Last week, we discussed Galp Energia (OTC:GLPEF) (OTCPK:GLPEY) in the previous edition of Focus on Europe as the vertically integrated oil and gas producer based in Portugal reported on its Q1 results.
We are staying on the Iberian peninsula for this week’s version of Focus on Europe as the spotlights are on Bankinter this week. Smaller Spanish banks are often still ignored by the market although they have turned a corner by now. Bankinter’s CET1 capital ratio is more than 40% higher than the regulator’s minimum requirement, and its dividend yield will very likely come in at 4.75% based on a currently assumed 50% payout ratio. Plenty of things to like here.
Did you want to re-read the Galp Energia article? You can do so here.
A closer look at Bankinter, a small Spanish Bank
When (potential) investors look at the Spanish financial sector, they usually focus on the bigger (multinational Banks) like Banco Santander (SAN) and BBVA (BBVA). Even 25B EUR market cap Caixabank (OTCPK:CAIXY) (OTCPK:CIXPF) often gets completely ignored by foreign investors. And that’s a pity. As I have shown in a previous article on Banco Sabadell (OTCPK:BNDSF) (OTCPK:BNDSY), even the smaller banks that predominantly focus on domestic operations (within the Iberian peninsula, so including Portugal) have done a decent job in strengthening their balance sheet after the Spanish sovereign debt crisis in 2010-2014.
Source: Yahoo Finance
And now, five years later, the Spanish banks appear to be doing fine. The balance sheets are stronger, the Non-Performing Loan ratios are falling while the coverage ratios are increasing. The loan loss provisions are decreasing, and most banks are comfortably meeting the minimum capital requirements as requested by the European regulators, paving the way for dividends.
Bankinter (OTCPK:BKNIY) (OTC:BKIMF) is a relatively small Spanish bank with a 5.7B EUR market cap and 78B EUR on its balance sheet. Trading in the company’s stock is very liquid on the Bolsa de Madrid, where Bankinter is trading with BKT as its ticker symbol. The average daily trading volume is in excess of 2M shares.
The current 5% dividend yield appears to be sustainable
In the first quarter of the current financial year, Bankinter saw its net interest income increase by 1.3% to 275.4M EUR. Unfortunately, the contribution from other elements to the operating income were a bit more disappointing (the ‘other’ income and gains on financial transactions decreased by respectively 2.42% and 13.24%), which means the gross operating income increase remained limited to just 1%. Perhaps that’s a little bit disappointing, and the main culprit appears to be a small reduction in the net interest margin at first sight as the interest income increased by 2.4%, but the interest expenses increased by 8.44%.
But that interpretation would be wrong. The net interest margin actually increased to 1.98%, and the main reason why Bankinter saw a relatively small increase in its net interest income is because of the substantial deposit inflow, which increased by approximately 5B EUR (or almost 10%) on a YoY basis while only 3.6B EUR was deployed in the loan book. This resulted in a 3% reduction of the loan-to-deposit ratio:
Source: Q1 Report (sic)
Meanwhile, Bankinter kept its operating expenses almost completely unchanged (which is quite impressive to see considering the headcount increased by 55 employees)), resulting in a 1.8% pre-provision profit increase. Unfortunately, the company hiked its provisions by 1/6th to almost 29M EUR, and this obviously weighed on the pre-tax income, which remained virtually unchanged compared to a quarter ago. The net income did increase by 1.4% to 145M EUR after reducing the loss on asset disposals.
Source: Q1 Report
One could be disappointed about the very marginal net income increase, but I’m personally definitely not against a bank that tries to be careful and increases its provisions to offset potential loan losses. In fact, Bankinter appears to be quite conservative: it wrote off 29.4M EUR in bad loans although it added just 21.4M EUR worth of bad loans to the non-performing loan book which stood at 1.78B EUR as of the end of March. Considering the total risk exposure of the bank totals almost exactly 62B EUR, the NPL ratio is just 2.87%, and the non-performing loans currently have a coverage ratio of 48.9% (and 45.54% for the foreclosed assets).
Source: Q1 report
The 145M EUR net income is the equivalent of approximately 16 cents per share, and this definitely puts Bankinter on track for a 0.61 EUR consensus estimate (although a lot will depend on the loan loss provisions later this year).
Bankinter is also paying a dividend which seems to vary each quarter and is never rounded. For instance, the most recent dividend that was paid in March was 0.0992745 EUR per share, and the total dividends that were paid out over the past 12 months totalled 0.29286053 EUR and consisted of three smaller interim dividends of around 0.065 EUR per share, with a larger final dividend.
Assuming the dividend will be hiked to 0.30 EUR in the current financial year, Bankinter will spend 270M EUR on dividends, and the dividend yield at the current share price would be around 4.75%. Also keep in mind Spain has a 19% dividend withholding tax, so you’ll have to check with your broker or tax consultant to see if and how you can reclaim these foreign taxes.
