, you have very large asset owners that have managed their capital or their investments in a certain way. In other words, have they completely outsourced it to external managers or have they done some internally. And frankly, we are seeing those types of organizations look at going both directions, and we've seen the impact of that.
So some of the larger ones saying we are going to do more in-house, because we think that that’s a better way for us as a scale manager of investments. When they do that, they have different data needs and different capability need. So a lot of time spent around the technology and what we can provide to them, APIs, think database things like that. And again, depending on what you can offer versus competitors, et cetera, it can change the dynamics but there is more activity around that.
Second, I would say with other asset owners, they have actually looked at at the opposite way. And we saw some of the impact of that in 2018, where as an asset owner that has done more in house they've said, frankly, that's not our business, if you will. In other words, large corporate pension plans saying we're not going to continue to operate a large in house investment team instead we're going to go more external, we are going to go more passive that's lower cost. And our objective is to get to the right answer for the client. And so in doing that these are still clients but what we do for them is less and we will see some fee impact from that.
As you shift to asset managers, there has been a lot of discussion on obviously the pressure on asset managers and therefore their primary objective of looking at the cost of these types of services. They have also when they're asset based they have seen the cost go up in an absolute dollar perspective. So they do look to see if they can reduce cost. There are different ways to get there, whether it's just negotiation with the provider or do they go out and do just an RFI or do they go to RFP, and what are the results of that. So as a result of all that, I would say more activity.
Now if you looked at 2018 for us as a result of more activity, I would say our gross business one, if you will, was towards the high end of the rates that we have been at, so in essence good number. The next as I mentioned before towards the lower end of the range. And then if you say okay how do you break out the negative or the "loss business" in that. The largest portion of it, so say you are in the neighborhood of 3% from a rate perspectives was more towards if lost or repositioned. And I should add into that certainly you see flows change and the impact of flow. So if we're the custodian for a very large sovereign wealth fund that we do it for equities and they switch out of equities then we're going to see impact of that. So you did see more funds flow and more activity there.
When you say loss business, so did you lose a lot and why did you lose it. Again, I would say every situation a little bit different. In certain cases, do we lose through the process because the competitor does a better job it certainly is going be the case. We'd like to win them all but we don't win them all and obviously, we're up against the best in this business. And at times could it be because of pricing, and let's say either to retain the business they've gotten aggressive on pricing or in this case to win it away. That's certainly part of it. But I would not tell you that we've seen overly aggressive pricing by competitors in order to win business on. I would say it's consistent with where we've been. We've tried to be very disciplined around our own pricing. And again, I would say that we've seen some impact but not dramatic.
So when you take the repricing component, it's going to be more in the neighborhood of 1.5% to 2% of what we saw this year from a rate perspective. So you're going to have that, as you mentioned, all the time in the marketplace whether it's a little bit higher or lower. But for us I wouldn't say that part of it has been dramatically different. And then I'm going to let Mark to address the second part of your question.
As far as the mix when we look at C&IS, and you're right we don’t published the actual segments within the C&IS. But when we look at it, roughly about half of C&IS is the fund services business, which is where our asset managers would be, and that's we don't breakout that between traditional. But within that, you have traditional asset managers, you have hedge funds, private equity funds. I would say that our GFS business is larger in EMEA than in the United States. So that hopefully gives you some flavor for the makeup of the fund services.
And then my second question is just around expenses and maybe I'll frame it a little bit differently. But I guess if I look at your core expense base in 2018 net of the severance charges and a couple of other things you highlighted, looks like we are running a little bit below $4 million. And assuming that you continue to aspire to grow the business organically in the 4% to 5% range. Is that a fair way to think about the growth and expenses off of that sub $4 billion number for 2019?
At the highest level, Alex, I'd say, yes. So in other words that's -- we're responsible for all the expenses. So we do break them down and cut them every way you could possibly think of. But at the end of the day, we're responsible for all of them. We aspire to do a little bit better than that number in the year from an internal target perspective, mystify a little bit for various reasons, not from a value per spend or productivity perspective but from some of the other things that Biff mentioned in his commentary there but that’s kind of the base, if you will. And then going forward, again, it should be aligned with the organic growth rate in the fees. And so to the extent we can stay in the range that we talked about from a fee growth perspective then yes, then that's what you would expect from an expense perspective. To the extent that that goes down for whatever reason, then we have to look at how do we bring that organic growth rate on the expense down with it.
