DBRS Morningstar Confirms Bankinter’s A (low) LT Issuer Rating, Revises LT Trends to Stable from Negative

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Bankinter S.A. (Bankinter or the Bank), including the Long-Term Issuer Rating of A (low) and the Short-Term Issuer rating of R-1 (low). The trend on the long-term ratings has been revised to Stable from Negative whilst the trend on the Bank’s short-term ratings remains Stable. DBRS Morningstar has also maintained the Intrinsic Assessment (IA) of the Bank at A (low) and the Support Assessment at SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The change of the trend to Stable from Negative reflects DBRS Morningstar’s view that the financial disruption on Bankinter resulting from COVID-19 has been less than anticipated. Asset quality deterioration has been contained, although asset quality risks do remain, following the full removal of Government support measures, although DBRS Morningstar expects the bank to be able to manage any deterioration during 2022. In addition the Bank’s capital and profitability levels have remained resilient throughout this period. Some pressure is expected on Bankinter’s revenue streams following the spin-off of their insurance subsidiary, Linea Directa (LDA). However, DBRS Morningstar believes that the bank’s increased revenue diversification and international business line growth will partially compensate for this, although the new revenue streams are likely to have more volatility than LDA’s revenues.

The confirmation of Bankinter’s ratings at A (low) reflects its still robust core profitability even after the transfer of the Linea Directa. Core revenues have also continued to improve throughout the pandemic. Furthermore, Bankinter’s asset quality remains notably better than domestic peers. Consistent annual growth in customer deposits has also benefitted Bankinter’s funding profile, alongside improving liquidity metrics. The rating action also takes into account Bankinter’s capital position, in particular its satisfactory buffer over minimum regulatory capital requirements, and it’s solid EBA-wide 2021 stress test results.

RATING DRIVERS

An upgrade of the Long-Term ratings would occur if the bank further strengthens their franchise and improves capitalisation, whilst maintaining solid profitability and asset quality in the wake of the COVID-19 pandemic.

The Long-Term ratings would be downgraded if the Bank’s profitability experiences a sustained and significant decline. A downgrade would also occur if asset quality materially worsens or if there is a substantial deterioration of the bank’s capitalisation.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good

Bankinter’s A (low) rating is supported by the Bank’s solid franchise in Spain where it is the 6th largest banking group with total assets of around EUR 103 billion at end-Q2 2021. The Bank’s national market shares for loans and deposits were around 4% at end-2020. However, its position in private banking is more substantial with a larger domestic market share. Bankinter’s franchise has seen changes recently through a number of corporate transactions, including: i) the acquisition of Barclays Portugal in 2016, ii) the acquisition of EVO Banco in 2019 and iii) the transfer of Linea Directa (LDA) to its shareholders in April 2021. The transfer resulted in LDA becoming an independent publicly traded company, with 82.6% of the company being transferred to Bankinter’s shareholders, with the remaining 17.4% still held by the Bank. The transaction had a marginally positive impact on capital ratios (around 8 bps), and a positive non-recurrent increase in net income. Nevertheless, the Bank has lost an important source of revenues. The Bank expects to compensate the lost revenues from this business with organic growth of its business in Spain, Portugal and Ireland. DBRS Morningstar notes that these revenue sources are likely to have more volatility than LDA’s revenues.

Earnings Combined Building Block (BB) Assessment: Good

DBRS Morningstar’s view is that the COVID-19 crisis has impacted the Bank’s profitability in a more modest way than initially anticipated. In 2020, Bankinter’s bottom line profitability was impacted by the increased provisioning for loans related to anticipated credit losses due to the impact of COVID-19 (up from EUR 138 million to EUR 452 million). Nevertheless, the Bank still achieved a solid ROAE of 6.6% which was at the top end of its domestic peer group. Core revenues grew YoY in 2020, despite COVID-19, with both net interest income (NII) and net fees increasing.

