DBRS: Bankinter Reports Solid 1Q; Signs of Asset Quality Stabilising

Summary:
• Solid overall performance with net income of EUR 60MM up both QoQ and YoY.
• Asset quality deterioration is contained with net NPL entries declining 57.7% YoY.
• DBRS rates Bankinter Senior Unsecured Long-Term Debt & Deposit at A (low) with a Negative trend.

DBRS Ratings Limited (DBRS) views Bankinter S.A.’s (Bankinter or the Bank) 1Q14 results as solid. Net profit increased 19% year-on-year (YoY) and ticked up slightly quarter-on-quarter (QoQ), supporting the positive growing trend in net income that the Bank has been generating since 1Q13. Net income benefited from increased levels of net interest income (NII) YoY, higher fees and commissions and the lower cost of risk in 1Q14. Operating costs increased by 9% due to the acquisition of Mercavalor, and the investment in the Bank’s strategic business segments with the addition of 49 new relationship managers in the private banking area. Still the cost to income ratio improved 148 bps YoY to 50.58% in 1Q14.

DBRS notes positively that Bankinter reported a 27% rise YoY in NII, despite a 2.7% decrease QoQ, which was a consequence of the considerable reduction in the ALCO portfolio in year-end 2013. This evolution of the NII was supported by the significant increase in the net interest margin (NIM) from 75bps in 1Q13 to the 126bps reported in 1Q14. This was mainly due to the consistent reduction in the cost of deposits amid the still subdued yields of the loan portfolio in an environment of low interest rates and low volumes. Furthermore, the Bank has been able to generate sustained fee and commission income, demonstrating the strength of its franchise. Additionally, Bankinter was successful last year in attracting new customers (up 38%) with a strong focus on corporates (up 43%) and this should be reflected in future new income generation.

Asset quality deterioration has been contained for the last three quarters with lower nonperforming loan (NPL) entries. The pace of deterioration has slowed considerably with net NPL entries decreasing by a notable 50% as compared with 1Q13 and net defaults also declining by 43%. With total NPLs amounting to EUR 2.3 billion at 1Q14, the NPL ratio stood at 5.1%, up 55 bps YoY, but well below the Spanish average system of 13.4% demonstrating the Bank’s good risk management practices and conservative risk profile. The coverage ratio of 42.6% at 1Q14 has decreased 494 bps since 1Q13 and is below some of its Spanish peers, reflecting Bankinter’s lower risk profile.

Bankinter’s liquidity profile improved in 1Q14. The increase in deposits and the continued deleveraging process enabled the Bank to reduce its commercial gap and reduce its use of ECB funding from EUR 7bn in 1Q13 to EUR 2.7bn in 1Q14. However, with a loan-to-deposit ratio of 131% the Bank still displays some dependence on wholesale funding. The Bank reported a sound Core Tier 1 Equity ratio (according to Basel III fully loaded) of 11.98% in 1Q14.

DBRS rates Bankinter Senior Unsecured Long-Term Debt & Deposits at A (low) with a Negative trend.

Note:
All figures are in Euros unless otherwise noted.