And next we will hear from Glenn Schorr of Evercore.
Just want to little follow up on the pricing discussion. Has anything dramatically changed in terms of client contracts, in other words, like the public money coming up every year or two and the rest of the world having five to seven year role. So maybe something like 15% to 20% of clients come up each year. Am I in the ballpark on that?
Glenn, I would say for certain clients, you do have I'll call it more locked-in term that generally where there is more of an investment upfront for the on-boarding. But in most of these contracts, there is generally a notice period six months notice or something like that. So we're not counting on just the contractual term and the fact that they would be locked in. And I would say this is particularly with some of your more just traditional asset management business, they have the ability to accelerate it. So has that sped up a little bit? Again, I haven’t looked at anything analytically. But as I mentioned before, I think we've just seen more activity as they have looked at their situation, I'll call it.
And maybe you could talk to the good part of growth. In response to, I think it was Mike's first question, you talked about that 4% to 5% certain growth and you dangled a little bit of if you want more, I'll give you more on what clients are driving. Could we talk a little bit about what are driving it?
Well, if I understand the question just peeling it back a level as to where we are targeting in order to have a higher organic growth rate, maybe starting with the asset servicing business. We have benefited from our focus on alternative managers. So for us particularly hedge funds and our hedge fund services business has grown at a higher rate. And again, we will continue to focus there. And we think there's opportunity in the other parts of the alternative space for us, both to the market itself but then for our position there. We also believe on the asset owner side with what we would call the more complex asset owners. So this is to my previous comments about asset owners that are doing more asset management if you will on their own. They tend to be asset owners that have high allocations to private. To some extent, hedge funds but also significantly in private equity infrastructure, et cetera. They have a different set of needs and therefore, we've been focused on how can we meet those needs with technology and a service model. And you saw the investment we made in a technology company that was part of it that was really to join up with what we've been developing on our own but we see greater growths in that segment.
Thinking about Luxembourg, obviously, we did the acquisition there but the fund services markets in both Ireland and in Luxembourg are both healthy. But I would say for us, in particular, Luxembourg has been and we think will grow at a higher rate for us just given our position there, which is lower position and now moving-up in the ranks there and we did see that. And then just shifting over to wealth management, on the wealth management side, again, we think that our value proposition resonates particularly well as the level of complexity goes up for the client or to the prospects, so ultrahigh net worth.
When I talk about goal driven wealth management, the platform that's behind that the technology that is geared more towards the ultrahigh net worth. And so we have seen a higher level of growth in that area and will continue to do it and then Michael as you see the numbers in Global Family Office. And I'll say that's beyond just keep doing a good job. There's been some very specific strategic initiatives in that business that are working very effectively. So, in particular, we looked at the technology there and we upgraded our technology offering, both the ability to do partnership accounting, just being a little bit technical but then also what we can offer as far as analytics. So we have something called anchor analytics that again is resonating very well with existing clients but also prospects.
And then I would just also say in wealth management. From a market perspective, we've talked many times about certain markets where we have lower market presence like in New York, like in Texas where we see higher growth rates for us. And that's not to diminish the growth from some of our more mature markets like Florida or here in the Midwest. And then just to close out in asset management, a significant focus around the area is again where we think we can grow faster, like ETFs and Quant active, which are not the larger parts of our assets under management base but where we see greater growth potential for us. So hopefully that gives you some of the areas that we're focused on.
Next we will hear from Steven Chubak of Wolfe Research.
So I wanted to start-off with a question on the securities portfolio. You manage the duration of the securities book very conservatively, I believe the duration now in assets is just a little above one year. And with the conversation now shifting from fed tightening to a likely fed pause and dare I say even fed easing cycle. I was wondering whether you might consider of locking in some duration and maybe mitigate some of those NII pressures in anticipation of possible fed easing in the future.
