DBRS: Bankinter’s Net Earnings Stronger in 4Q13; NII Pressure and Credit Costs Remain Concerns

Summary:
• A 72.8% YoY increase in net income means 2013 results are the highest since 2010.
• This upturn in net earnings is the result of a well-established franchise focused on affluent individuals, enterprises and of a relatively low risk profile.
• DBRS rates Bankinter’s Issuer and Senior Debt at A (low) with a Negative trend.

DBRS Ratings Limited (DBRS) considers that the 4Q13 results of Bankinter S.A. (Bankinter or the Bank) were a strong quarterly performance which demonstrated the Bank’s revenue generation capability as a result of its well established franchise focused on affluent individuals and enterprises and its relatively lower risk profile. This has provided the Bank with robust capital generation capacity and has enabled it to cope with the ongoing market disruption in Spain.

Overall, Bankinter reported net earnings of EUR 215.4 million on total net revenues of EUR 695.6 million in 4Q13. Income Before Provisions and Taxes (IBPT) was up 19.18% quarter-over-quarter (QoQ), mainly driven by non-interest income derived from the growth of strategic business units like private banking and corporate lending. An additional factor was one-off gains from financial operations, particularly sales of sovereign bonds. The driver for the disposals was to reduce the Bank’s exposure to sovereign debt ahead of the European Banking Authority stress tests. Areas of concern for DBRS are the pressured net interest income and the steady increase in non-performing loans (NPLs). Bankinter reported an NPL ratio of 4.98% in 4Q13, up from 4.28% in 4Q12, but still substantially below the sector NPL ratio of 13.08% in November 2013.

Net interest income decreased 3.7% year-over-year (YoY) driven by a deleveraging process (which is underway for most Spanish banks), the low level of interest rates in the Eurozone, which impacts the yields on existing loans, and the reduction in sovereign debt holdings. However, there were some positive signs as the net interest margin is improving quarter by quarter in 2013, due to the reduction in the cost of deposits and wholesale funding.

Bankinter has a lower risk profile than some Spanish peers, particularly with respect to exposure to the real estate and construction sectors, and this has helped the Bank to report better NPL ratios than peers. Nevertheless, asset quality is still deteriorating due to the difficult operating environment in Spain. This, unavoidably, puts pressures on credit costs which, in aggregate, consumed 43.7% of net operating income. DBRS expects this tendency to continue in the near term due to the ongoing adjustments in the Spanish economy.

Bankinter continues to maintain an adequate liquidity profile and sound capitalisation. The Bank’s deleveraging process (which improved the commercial gap between customer deposits and loans), its strategy to avoid debt maturity concentrations, and its capacity to increase customer deposits (up 12.8% in 2013) through alternative channels, is steadily reducing its dependence on the European Central Bank (down 66% in 2013 from EUR9.5 bn to EUR3.2bn) and wholesale funding (down 15% in the year). The loan-to-deposit ratio of 130% still denotes some dependency on wholesale funding; however the Bank is in a better position to tap the markets than some of its peers. Bankinter also reports robust regulatory capital ratios according to Bank of Spain criteria with a Core Tier 1 of 12.35% at quarter end.

DBRS rates Bankinter issuer and senior debt at A (low) with a Negative trend.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include publicly available company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Ratings assigned by DBRS Ratings Limited are subject to EU regulation only.

Lead Analyst: Rui Croca
Approver: Alan G. Reid
Initial Rating Date: November 15, 2012
Most Recent Rating Update: November 15, 2012

For additional information on this rating, please refer to the linking document under Related Research.