DBRS Comments on Bankinter’s Rating Actions – Trend now Stable

As detailed in the press release “DBRS Downgrades 31 European Banking Groups due to Removal of Systemic Support Uplift”, published earlier today, DBRS Ratings Limited (DBRS) downgraded the ratings of Bankinter S.A (Bankinter or the Bank), including the Senior Unsecured Long-Term Debt and Deposits ratings to BBB (high). The trend on the Senior Unsecured Long-Term Debt and Deposits ratings is now Stable. DBRS also confirmed the Short-Term Debt and Deposit rating at R-1 (low) with Stable trend. The downgrade reflected a change in DBRS’s support assessment for Bankinter to SA-3, from SA-2, which resulted in the removal of one notch of uplift from the Intrinsic Assessment (IA) for potential systemic support. Bankinter’s intrinsic assessment has been maintained at BBB (high) but the trend on the senior debt ratings, which was Negative prior to the rating review initiated in May 2015, has now been changed to Stable. This commentary provides further background to the change in the trend.

RATIONALE FOR THE CHANGE IN TREND:

The change in the Trend from Negative to Stable reflects Bankinter's solid performance throughout the financial crisis due to its resilient franchise and conservative risk profile, which has enabled the bank to weather the difficult economic conditions in Spain and the historically low interest rate environment well. It also reflects the good progress Bankinter has made in improving its funding profile through increasing customer deposits, and significantly reducing its historically high reliance on wholesale funds. Customer deposits now represent 64% of total funding compared to 34% at end-2009 and Bankinter's loan-to-deposit ratio is down to 140% at end-June 2015, from 240% at end-2009.

DBRS views positively the fact that Bankinter has been able to gradually expand its business toward segments where the bank had a lower presence before the financial crisis, such as SMEs and consumers, at the same time maintaining its relatively low risk profile and sound fundamentals. As a result core banking revenue generation improved, as evidenced in 2014 and 1H15 when Bankinter reported higher profits than pre-crisis. DBRS sees Bankinter’s improving profitability and further developing of its SME franchise in Spain as an important rating factor which will continue to support the Bank's capacity to generate capital organically.

Bankinter’s BBB (high) IA reflects the Bank’s strong, but relatively small, franchise in Spain, which principally focuses on affluent individuals and increasingly SMEs and corporates. Bankinter’s IA also reflects its sound capitalisation, and resilient profitability throughout the financial crisis. Bankinter’s conservative risk management approach is also reflected in the IA, with the Bank’s asset quality among the best in the Spanish banking sector, and its lower than peers’ exposure to the real estate and construction sector.

RATING DRIVERS:

The trend on the Group’s ratings is now Stable. Further upward movement in the senior ratings could arise from a significant improvement in the Group’s fundamentals. In particular it could arise if Bankinter continues to demonstrate steady growth of recurrent banking revenues and further rebalances its funding structure whilst maintaining capitalisation at current levels or higher. It could also arise from a sustained strengthening of the Bank’s SME franchise. Negative rating pressure could come from significantly weaker underlying earnings generation and higher than expected provisioning levels, negatively affecting the Bank’s internal capital generation and/or if DBRS sees any indication of deterioration in the Bank’s improved funding position.

SUPPORT ASSESSMENT:

The rating action concluded the rating review initiated in May 2015 and reflected DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Countries across Europe continue to make progress in enacting the Bank Recovery and Resolution Directive (BRRD) into national legislation, including Spain. BRRD has harmonised the approach that will be taken in the resolution of failing banks across Europe and has led DBRS to conclude that there is not sufficient certainty of support to have any uplift in the senior debt ratings of European banks. Consequently the support assessment for Bankinter was changed to SA-3 (the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support) from SA-2 (indicating the likelihood of timely systemic support).

Note:
All figures are in Euros unless otherwise noted.