So the answer to that is we have our asset liability committee meets regularly and frequently. And what you just described is the key input to our decision-making and certainly an item that we're considering, given the balance of risks now between future rate increases and either no rate increases or even a reversal of the trends we've had. We do that on a regular basis. We have that conversation at all times. And we've benefitted as you see from the growth in our net interest income overtime from that short duration, but internal debates and views on what may happen in the future is something we consider. As a general rule, overtime, we've always had reasonably short but there is the ability to look at how we want to position that. And I can assure you that that is actively discussed and regularly discussed internally, and will continue to be. And as we look at what is I think now a more balanced picture in terms of what may happen in terms of future fed increases and/or at some point maybe even a reversal of that trend. But we are certainly looking at it and you can see those things in some of our disclosures in the Qs and Ks where we look at sensitivity of net interest income to those factors.
And just one follow-up for me on capital management. One of your peers recently increased their capital return with the mid-cycle ask. You guys have incredibly robust capital ratios. I'm just wondering if that’s something that you would consider pursuing. Maybe any insight into how you're thinking around long term capital targets have evolved. I know you try to stay at least in the ballpark with some of your peers that you compete with for RFPs. From the looks of things, you are actually above many of those peers today. I'm just curious how you are thinking about managing to explicit long-term capital target or what you think is a reasonable expectation from here?
So with regard to, first of all, we did a dividend increase yesterday, which was something that we had in our capital plan ask from last year, not public here until yesterday but we did do that. But the way we think about capital and the way the firm thinks about capital is; first, do we have enough to support our growth; second, do we have enough to support ourselves through times of high stress; do we have enough to maintain very high ratios and ratings; and then do we have enough to support a competitive position in the marketplace so that we can compete against others to win that business. I think the answer to all of those is, yes that we are strongly and well-capitalized at this position. And so as we think about entering the capital planning cycle and the submissions are due first part of April, we enter those from a position of strength.
That gives us a great deal of flexibility in our thinking and we do look at the competitive environment in terms of where we are, that's one of the four items I just highlighted for you. We think about our position vis-à-vis the others. But we think we are very well-capitalized right now and are focused on thinking that through in our capital ask and the regulators. In terms of would we ask in the mid period at this point, we think we have got a plan at this point in time that we are going to continue to execute on in the remainder of this quarter and the remainder of the second quarter and we will submit in April. But it's a strong position that we enter the capital planning cycle and submission from, and it allows us to think about our returns with great flexibility.
Brian Bedell of Deutsche Bank.
Maybe just to circle back to wealth management, Mike, I think you said that right now that organic growth range is low single-digit in the 2% to 3% area. Maybe if you can just talk about whether you think that’s more of a regional focus in terms of improving that or rather more of the capabilities that you are talking about? And then also just what the client behavior is trending like in wealth management given we're seeing more volatile markets, are there anything more of cash? And then can you accelerate your own investment products within the open architecture platform across that business?
Brain, a couple embedded ones in there, so make sure I hit on all of them. As far as the growth, I would say I'm going to call it across the business, so both within the regions but also in Global Family Office. I did highlight some of the things we're doing in Global Family Office, but that's not to say that that's the only area where we see opportunity increase that organic growth rate. And in fact, when I talk about goals driven wealth management ultrahigh net worth that's in the regions, if you will, so good opportunities across the markets when we look at trying to increase that. And I would also just say part of that is I am going to call it addition through subtraction just meaning we have a higher gross in new business rate, it's just that you also have to deal with the flows and people pay their taxes and things like that, that nets you down to that two or three. So we're trying to just get to the best net number that we have that we can get.
I think the second part was just about client behavior and I would say, you are absolutely right. When we talk about volatile markets, etcetera, the first thing that we think about is how do we make sure we're very close to the client and managing the situation with them. And I would say so far that we haven't seen a lot of dramatic behavior or changes. And I would say that that's particularly because that's the driving objective behind goals driven wealth management is keeping them focused on what are their goals, what are their objectives and we put together a portfolio that support those goals. And it gives you the ability to go through volatile situations like this without being over reactive and quickly moving out of equities only to then miss the opportunity when it goes back up again.
