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 all long-term ratings remains 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 is SA3. See a full list of ratings at the end of this press release.
KEY RATING CONSIDERATIONS
The maintenance of the Negative trend on Bankinter’s long-term ratings continues to reflect our view that the wide and evolving scale of economic and market disruption resulting from the coronavirus (COVID-19) pandemic will have a negative effect on the operating environment for Bankinter. As a result we expect revenues, asset quality and cost of risk to be negatively affected. The scale of the impact will likely only emerge in the coming quarters. DBRS Morningstar also notes that revenues will also be impacted by the planned listing of its insurance subsidiary, Linea Directa (LDA), which has been an important source of revenues in recent years. This transaction was approved at Bankinter’s Annual General Meeting in March 2020, and the Bank expects to close the transaction after receiving regulatory authorisation. In addition, the Bank’s relatively high exposure to SMEs makes it potentially more vulnerable to deterioration in sectors that are likely to be severely affected in this environment.
The confirmation of Bankinter’s ratings reflects its solid core profitability and the Bank’s improved asset quality. Bankinter’s funding profile has benefitted from consistent deposit growth, enabling the Bank to rebalance its funding mix, and this is now more aligned with similarly rated peers. The rating action also incorporates Bankinter’s capital position with its satisfactory cushion over its minimum regulatory capital requirements. DBRS Morningstar considers that the Bank’s relatively higher exposure to affluent individuals, which may be less affected in this environment, and the good risk management track record to date could help to mitigate some of the negative impact of this crisis on its credit fundamentals. DBRS Morningstar also expects the substantial support measures announced by the Spanish government, as well as several other international authorities and central banks to help to mitigate the economic impact.
Any upgrade of the Long-Term ratings is unlikely in the short-term given the Negative trend. However, the trend on the Long-Term ratings could revert to Stable if the Bank is able to demonstrate solid core profitability despite the global Covid-19 pandemic and limited asset quality impact.
The Long-Term ratings could be downgraded if the Bank’s profitability experiences a material decline. A downgrade could also result if asset quality is materially impacted or there is a significant weakening of capital.
Bankinter’s A (low) IA is underpinned by the Bank’s solid franchise in Spain where it is the 6th largest banking group with total assets of EUR 87 billion at end-Q1 2020. The Bank’s national market shares for loans and deposits were 4% at end-2019. However, its position in private banking is more substantial with a market share of around 13% for open-ended collective investment schemes (SICAVS). Bankinter’s franchise has grown both organically and through acquisitions. In 2016, Bankinter acquired Barclays Portugal, and its loan portfolio in Portugal now represents around 10% of its total loan book. In addition, during Q2 2019, the Bank completed the acquisition of the retail banking business of EVO Banco.
DBRS Morningstar views the planned listing of Linea Directa (LDA) as negative for the Bankinter’s earnings and business mix, given it has been an important source of revenues in recent years. This transaction was approved at Bankinter’s Annual General Meeting in March 2020, and the Bank expects to close the transaction after receiving regulatory authorisation. DBRS Morningstar also notes that the requirement of the ECB for banks not to pay dividends during the COVID-19 pandemic, at least until 1 October 2020, means that it is still not clear whether the transaction will be completed in 2020 or delayed to 2021.
The wide and growing scale of economic and market disruption resulting from the COVID-19 pandemic poses significant challenges, and will put pressure on Bankinter’s revenues and profitability. Nevertheless, Bankinter enters this period with solid profitability metrics, reflected in its 12% Return on Average Equity (ROAE) ratio (as calculated by DBRS Morningstar) in 2019. The Bank reported EUR 130 million of net attributable income in Q1 2020, down 10% YoY. Results were impacted by lower trading gains and higher provisions for credit losses related to anticipated credit losses due to the impact of COVID-19. Bankinter’s loan loss provisions increased and the cost of risk (as calculated by DBRS Morningstar) went up to 47 bps during Q1 2020 from an average of 25 bps in the previous four quarters. The Bank expects a cost of risk in a range between 50-70 bps during 2020. Despite the current modest impact from COVID-19, DBRS Morningstar considers that this crisis will impact the Bank’s profitability and asset quality in a more significant way in coming quarters.
DBRS Morningstar views the Bank’s relatively high exposure to SMEs makes it more vulnerable to deterioration in sectors that are likely to be severely affected given the anticipated impact on GDP and significant rise in unemployment. However DBRS Morningstar also considers that its relatively higher exposure to affluent individuals, which are likely to be less affected in this environment, and good risk management track record to date could help to mitigate some of the negative impact of this crisis on its credit fundamentals. In addition, DBRS Morningstar views as positive the guarantee loan scheme provided by the Spanish government to SMEs and Corporates, as it significantly reduces the credit risk taken by banks. Bankinter was allocated EUR 2.2 billion, or 5.5% of the total amount of guarantees in the first two tranches, in line with its market shares. DBRS Morningstar understands that the bulk of these loans refer to renewals and refinancing needs with the guarantees linked to a total of EUR 2.7 billion funding.
Although DBRS Morningstar expects asset quality to deteriorate in the current environment, Bankinter’s prudent risk management and policies, including the low exposure to real estate assets, have helped the Bank to maintain good asset quality metrics. DBRS Morningstar views Bankinter’s current asset quality as sound and notably better than domestic peers. Bankinter’s non-performing loan (NPL) ratio was 2.9% (as calculated by DBRS Morningstar) at Q1 2020, down from its peak of 5.4% at Q1 2014, and well below the 4.8% average of the Spanish banking system. Total non-performing assets (NPAs, which includes NPLs and foreclosed assets (FAs)) were 3.3% of total loans and FAs at Q1 2020, again lower than most domestic peers.
DBRS Morningstar considers Bankinter’s liquidity and funding as well placed to face this challenging environment. The Bank had EUR 13.6 billion of liquid assets at end-March 2020 and additional capacity to issue a further EUR 6.2 billion of covered bonds, at end-2019 the Liquidity Coverage Ratio was 154%. Its refinancing risk is manageable with wholesale funding maturities totalling around EUR 6.3 billion at end-March 2020, of which only EUR 800 million is maturing in 2020. As of end-March 2020, total ECB funding stood at EUR 7.6 billion, representing around 10% of its total funding. The Bank has additional capacity to take ECB funding in the new TLTRO-III scheme. Bankinter’s net loan to deposit (LTD) ratio, (as calculated by DBRS Morningstar), has improved in recent years and was around 106% at end-March 2020.
DBRS Morningstar views Bankinter’s capital position as satisfactory, given the Bank’s demonstrated ability to generate capital internally through retained earnings, and improved access to the capital markets. Nevertheless, DBRS Morningstar considers that capital generation will likely be negatively affected by the COVID-19 crisis. Bankinter reported a CET ratio of 11.47% at end-March 2020. Capital cushions over minimum regulatory requirements were 209 bps for Total Capital, lower than other domestic peers. Notably, Bankinter has the lowest capital requirements under the SREP among the large Spanish banks.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792
The Grid Summary Grades for Bankinter S.A. are as follows: Franchise Strength – Good; Earnings Power –Good; Risk Profile – Good; Funding & Liquidity – Good; Capitalisation – Good.
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations and the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (22 January 2020) - https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883
The sources of information used for this rating include Bankinter - Annual Reports (2015-2019), Bankinter - Quarterly Reports (2015-2019), Bankinter - Presentations (2015-2019), European Banking Authority (EBA) Transparency Exercise 2019, 2018 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
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/362872
Ratings assigned by DBRS Ratings GmbH, are subject to EU and U.S. regulations only.
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: April 15, 2020
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