Assuming a full-year net income of 0.61 EUR per share and a 0.30 EUR dividend, Bankinter would retain approximately 275M EUR on its balance sheet (see later).
It’s also important to emphasize Bankinter’s strong ROE (12.6% in Q1) and ROA (0.75%) which also confirm the bank’s financial and operational strength.
Bankinter does have a capital surplus
Unfortunately, the bank is too small to have been part of the stress test of the European Banking Authority, so there is no clear adverse scenario available for Bankinter, and we can only check up on the current capital ratios.
And those capital ratios actually were a pleasant surprise. One would think a small Spanish bank would be in a worse position than the big boys (Banco Santander and BBVA, which can take advantage of their presence in other markets), but this purely Spain and Portugal-focused bank seems to be doing pretty well.
Source: Q1 presentation
As of the end of March, Bankinter had a CET1 capital of 3.89B EUR on a total Risk-Weighted Asset base of 32.99B EUR, resulting in a fully-loaded CET1 ratio of 11.8%. That’s way ahead of the SREP requirement of 8.20%, indicating a surplus of 3.6% or approximately 1.19B EUR (representing 1.32 EUR per share in ‘excess’ capital).
This probably indicates the expected retained earnings to the tune of 275M EUR, will very likely be used to further expand the loan book, as there’s no real need for Bankinter to continue to further add to its CET1 capital. In fact, adding 275M EUR per year on an RWA sum of 32.99B EUR indicates that even after paying a 4.75% dividend, Bankinter would still be in a position to add 0.83% of CET1 capital per year.
Taking everything into consideration, it does look like the market isn’t fully appreciating Bankinter’s strength as the bank lost approximately 30% of its value in the past twelve months despite being able to increase profits, dividends and capital ratios.
This doesn’t mean the bank is a slam dunk investment as it generates almost 100% of its business on the Iberian peninsula, so shareholders of Bankinter are exposed to the economy of these countries.
Other news from Europe
Unilever (UN) (UL) issued 500M GBP and 650M EUR in new bonds; both bonds have a 1.5% coupon. The Euro-notes are maturing in 2039 (20 year) while the GBP notes are maturing in about 7 years in July 2026. The latter were priced at 99.228% of the principal indicating a YTM of approximately 1.65%, while the Euro-notes were issued at 99.709 cents on the Euro. This means the yield-to-maturity for Euro-denominated debt securities in Unilever for 20-year debt is just 1.56% so it’s understandable the company wants to kick the (repayment) can as far down the road as possible.
Rio Tinto (RIO) has provided an exploration update on its Winu project in Australia, where almost 200 people are working to define a resource at the project. Major companies usually don’t disclose much of their exploration activities and usually couldn’t care less about individual drill results, but the Winu exploration results are absolutely impressive with for instance 681 meters of 0.49% copper, 0.33 g/t gold and 3.17 g/t silver, and 439 meters of 0.42% copper, 0.32 g/t gold and 2.45 g/t silver. Low-grade mineralization, indeed, but Newcrest (OTCPK:NCMGF) (OTCPK:NCMGY) is successfully mining its Cadia underground mine at a lower average grade, so the importance of this discovery should not be underestimated. That’s also great news for Greatland Gold which is exploring the same Paterson region in a joint venture with Newcrest Mining, the specialist in underground block cave mines.
Belgium’s Exmar (OTC:EXMRF) announced the Tango FLNG has been fully commissioned and user YPF (YPF) has accepted the FLNG which will soon offload its very first cargo of LNG. The gas was sourced from the Vaca Muerta gas field and by converting it into LNG, it’s easier for Argentina’s YPF to sell the gas overseas. That could be good news for the entire country, as it’s a relatively easy way to get some hard dollars into Argentina as the country is still battling a tough economy and a hyperinflationary environment. The vessel looks pretty ‘cubic’ , but as long as it generates cash flow (Exmar estimates the Tango FLNG vessel will generate $43M per year in EBITDA), the Exmar shareholders won’t care how it looks.
Source: Exmar corporate presentation. The Tango LNG is the rectangular ‘thing’.
Great news for thirsty Belgians as AB InBev (BUD) is launching a local promotion whereby consumers who order a standard-size 25 cl beer will receive a 30 cl drink. Unfortunately, non-alcoholic beers are not included in the promotion, while InBev may hurt itself as consumers will no longer opt for the second standard glass of 33 cl. InBev is supplying all bars with a 4+1 barrel promotion so they don’t incur any negative effects from the promotion.
Euronext (OTCPK:EUXTF) (OTCPK:ERNXY) now controls almost 98% of Oslo Bors after Nasdaq (NDAQ) walked away, and will now keep its tender offer open until June 28 in order to secure full ownership of the Norwegian stock exchange operator.
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Disclosure: I am/we are long BNDSF, BUD, CAIXY, ERNXY, EXMRF, SAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.