DBRS: Bankinter Full Year Results Boosted by Recurrent Banking Revenues

Summary:
• Solid net income of EUR 276 million supported by strong recurrent banking revenues
• Stabilisation of asset quality continued with net NPL entries declining 89% YoY.
• DBRS rates Bankinter at A (low) for Senior Unsecured Long-Term Debt & Deposit with a Negative trend

DBRS Ratings Limited (DBRS) views Bankinter S.A.’s (Bankinter or the Bank) 2014 results as solid. Revenue growth was achieved in all business lines, despite the still challenging operating and economic environment. Net income of EUR 276 million was the best result reported since 2007, up 45.3% year-on-year (YoY) (for comparative purposes DBRS is considering pro-forma 2013 results after incorporating the effect of the adoption of IFRIC 21 on levy liabilities).

Bankinter’s net interest income (NII) grew by 19% YoY benefiting from a reduction in the cost of funding and higher lending volumes. While the majority of Spanish banks continue to deleverage, Bankinter grew its loan book by 3% YoY in 2014, mostly through enterprise lending. The reported net interest margin (NIM) of 1.34% in 2014 (up 24 basis points YoY) remained weaker than at peers, partly reflecting Bankinter’s traditionally low risk and low yield core businesses. However, NIM continued to benefit from the growth in higher risk enterprise and consumer loans.

Fees and commissions also grew by 17% YoY mainly driven by asset management and brokerage services, supported by private banking growth in 2014. Insurance revenues from Linea Directa Aseguradora also grew by 7% YoY. Gains from the sale of debt portfolios, which DBRS sees as non-recurrent in nature, were significantly lower than previous years. For the full year, the cost to income ratio was 49.6%, improved from 50.8% in 2013, although it was affected by 5.8% growth on operating expenses mostly associated to its growing private banking unit.

In line with the nascent economic recovery, Bankinter’s cost of risk declined by 18% YoY with loan loss provisions absorbing 33% of income before provisions and taxes (IBPT) in 2014, compared to 44% in 2013. Asset quality deterioration showed signs of stabilisation and the Bank reported negative net non-performing loan (NPL) entries in 4Q14 for the first time in several years. The NPL ratio stood at 5.1%, which is among the best asset quality ratios in Spain and well below the Spanish system average of 12.7% at end-November 2014, partly thanks to the Bank’s exposure to affluent individuals, lower exposure to real estate and conservative risk management policies. The NPL coverage level at end-2014 was 44%, which is weaker than seen at some peers. Nevertheless, DBRS sees NPL coverage level as adequate in the context of the Bank’s risk profile.

The Bank continued to consistently grow its customer deposit base (8% YoY) and assets under management (up 41% YoY) in 2014. However, with a reported loan to deposit ratio of 128%, DBRS considers the Bank’s funding mix as relatively weaker than similarly rated peers. Albeit reducing, the Bank’s reliance on wholesale and European Central Bank (ECB) funding is relatively high. Bankinter reported EUR 3.2 billion of ECB funds at end-December 2014, or 5.4% of total assets, which represents a higher proportion of total assets than at similarly rated domestic peers. As such, DBRS would welcome further rebalancing of the Bank’s funding profile towards more customer deposits and lower ECB and wholesale funds. The Bank reported a solid Common Tier 1 Equity ratio under Basel III (fully loaded) of 11.5% and a 5.4% leverage ratio at end-December 2014.

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.