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Northern Trust defends CCAR payout ratios

Northern Trust defended the bank's 2016 capital return request, saying it preservedcapital ratios to near-peer levels.

The bank reportedsecond-quarter net income of $260.7 million compared to $269.2 million in the year-agoperiod. Net income applicable to common stock was $254.9 million, or $1.09 per share,for the latest quarter, compared to $263.4 million, or $1.10 per share, for thesecond quarter of 2015.

On the company's earnings call, observers took an opportunityto question Northern Trust's 2016CCAR submission, which included increasing the common stock dividendto 38 cents per share from 36 cents and a $275 million repurchase plan. One analystpointed out that the bank's payout percentage had declined from previous years,even as the bank continues to grow capital and has business lines that are not capital-intensive.

Management had said during their prepared remarks that they consideredthe amount of retained capital needed to facilitate continued growth, as well aswhat would be needed to maintain top-tier credit ratings during a period of significantstress. An executive added that Northern Trust wants to be "in the vicinity"of close peers as a "competitive factor" because clients look at thoseratios across firms when deciding where to do business. However, management promisedto "revisit" its capital return ask in future submissions if the bankdoes not see the retained capital translating into risk-weighted asset growth thatgenerates a 10% to 15% return on equity.

M&A has been part of those considerations, as well. Managementsaid the bank considers potential M&A opportunities alongside organic growthwhen submitting its capital plan, but that the bank's approach to acquisitions hasnot changed.

"We have typically and will continue it for the foreseeablefuture to focus in on acquisitions that either add a client capability that we don'thave, a geographic region where we need scale, or a talent source or a technologysource where the acquisition provides us with that," said CFO S. Biff Bowman."But we do consider it in our capital plan submission."

Bowman also praised the Northern Trust staff on its handlingof the Brexit vote and execution of the contingency plan following the success ofthe Leave campaign. He said the team was prepared for a potential exit and executedwell against Brexit's immediate impacts, with clients largely unaffected. NorthernTrust's European banking entity is currently based in the U.K., and the bank alsohas a large fund administration business in Ireland and Luxembourg, locations towhich it could place current U.K.-based operations. Bowman said another importantconsideration of its European custody and asset servicing is the ability to do businessacross the continent, adding teams are working on addressing these questions butthat it is still too early to comment on Brexit's impact on the bank.