Bankinter’s core revenues in 9M 2021 show the same positive trends as in 2020, with NII and net fees up YoY despite reduced rates, driven by increasing lending. In contrast to 2020, loan loss provisions are trending lower, and were down 51% YoY. The bank’s Cost of Risk stood at 37bps in Q3 2021 compared to 55bps in Q3 2020 (as calculated by DBRS Morningstar). In 2021, the Bank expects to register a Cost of Risk of circa 40 bps. In addition, in Q2 the bank registered a post-tax capital gain of EUR 896 million, as a result of the difference between the book value of Linea Directa, and its market value prior to its IPO. As a result, the Bank reported a net attributable profit in 9M 2021 of EUR 1,251 million. When excluding this one-off capital gain, Bankinter’s net attributable profit in 9M 2021 was EUR 354.9 million, up 61% YoY.

Risk Combined Building Block (BB) Assessment: Strong/Good

Despite the COVID-19 outbreak, Bankinter’s asset quality profile remains sound, and stronger than that of its domestic peers, driven by the Bank’s low risk profile and sound risk management. The Bank´s non-performing loan (NPL) ratio was 2.6% at end-September 2021 (as calculated by DBRS Morningstar), down from 2.7% at end-September 2020 and well below the Spanish banking system (4.4% at end-June 2021). Total Non-Performing assets (NPA, which includes NPLs and foreclosed assets FAs) were 2.9% of total loans and FAs, also down YoY.

DBRS Morningstar believes that the use of government support measures such as state guaranteed loans has limited past-due situations thus far. However, we continue to anticipate asset quality deterioration when government support measures end in the coming months, although in a less severe way than initially expected. Bankinter’s comparatively high exposure to SMEs potentially makes it more vulnerable to this deterioration. The Bank has granted, as of end-June 2021, around EUR 6.6 billion of State Guaranteed Loans (mainly in Spain), which represents around 10% of their total loan portfolio. A smaller proportion of the gross loan portfolio was subject to moratoria, at around 3.5%. Most of these have already expired, with the bank having seen little follow-through to NPLs following the expirations.

Funding and Liquidity Combined Building Block (BB) Assessment: Good

DBRS Morningstar considers Bankinter’s liquidity and funding as solid, despite the COVID-19 crisis. DBRS Morningstar notes that Bankinter’s customer deposit base has grown by 10.5% YoY in Q3 2021. The bank’s net loan to deposit (LTD) ratio, (as calculated by DBRS Morningstar) has also seen improvement in recent years, and stood around 96% at end-September 2021. The bank’s LCR and NSFR ratios are also solid and remain above regulatory requirements.

Capitalisation Combined Building Block (BB) Assessment: Good/Moderate

Bankinter reported a CET1 ratio of 12.25% at end-September 2021, up from 11.97% one year ago, and well above minimum regulatory requirements. DBRS Morningstar believes that Bankinter’s capital position is satisfactory, especially in the context of the Bank’s ability to generate capital internally through retained earnings and improved access to the capital markets. Capital cushions over minimum regulatory requirements stood at 458 bps at end-September 2021 up from 433 in September 2020, but lower than other domestic peers. Despite this, Bankinter has the lowest capital requirements under the SREP among the large Spanish banks and posted a very solid result in the 2021 EBA-wide stress test.

Further details on the Scorecard Indicators and Building Block Assessments can be found at
https://www.dbrsmorningstar.com/research/388176

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (31 May 2021) - https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support

The sources of information used for this rating include Bankinter - Annual Reports (2015-2020), Bankinter - Quarterly Reports (2015-Q3 2021), Bankinter - Presentations (2015-Q3 2021), European Banking Authority (EBA) Transparency Exercise 2019, 2021 EBA-wide stress test, Bank of Spain Statistical Bulletin and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar 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 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/388177

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Manzano, CFA, Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: November 15, 2012
Last Rating Date: June 17, 2021

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