Bankinter: Strong Q1 Results Indicate Resilient Earnings

seekingalpha04-20

Shares of Spanish lender Bankinter have started 2024 well, helped by a nice jump following strong Q1 results released earlier this week.Earnings and profitability remain resilient, with interest ...

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With interest rate spreads and credit quality both remaining resilient given where we are in the cycle, Bankinter continues to report very attractive levels of profitability despite the headwind from Spain's windfall banking tax. Data by YCharts While recent results do point to resilient 2024 earnings, the recent rally means these shares now trade at a healthy premium to tangible book value. With this already reflecting the bank's elevated profitability to a large extent, these shares look less attractive than certain Spanish peers such as Banco Santander (SAN). As such, I open on the name with a 'Hold' rating. Bankinter Overview Bankinter is a relatively straightforward bank as it has fairly limited universal banking capabilities. Rather, most of its earnings are generated from domestic lending activities. Spain accounts for a little over 80% of Bankinter's loan book, split around 50/50 between retail (mostly mortgages) and business lending (corporate through to SMEs). The bank also has a presence in Portugal (~13% of loans), where it is mostly a retail lender, and Ireland (~4% of loans), where it is entirely a retail business. One point to like about Bankinter is its funding profile, as the bank is largely funded by customer deposits rather than relying on more expensive wholesale funding. While ~€67 billion in Spanish retail deposits does point to a much smaller market share versus larger peers like Santander (~€300 billion in total Spanish deposits), Bankinter's business skews more to affluent customers, so national market share figures can be slightly misleading. In any case, total customer deposits of around €80 billion fund approximately 70% of Bankinter's assets, and around €53 billion of these deposits are in current accounts. Data Source: Bankinter Quarterly Results This is a very nice position to be in when interest rates rise, as low funding costs lead to widening spreads and increased pre-provision profitability. Note that despite rising interest rates and funding cost pressure, customer deposits were only costing the bank around 140bps annualized as of Q1 2024. As a result, Bankinter's net interest margin (\"NIM\") has increased from 137bps in Q1 2021 to 210bps as of Q1 2024. As credit quality has remained robust in that time, Bankinter's overall profitability has similarly increased sharply, with its return on tangible equity (\"RoTE\") up from circa 10% in 2021 to around 18% currently. Q1 Results Point To Resilient Earnings Bankinter reported Q1 results on Thursday (April 18), with a strong print sending the shares up nicely on the day. With net income landing at €200 million, the bank generated a solid mid-teens annualized RoTE. This figure includes the impact of the Spanish windfall banking tax, meaning underlying earnings are actually holding up very well compared the high-teens RoTE it generated in 2023. A few trends are driving this. Firstly, funding cost increases are moderating significantly now that the ECB has finished raising rates. Deposit costs were up just 3bps last quarter (to 140bps), with the bank actually highlighting a 7bps decrease in costs when comparing period-end monthly figures (i.e. March versus December). With the yield on interest-bearing assets also only ticking up slightly (up 4bps sequentially to 418bps), NIM remains solid at around the 210bps mark, increasing by around 3bps quarter-on-quarter. Source: Bankinter Q1 2024 Results Presentation While Bankinter is primarily a NII bank (~75% of income), fee income has also been resilient, with the €165 million quarterly print representing flat sequential performance but growth of around 8.5% year-on-year. As markets have risen, asset management fees have been a large contributor to this performance, increasing by around 20% year-on-year. Source: Bankinter Q1 2024 Results Presentation Credit quality remains very strong, a big driver of Bankinter's continuing high levels of profitability. While non-performing loans did tick up in Q1, increasing around 5bps year-on-year and 12bps sequentially, Bankinter has also seen corporate loan growth come in faster than retail loans. These carry structurally higher NPL ratios as most of its retail lending is household mortgages, so at least part of the rise in its NPL ratio is simply mix effect. I would also point out that, at 223bps, the overall NPL ratio remains very low by historical standards. With Stage 2 loans (i.e. loans where credit risk has increased but are still performing) actually falling a little sequentially to just under 300bps, overall credit quality remains incredibly strong. The final quick point I would make on Q1 earnings relates to the windfall banking tax, now in its second year, and which levies an extra 4.8% charge on NII and net fee/commission income for large Spanish banks. As this was accounted for fully last quarter, resulting in a circa €95 million headwind, the Q1 RoTE print is actually even better than it looks on paper. Not Much Upside From The Current Valuation While Bankinter continues to post strong results, its valuation now largely reflects this. The shares currently trade for €7.25 in Madrid trading (~$7.75 per ADS), putting them at a little under 1.3x Q1 2024 tangible book value per share (\"TBVPS\") of €5.71 (~$6.10 per ADS). While I expect RoTE to remain in the 17-18% area this year (it was ~18% in 2023), this is nevertheless a high mark for earnings. As Eurozone rate cuts start to come through later in the year, I expect RoTE to gradually move down to the low-teens area. Now, Bankinter's payout ratio policy is quite conservative, with management electing to distribute 50% via dividends and use the remainder to fund growth. Because of this, the bank should still be able to grow TBVPS at a high single-digit clip over the next few years despite not utilizing stock buybacks. I expect around 8-9% growth this year, before moderating slightly as profitability normalizes lower, ultimately resulting in around 7-8% annualized balance sheet growth out to 2026. My main concern is that a move down to around the 1x TBVPS valuation mark would be enough to offset this in terms of the bank's stock price, essentially leaving investors with just the dividend to drive total returns. Note the stock traded at this level as recently as February. Data Source: Company Results Releases, Author Calculation While Bankinter's dividend is reasonable, with the 2023 payout of €0.45 per share mapping to a yield of 6.2%, on its own isn't enough to get total returns up to the double-digit per annum mark, especially as dividend growth is likely to moderate sharply alongside earnings growth. With certain peers like Banco Santander still trading for a modest discount to TBVPS on a similar RoTE profile, I see better value elsewhere, and I open on Bankinter with a 'Hold' rating as a result.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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