DBRS Comments on Bankinter S.A. 4Q12 Results – Senior at A (low), Negative Trend

DBRS, Inc. (DBRS) has today commented on the 4Q12 results of Bankinter S.A. (Bankinter or the Group). DBRS rates Bankinter’s Senior Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend, and Short-Term Debt & Deposits at R-1 (low) with a Stable trend. Bankinter reported net income of EUR 52.4 million in 4Q12, up from EUR 49.7 million in 3Q12 and EUR 34.2 million in 4Q11. For the full year 2012, the Group reported net income of EUR 124.7 million as compared to EUR 181.2 million in 2011.

Bankinter’s results in 4Q12 demonstrated the resiliency of its franchise and earnings that is helping it cope with market disruptions, higher provisioning and increased capital requirements. Bankinter’s franchise is underpinned by the quality of its client base which targets affluent individuals and medium- and large- enterprises in Spain combined with a multichannel network and technology expertise in on-line and product delivery, which enables the Bank to compete successfully with larger competitors. Bankinter’s consolidated credit costs remain well below the Spanish average, illustrating the quality of their credit risk management, despite the jump in provisioning in 2012 driven by the new provisioning requirements in Spain. At the same time, the Group is having success in offsetting these costs by growing pre-provision profit, or income before provisions and taxes (IBPT) to EUR 141.3 million in 4Q12, up from EUR 129.7 million in 4Q11. Improved IBPT helped Bankinter to absorb provisioning and asset losses of EUR 79.4 million in 4Q12, or 56% of IBPT, which was close to twice the level of provisioning and asset losses of EUR 43.1 million in 4Q11, or 33% of IBPT. DBRS views the current level of provisioning expense as manageable for the Group given that Bankinter does not need to add any additional exceptional (RLDs) provisions in 2013.

To cope with the challenges in its home market of Spain, Bankinter has been able to sustain net interest income by increasing its customer spread in 2012 (up 24 bps year-over-year (YoY) to 0.95%) and growing its business in key customer segments, such as SMEs, to support its revenues. While the Group’s net interest income declined from strong performances in the first three quarters of 2012 reflecting margin pressure, net interest income of EUR 146.7 million in 4Q12 was largely flat when compared to 4Q11. The yield on the loan book overall rose in 2012, as rates on new loans increased to reflect the market environment. Bankinter has benefited from an earnings standpoint from shifting its business mix to grow its shorter-duration corporate loan book, which allows the Group to quickly reprice its loan book to defend its margins, while reducing its lower-yielding residential mortgage lending. Noninterest income performed well, as Bankinter ultimately grew noninterest income by 5.9% in 2012 vs. 2011. Insurance activities supported by its subsidiary Linea Directa continued to deliver good performance in 2012 with profit before tax up 13.3% to EUR 121.5 billion. The Bank’s cost/income ratio improved to 46.2% in 2012 vs. 52.6% in 2011, maintaining it at a low level, and resulting in a greater share of revenues flowing to its bottom line.

Solid risk management is evident in Bankinter’s low NPL ratio of 4.3% relative to its Spanish peers, up from 3.2% in 4Q11 and 4.0% in 3Q12 but well below 11.4% for the sector. Total problematic assets, which include non-performing loans, substandard loans and foreclosed assets, were EUR 2.7 billion at year-end 2012, resulting in a problematic asset ratio of 5.9%, which compares well to Spanish peers. Nevertheless, DBRS views further asset quality deterioration as likely, given the weakness in the Spanish economy.

Access to market funding has recently eased, as market concerns about the liquidity and capitalisation of some of the Spanish financial institutions as well as the position of the Spanish sovereign is receding. In this still uncertain environment, Bankinter continues to reinforce its funding mix, liquidity and capitalisation. The Group continues to have success in attracting customers and growing deposits, with retail deposits increasing by EUR 2.4 billion YoY to EUR 25.0 billion at year-end 2012. DBRS notes that deposit growth can be partially attributed to higher rates paid on sight deposits with the perspective of returning to lower rates progressively in 2013 as new regulations on deposit rates is implemented. Bankinter has further reduced its loan-to-deposit ratio to 149.5% at 4Q12 relative to 154.1% at 3Q12, and 171.2% at 4Q11.With more constrained lending, the Group’s commercial gap is down to EUR 16.2 billion at 4Q12 vs. EUR 19.4 billion at 4Q11. Access to the ECB’s long-term refinancing operation (LTRO) facility has also helped to alleviate near term funding pressures. With EUR 7.9 billion of available, unencumbered collateral and continued progress on its funding strategy, the Group has full liquidity coverage of its unsecured debt maturities through 2015.

The Group had an EBA Core Capital Ratio of 10.22% at 4Q12, above the 9% minimum under the Bank of Spain’s requirements, and up significantly from 7.28% at 4Q11, helped by new issued capital, RWA management, and to a lesser extent internal capital generation during 2012. Additionally, the Oliver Wyman stress-tests results showed Bankinter with a capital surplus under the adverse case scenario (over 6% minimum).

Notes:
All figures are in EUR unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]