I will say in addition to that we do provide our strategic and tactical allocation portfolios from asset management to our wealth management client and they do tactically move. And last year I think appropriately it moved to more of a neutral position earlier in the year and then more recently in the beginning of this year, moved back to a more balanced position by increasing the allocation to risk assets. So once again, trying to see through cycles for our clients but then also being mindful of what's happening on a tactical basis as well.
And are you able to get more of the Northern Trust investment in managed product within that asset allocation platform, or are you seeing or just you are using more of an open architecture approach?
So I would say everything I talked about there is agnostic to the product. Asset management itself, Northern Trust, is certainly trying to develop products that meet the needs of clients, but that's the only time that those two would come together. So I talked about ETFs and being focused on ETF as part of the success there, they've designed product that we think meet with the goals and objectives of our clients. But it's that direction, if you will, I'll call it top-down, not something the other way.
Betsy Graseck of Morgan Stanley.
So just a couple of follow-up questions here. I heard earlier about the conversation around price pressure, 1.5% to 2% in line with what you have been seeing for a while now. I guess I'm wondering if you could give us a sense, Mike. What that range of pressure is on just a couple of key either client types or product sets that you offer? I guess, I'm thinking maybe it’s a little bit heavier on some of the more equity mutual funds and might be it'd be lighter if it all on alternatives but maybe that’s wrong. And just like to get your sense on that?
So I'm not going to be in a position to give you a product by product breakdown of where they're more or less. I mean, I think in general as I said, it's more about activity than it is about everybody just driving to lower cost per se. And as much as we know that there's a lot of pressure on asset managers and maybe you would say particularly certain categories of traditional asset managers that doesn't mean that a hedge fund is not focused on their expense base as well. It's probably more acute in the traditional asset management space, I would say that. But I know that that doesn't mean that we are immune in other categories as well.
And as I mentioned on the asset owner space as well, they certainly do look at the fees that they pay in order to custody and administer the assets. And so it's not again just a asset manager phenomena, it's something that you have to anticipate, which once again goes back to if you know that that's going to be to the case overtime what you do strategically. And I think importantly the first thing we do is we want to make sure we are providing value right, because the value is going to support the fees that you are paying, it's also going to lock you more into that client relationship. Then we are also going to look at productivity. Both in general as I talked about but within the client how can we be as productive as possible. And sometimes it goes the other way, which is to look at the value we are providing, look at the fees we are getting. And frankly if it's the other direction then we have to have that conversation with the client about the fee that they are paying relative to the service that we are providing to them. So I know that doesn’t necessarily give you the specificity that you are probably looking for, but that would be my perspective.
I know you can't give. I was just looking for whether or not there was a range we could talk about. But I get your point. I guess the other question I had Mike was just on in the conversations you are having with both existing and perspective clients. What do you see as some of the biggest pain points that clients have frictions to solve that you are focused on addressing, say over the next year or so?
So if it's institutional clients, I would say that on the asset owner side, the primary pain point is around data. So they are primarily trying to assess and determine for themselves what is the appropriate data model for them to have data operating model, and you say what does that mean? Well, it would be easy to say I want perfect data that’s real time. We can provide that essentially. But in providing that that is a higher cost model to be able to provide that to them as opposed to a model that is either on a daily basis or some other basis, okay. And the point on that is it's worthwhile for the client if they are actively managing their investments. So higher cost but they would view it as more than make-up for it, because we are actively managing the assets, and that could be either directly in the market investing, it could be active with managers and it could be also what we would consider overlay strategies where they want to be able to quickly shift their asset allocation. But to do that, they need essentially real-time information in order to be able to do that.
Now, as I hopefully laid out, there is a spectrum there of both what the needs are and what we can offer, and so it's not a one-size-fits-all for all of those clients. And that's the dialogue. So with each client, you really have to assess where they are and what they're trying to achieve. And then as a result do they have the right offerings for them. And then I would say on the asset manager side, this is where we're investing significantly in our fund services platform, meaning both fund accounting and transfer agency to really make that much more of a digital experience for the client. And if you think about what we're doing there, we are helping our clients, meaning the asset manager service their clients. And so they are trying to provide a digital experience to their clients, while they can't do it unless we can provide it to them as well. So that's where the investment has been and trying to solve that pin point if you well for dealing with their client. So hopefully that's helpful.
