DBRS Morningstar Confirms Bankinter’s A (low) LT Issuer Rating with Negative Trend

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 reflects DBRS Morningstar’s view that the impact of the Coronavirus Disease (COVID-19) continues to pose challenges to the operating environment in both Spain and Portugal, Bankinter’s key operating markets. As a result, we expect asset quality and cost of risk to be negatively affected, particularly once moratoria and other government support measures are removed. DBRS Morningstar considers that Bankinter’s exposure to small and medium-size businesses (SMEs) means it could potentially be more negatively affected by the challenging operating environment. DBRS Morningstar also notes that revenues will be impacted after the listing of its insurance subsidiary, Linea Directa (LDA), which has been an important source of revenues in recent years. This transaction closed in April 2021.

The confirmation of Bankinter’s ratings at A (low) reflects its solid core profitability with a still good ROAE of around 6.6% in 2020, despite COVID-19. In addition, DBRS Morningstar views Bankinter’s current asset quality as sound and notably better than domestic peers. 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 minimum regulatory capital requirements. Lastly, DBRS Morningstar considers that the Bank’s relatively higher exposure to affluent individuals, which may be less affected in this environment, and its good risk management track record to date, could help mitigate some of the negative impact of this crisis on its credit fundamentals.

RATING DRIVERS

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 continues 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.

RATING RATIONALE

Bankinter’s IA is underpinned by the Bank’s solid franchise in Spain where it is the 5th largest banking group with total assets of around EUR 101 billion at end-Q1 2021. The Bank’s national market share for loans and deposits was around 4% at end-2020. 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 changed in recent years through a number of corporate transactions, including the recent transfer of Linea Directa to its shareholders. In April 2021 Bankinter transferred its insurance subsidiary, Linea Directa (LDA), to become an independent publicly traded company. The transaction had a marginally positive impact on capital ratios (around 8 bps) but the Bank will lose an important source of revenues. LDA’s contribution to Bankinter´s net attributable income ranged between around 20% at normal times and around 40% during the last economic crisis. The Bank completed the transfer of LDA shares to its shareholders via an in-kind dividend. The transfer delivered 82.6% of LDA to Bankinter´s current shareholders with the remaining 17.4% still held by the Bank.

DBRS Morningstar’s view is that the COVID-19 crisis has impacted the Bank’s profitability, but in a more modest way than initially anticipated. In 2020, Bankinter reported EUR 317 million of net attributable income, down 42% YoY. Results were impacted mainly by higher provisions 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 ROAE of 6.6% which is at the top end of the Spanish banks. Bankinter's core revenues in 2020 were resilient despite COVID-19, up YoY with both Net Interest Income (NII) and Net fees increasing. The Bank´s cost of risk (as calculated by DBRS Morningstar) went up to 72bps during 2020 from 24ps in 2019. Bankinter´s core revenues in Q1 2021 reflect the same trends as in 2020, with NII and Net Fees up YoY despite the low interest rate environment-driven by strong lending volumes. In addition, loan loss provisions were down 12.5% YoY in Q1 2021. The cost of risk was 37bps in Q1 2021 compared to 45bps one year ago and 72bps in 2020. As a result, the Bank reported a net attributable profit in 1Q 2021 of EUR 148 million, up around 14% YoY with an ROAE of 11.85%.

There is additional negative pressure on Bankinter´s revenues as a result of the transfer of LDA. The Bank expects to compensate the revenues coming from LDA with organic growth in its businesses in Spain, Portugal and Ireland in coming years. Whilst DBRS Morningstar considers the plan as realistic, we consider that LDA´s revenues provided a better risk return profile as well as being less procyclical than the revenues coming from the new business lines.

DBRS Morningstar views that the COVID-19 outbreak has to date had a limited impact on the Bank’s asset quality profile. However, we expect asset quality to deteriorate when moratoria and other government support measures end in the coming months, although in a less severe way than initially expected. Bankinter´s relatively high exposure to SMEs makes it more vulnerable to this deterioration. At-end 2020, Bankinter had a significant part of the lending book to SMEs and self-employed workers (29.7%). The Bank has granted as of end-2020 around EUR 5.8 billion of State Guarantee Loans (mainly in Spain), which represents around 9% of their total loan portfolio. The bulk of those guarantees was assigned to SMEs loans. As a result, around 25% of the loans related to SMEs has some kind of public guarantee attached.

DBRS Morningstar views Bankinter’s current asset quality as sound and notably better than domestic peers. The Bank´s non-performing loan (NPL) ratio was 2.6% at end-March 2021 (as calculated by DBRS Morningstar), down from 2.9% at end-March 2020 and well below the average of the Spanish banking system (4.5% at end-March 2021). Total Non-Performing assets (NPA, which includes NPLs and foreclosed assets FAs) were 3.0% of total loans and FAs were also down YoY. DBRS Morningstar considers the evolution of Stage 2 loans (exposures whose credit risk has significantly increased) as a key indicator to assess whether banks are quickly identifying credit risk. Bankinter has increased the portion of Stage 2 loans significantly in the last quarter of 2020 and at end-March 2021, but these exposures still represent only around 2.8% of the portfolio compared to 2.4% at end-2019. Bankinter has a lower proportion of Stage 2 loans to date than other Spanish banks, which have also experienced a limited increase in Stage 2 loans YoY compared to banks in other countries, leading to concerns that the recognition of Stage 2 loans will appear at a later stage.

DBRS Morningstar considers Bankinter’s liquidity and funding as well placed. The Bank had EUR 22.7 billion of liquid assets at end-March 2021 and additional capacity to issue a further EUR 2.9 billion of covered bonds. At end-2020 the Liquidity Coverage Ratio was 198%. Bankinter’s net loan to deposit (LTD) ratio, (as calculated by DBRS Morningstar), has improved in recent years and was around 99% at end-March 2021. Total ECB funding stood at EUR 14.4 billion representing around 15% of total funding at end-March 21, but the net exposure to the ECB, including cash at the ECB, was close to 0%.

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. Capital cushions over minimum regulatory requirements stood at 332 bps up from 209 bps at end-March 2020, but lower than other domestic peers. Nevertheless, Bankinter has the lowest capital requirements under the SREP among the large Spanish banks.

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.

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.

Notes:
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/346375/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

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 (2015-2020), Bankinter - Quarterly Reports (2015-Q1 2021), Bankinter - Presentations (2015-Q1 2021), 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. 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/380226

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: Elisabeth Rudman - Managing Director, Head of European FIG - Global FIG
Initial Rating Date: November 15, 2012
Last Rating Date: June 19, 2020

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