DBRS Confirms Bankinter Ratings at A (low), Negative Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Bankinter S.A. (Bankinter or the Bank), including its Senior Unsecured Long-Term Debt & Deposit rating of A (low), with a Negative trend, and its Short-Term Debt & Deposit rating of R-1 (low), with a Stable trend.

Bankinter´s ratings reflect an intrinsic assessment (IA) of BBB (high) combined with a support assessment of SA-2. The SA-2 considers Bankinter’s role as a systemically important entity to the financial system in Spain and DBRS’s expectation of timely systemic support in a stressed scenario. For Bankinter, this SA-2 designation results in a one-notch uplift from the IA. The ratings and IA were confirmed following a review of the Bank’s operating results, financial fundamentals and outlook.

DBRS views the Bank’s BBB (high) intrinsic assessment as underpinned by Bankinter’s well-established franchise in Spain, which targets affluent individuals, small- and medium-sized enterprises (SMEs) and corporates. Its franchise strength is backed by technology expertise in online and product delivery, which enables the Bank to compete successfully with larger competitors. While Bankinter has a unique advantage with its innovative technology, competition in this area is becoming stronger as peers adapt to changing customer preferences and Bankinter faces the challenge of maintaining this advantage.

The Bank has remained profitable throughout this extended crisis, helped by its lower level of nonperforming (NPL) loans and important noninterest income contributions, which somewhat compensates for a historically low net interest margin (NIM). The IA also incorporates still elevated levels of cost of risk in certain segments, particularly SME lending, and a relatively high level of market risk, which DBRS views as concentrated given the Bank’s risk exposure to Spain (approx. 2.4x equity). Within the Investment Banking business, where the Bank is focused on expanding to increasingly cater to client needs, DBRS could have concerns if the scale of large-volume lending exceeds Bankinter’s generally conservative client risk limits. While the Bank’s funding profile has improved, it still maintains a relatively high loan-to-deposit (LTD) ratio of 124%, which is a factor that could impact the rating.

Bankinter, whose franchise is predominantly in Spain, has been impacted by the challenging environment in its home market. The Negative trend on the rating reflects the trend on DBRS’s long-term sovereign debt rating on the Kingdom of Spain. DBRS also views Bankinter’s exposure to Spanish sovereign debt as contributing to the sovereign rating constraint and is reflected in the Negative trend on the Bank’s long-term rating.

Despite the still challenging economic environment in Spain, Bankinter continues to report solid underlying earnings generation capacity, underpinned by its well-positioned franchise in its home market. The Bank reported income before provisions and taxes (IBPT) of EUR 696 million in 2013, an increase of 18.1% year-on-year (YoY), and continued this trend in 1H14 with IBPT of EUR 361 million. With provisions absorbing 50% of IBPT in 2013, and declining to 42% of IBPT in 1H14, the Bank has been demonstrating positive trends in bottom line profitability.

Asset quality deterioration appears to be contained with declining levels of nonperforming loans and foreclosed assets. With an NPL ratio of 5.0%, Bankinter compares well to the Spanish banking sector average of 13.1%. DBRS notes that the Bank’s coverage ratio remains solid at 42%. While overall coverage is below peers, the Bank has much less exposure to the Construction and Real Estate Developer segment, which is a large driver of asset quality weakness within the Spanish banking sector.

Bankinter’s funding and liquidity profile is viewed as satisfactory, and improving, as it continues to grow its deposit base while gradually deleveraging. The Bank has reduced its LTD ratio to 124% as of 1H14, down from a peak of 177% at year-end 2010. DBRS would anticipate further improvement in this ratio in the future, although at a slower pace. Bankinter has also reduced its dependence on the European Central Bank (ECB) to EUR 2.7 billion of LTRO funding as of June 2014, down 72% from peak levels in 2012. Further supporting its solid liquidity profile, Bankinter’s liquidity buffer of EUR 8.6 billion compares well to wholesale maturities for the period 2014 to 2016 of EUR 3.8 billion, while also providing coverage for other contingencies such as the maturity of LTRO funding of EUR 2.7 billion in February 2015.

Bankinter’s capitalization continues to improve through earnings retention, following a successful capital raise in 2013. Regulatory capitalization remains solid despite increased risk-weighted assets (RWAs), which was driven by growth in lending to corporates and SMEs. Under Basel III criteria, the Bank reported a Common Equity Tier 1 (CET1) ratio of 12.2% on a phased-in basis and 11.9% on a fully-loaded basis.

At the same time, DBRS withdrew Bankinter’s Senior Notes, Guaranteed by the Kingdom of Spain rating as the notes have been fully repaid and are no longer outstanding.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Lisa Kwasnowski
Rating Committee Chair: 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.