Ken Usdin of Jefferies has our next question.
Just if I might just clean up a couple of questions. So Biff, you mentioned in your prepared remarks when you're talking about the AUC that the quarter you had a transition out of a large custody client. And I was just wondering can you help us try to understand of the 7% decline roughly just how much that was? And if in fact, the revenue from that client was also already out of the quarter's run rate?
Yes, so we refer to one large client transition out during the quarter, you're right. And it was a U.S. large corporate client. It was primarily a U.S. corporate cash custody relationship. When you look at it in our trend report, I think Glenn you'll be able to see that the drop of about $91 billion that you'll see in AUC in fixed income within C&IS, that's a reasonable indicator of the magnitude, that's a pretty good explanation of that. And then in terms of the fees, it was partially transitioned. So it was partially it was -- that's where Mark has talked about not all AUC is created equal and there's different fee structures associated with some of that. But it was -- it makes enough movement in the fixed income space that we called it out here.
And then just a couple of little ones, there are couple of good plusses and minuses throughout the fees and expenses. And I'm wondering can you help us to the extent that you can clarify what leasing gains, software charge and the magnitude of what it sounded like a little higher servicing errors perhaps on the other expenses? Seem like there was some lumpy stuff and a bunch items. Any help you can help us in trying to get some starting points?
On the leasing side in the quarter, there was approximately $5 million worth of the gain. And we didn’t call that out explicitly, because over the course of the year, there are gains and losses of that in the quarter. And interestingly enough over the course of the year, they wash through. So we at that magnitude haven’t necessarily called them out given their size.
On the expense side, the items that I would call out on the software charge that we talked about. If you look at the sequential increase for us, which I believe was just under $7 million in equipment and software, I think it's fair to say that that was essentially all attributable to the software charge. So that gives you some idea of the magnitude of the charge, but it was largely that was driven there.
And then in terms of the costs associated with client servicing, we tend to look at that line item, which as you know it sits in other expense over the course of the year. It is fair to say that in this quarter that was higher than our normal run rate and meaningfully higher than that. But if you look at that line over the course of the year, it reverted closer to where we see it. It was a little higher we called it out. And the fourth quarter was indeed higher. But hopefully that gives you some color on what those were. Inside of other expense, which is a copulation of a lot of different moving parts, we had FDIC expense move in our favor by let's say $5 million to $5.5 million in the quarter, but we have these larger expenses associated with servicing clients meaningfully above the normal run rate and they are more than offsetting that. And then we have a lot of other items like value-added tax that all moved that item around. I think it's probably better to look at other expense over the course of the year and look at the average of those run rates.
Next we will hear from Jim Mitchell of Buckingham Research.
Maybe just a question on the balance sheet and deposit flows. Seems like noninterest bearing and interest bearing both stable quarter-over-quarter. Do you think the flows, the outflows particularly non-interest bearing are starting to come to an end? Should we start to think about deposit growth yet or do you still think given where rates are, the deposits continue to trend down? Just wanted to get a sense of how you are thinking about it?
So we did see the stabilization, particularly in the non-interest-bearing line item in the quarter. I think it was down about $200 million, so essentially flat non-interest-bearing movement. And as we discussed last quarter when we look at that bucket and the nature of the makeup of that bucket, we think that a lot of the most rate sensitive money had already sought other return seeking products, whether those were within Northern Trust or somewhere else. So we feel reasonably confident that that bucket has reached at least the current level where rates are right now. And in particular, if we don't have any future rate hikes, we think that there could be some stability in that.
In the interest-bearing portion of the deposits, while it was flattish from what you can see here, there was some movement down in interest-bearing that can bolster with wholesale funding or others, not a lot, a little over between $1 billion and $2 billion. We view that more as normal operational movements but we would see amongst our clients as they reposition their portfolios, reposition their cash. That is much more a function of the interest-bearing to us, is much more a function of the growth of our business where we're growing our asset servicing relationships and we just generally see our balance sheet growth. Can we see deposit growth? I think we can see deposit growth if we see our asset servicing businesses continue to grow and our wealth businesses continue to grow we should be able to see that.
