DBRS Confirms Bankinter’s Senior Ratings at BBB (high); Trend Changed to Positive

DBRS Ratings Limited (DBRS) has today confirmed Bankinter, S.A.’s (Bankinter or the Bank) Senior Unsecured Long-Term Debt & Deposit rating at BBB (high) and its Short-Term Debt & Deposits rating at R-1 (low). The trend on the Senior Unsecured Long-Term Debt & Deposits has been changed to Positive. The trend on the Short-Term Debt and Deposits remains Stable. Concurrently, DBRS maintained Bankinter’s Intrinsic Assessment (IA) at BBB (high) and the Support Assessment at SA3.

The confirmation of the ratings reflects Bankinter's sound fundamentals and solid performance throughout the financial crisis which has enabled the Bank to strengthen its franchise position in the Spanish market. DBRS views Bankinter as a strong medium-sized bank, with one of the best asset quality profiles among the Spanish banking sector and sound capitalisation. The change in the trend to Positive from Stable incorporates the fact that the Bank's previous heavy reliance on wholesale funding has improved to more acceptable levels. DBRS views that the Bank’s sound and improving core profitability, asset quality and capitalisation outweigh the still relatively high loan to deposit ratio. DBRS also considers that the Bank has demonstrated a good track record of consistent growth in retail deposits (ex-repos) which now represent around 54% total funding, much improved from the 37% at end-2012.

Bankinter’s ratings are underpinned by the Bank’s strong franchise strength amongst customers in Spain. The Bank also benefits from a digital network which supports the growing market shares in high margin businesses such as private banking and lending to SMEs and corporates. Bankinter's franchise has been growing steadily since the onset of the financial crisis when most Spanish banks were struggling with consolidation and the integration of weaker banks. Since then Bankinter has adjusted its business mix towards SMEs and reduced the dependence on mortgages while maintaining its conservative risk profile and sound capitalisation. As a result, Bankinter’s commercial margin has consistently improved year-on-year (YoY) despite the very low interest rate environment, which continues to pressure domestic peers’ core revenue generation capacity.

DBRS also considers Bankinter’s revenue streams as relatively well diversified both in retail banking and insurance business through Linea Directa Aseguradora, with the insurance operations increasingly supporting profits. Good revenue diversification should provide Bankinter with improved financial flexibility to cope with the challenging operating environment and tougher regulatory requirements. The Positive trend also reflects DBRS’ view that the Bank will be able to successfully integrate the acquired businesses of Barclays Plc in Portugal.

Bankinter continued to report solid and resilient underlying profitability in 2015, helped by its strong domestic franchise and one of the best returns on equity (ROE) among domestic peers at 10.1% (according to DBRS’ calculations). The Bank reported net income of EUR 377 million in 2015, up 36% YoY from EUR 276 million as results benefited from consistent business growth across all segments, continued reduction of funding costs and lower cost of risk. Net interest income (NII), its main source of revenue, grew by 15% in 2015 and a further 4% in 1Q16 YoY, mostly helped by the strong reduction of funding costs, both from retail and wholesale funds. These elements offset the pressure on interest income from the very low interest rate environment and a lower contribution from the ALCO portfolio.

Bankinter benefits from one of the better asset quality profiles among Spanish banks with a non-performing asset (NPA) ratio (including non-performing loans and foreclosed assets) of 5.3% at end-March 2016. However, Bankinter’s exposure to Spanish sovereign debt remains sizeable, representing a significant 1.8x of the Bank’s equity at end-2015, which in DBRS’ view makes the Bank vulnerable to developments in the Spanish sovereign’s position. Capital levels are sound and the Bank reported a CET1 ratio (fully loaded) of 11.6% at end-March 2016, which in DBRS’ view should remain sound at around 11% after the integration of Barclays Portugal. The Bank’s minimum SREP CET1 (phased-in) requirement is 8.75% for 2016, the lowest in the Spanish banking sector.

RATING DRIVERS
Positive rating pressure on the ratings could arise if Bankinter further improves its funding structure and its loan to deposit ratio, whilst maintaining strong asset quality and capital. It could also arise from a sustained strengthening of the Bank’s SME franchise.

Negative rating pressure on the ratings could occur from a material weakening of capital levels and funding position. It could also arise from a significant increase of the Bank’s risk profile.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’ outlooks and ratings are under regular surveillance

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Maria Rivas
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: 15 November 2012
Most Recent Rating Update: 29 September 2015

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