Counterbalancing that is any actions that maybe going on amongst the fed in terms of its own balance sheet management activities, which can put some pressures on it. But generally, we've seen now a couple of quarters of some balance sheet stabilization in terms of balances.
And as we think about continuing organic growth in that mid single-digit range is that where you like as you think that’s a intermediate term goal in terms of deposit growth?
It's not always one-for-one on that in terms of the balance sheet growth, because it depends on the nature of the organic fee growth we're getting. For instance, we could win fund administration and other type businesses where we don’t necessarily have the custody, and we may not actually get balance as they come but we get fees. So it isn’t necessarily one to one with that but it is growth where we get traditional AUC. There's generally some balance sheet growth that could come with that. So I don’t know that I would quite put it at the -- peg it at the levels you talked about, but it could grow from there.
Brian Kleinhanzl of KBW.
Quick question if the fed does pause given where we're at with the deposit pricing and still seeing some upward pressure there, I mean if Fed doesn’t move next year. Do you still think that you can see some margin movement I mean just assuming that the balance sheet stays flat? Or at this point in the time, we're almost liability sensitive?
If all things being equal here, if everything else is equal, we do think that there could still be some NIM expansions with no fed rate hikes. But the pace of that growth and the pace of that will be subject to the asset re-pricing that we have. We still have some assets that will roll some that need to reprised, so we do think there could still be some NIM expansion, but probably at a more measured pace. In terms of liability pricing with no future fed rate hikes, we don't see at this point a meaningful need to continue to have see upward pressure on deposit pricing. There might be some modest amount somewhere in the portfolio on the margins, but not broadly across the portfolio. We think we're at or near market competitive levels.
And then just a separate one on tax, looks like you ended the year at the low point for the tax rate and that's excluding some of the onetime items you called out already in the presentation. How are we thinking about the tax rate then as you go through 2019? Are you able to adjust your go forward tax rate down, because of the guidance that you put out?
Yes, I still think at this point in time to 23% to 24% range that we've given you, is where we would suggest you think about for 2019.
Next we will hear from Gerard Cassidy of RBC.
Can you guys share with us -- you have talked about this transitioning some folks into lower cost markets from your higher cost labor markets. How much more can you do there? I mean are you 50% there 90% there where there is not much more you can do in transitioning people into these lower cost markets?
I'm glad to start on that one, Gerard. So I think it's a appropriate observation and one that we have had for some time, because it has provided a significant benefit to us over the last several years meaning going back 12, 13 years ago when we first started what I would consider location strategy to actually move functions into different geographies. And that has matured over time how we think about that. So Biff in his commentary had mentioned some of the different locations, those locations are not all the same. So what we do in Bangalore, for example, is different than what we may do in Manila or what we do in Limerick or Tempe. And so we've evolved it in that way.
The third thing I would say is that we've been growing as we've talked about. We have a higher growth rate in our businesses and particularly in asset servicing, which requires more people for it. And so really what it's enabled us to do as opposed to moving positions over, it's that we essentially absorb the growth in those locations. And then to wrap up with the answer to your question, there is still opportunity, both because of the growth and where it happened but also certain functions that still have not fully matured into where their appropriate location is. But acknowledging that and saying well then what does that mean if you are closer to the end I'll call it of location strategy and then in the beginning. And that's why we talked about automation and robotics and what we can do from that perspective. And we have a number of initiatives underway that are part of value per spend where we are looking to automate the functions as opposed to necessarily moving them to a different location. And the view is that that creates even more scalability than in our model.
And then as a follow-up, Mike, you guys obviously are very well-capitalized. You have had a successful acquisition strategy over multiple years of buying different businesses and integrating them into your organization. As the markets remained maybe more volatile pressures on revenues or across the board. Does it make sense to look at acquisition opportunities may be in a more heightened fashion or maybe that hasn't changed and you have been looking, and you just haven’t really found anything?
So, as we've talked about on the call, we're all very cognizant. There are a lot of negative aspects of volatile or down markets. And having said that as Biff articulated well with regard to capital. Now is a particularly good time to have a strong capital base and is part of the strategy with regard to capital because it does provide us the flexibility in these types of conditions to both be more opportunistic to your point on acquisitions, if they are attractive for us and to be able to have the flexibility around our capital returns. So, the answer is that we -- yes, we are always looking at acquisitions that can accelerate our strategies. And often, we're not able to execute on those because of the market, i.e., high valuations. And then you are presented with the opportunity because of the environment that either strategically, competitively, certain companies may have issues that then present themselves as opportunities for us or from a pricing valuation perspective, it just becomes more attractive.
Next we'll hear from Mike Mayo of Wells Fargo Securities.
Whether you intended to or not, I think you're coming across a little cautious on this call. So I just wanted to ask you, was that your intention going into the call. And specifically, when you add it all up, do you guys expect to show revenue growth faster than expense growth in 2019? And your ROE target, I'm not sure if you updated that are not, but it was 10% to 15% and you reported 16% in 2018. So is there caution? Is that the reason why you're not raising your ROE target or am I just missing something here? Thanks.
Sure. It's Mike. I'll address both of those. So first of all, as far as the tone, we didn't come in with an objective for a particular tone. This is just the way that we're looking at the business and the environment et cetera. But needless to say, I mean, I would say, we're certainly optimistic about our position from a competitive perspective and our ability to serve clients and to continue to grow and produce attractive returns for our shareholders.
More specifically to your questions with regard to organic growth, fees and expenses, I would say in 2018, the objective was to have those in line, as we've talked about and we came up a little bit shy of that. So we did not meet our target. Now, almost were there and there were certain aspects of as to why that happened. And again we own all the expenses, so it's more reasons as opposed to excuses. And then coming into this year, absolutely the objective is the same on an organic basis. Now, there's a lot of things we can't control. We talked about the markets, how it effects our fees things like that. But the view is, if we can produce it on an organic basis and you have a year like 2018 that produces, I think 1.6 points of fee operating leverage. So that remains the same and that's our objective.
And then as far as ROE, we haven't changed the range per se, but I would definitely say that has not limited us in our aspirations or targeting. So we had 16% this year and certainly are not afraid to target for ourselves doing better, absent knowing what is going to happen in the environment. And I would say, now it's a particularly difficult time to say, all right, should you recast the range when part of the reason why we're above the range frankly is because of tax reform a year ago, which boosted the ROE. Hopefully that stays in place, but again there is nothing certain on that front. And then also the markets and everything we've talked about here, we tried to have a range that was through the markets. Hopefully we're not at the top end of that for it, but we don't find the range itself to be constraining on our activities or aspirations.
And finally, I would say for shareholders, we're trying to produce the most attractive combination of growth and returns. So as I've said many times, if it was just about the returns there is probably some things we could do to pull back on spending and investing and things like that. And in the short-term get it up, but over the long-term not create as much value for shareholders. And so, how do we make sure we're balancing growth with returns, particularly when we're at a relatively attractive levels.
Whether if I could add here, I would say, Mike, tonally there was no preview of let's have this be cautious, what it was is us just talking about the environment we're operating in right now. But I think, as Mike said he is optimistic about the positioning of our businesses and the opportunities to grow organically. And I would say -- he and I are both and the Board and everyone is equally optimistic about the financial strength, with which we entered this period of uncertainty and volatility. We have a strong balance sheet, we have good liquidity and we're well positioned to take advantages of the opportunity that type of volatility can put in front of us.
So whether you call that caution or optimism, I think that gives us a great array of opportunities. But we are entering a period of time that looks different, then say previous five, six, seven, eight year positive equity run and at least the last three or four with upward sloping rate likelihood. So I -- there was no intention to be tonally cautious, just factually the environment we're operating in, but business positioning, I think, Mike and I would both agree financial strength and strategic product and execution strength are pretty high.
Our objective is to deliver on the results.
And that does conclude today's conference. Thank you all for your participation, you may now disconnect.