Bankinter, S.A. (BKT) Earnings Call Transcript & Summary

Good morning, and welcome to the Linea Directa transaction webcast. Today, Jacobo Diaz, our CFO, will share with us the highlights of the transaction. We will follow-up with a Q&A session. Thank you.

Good morning, and welcome to this special webcast to provide you with more information about the price-sensitive information, all relevant facts posted early today on the CNMV website. This information addresses the decision taken yesterday late in the evening by the ECB Supervisory Board to authorize the in-kind distribution of the entire share premium of Bankinter totaling EUR 1.184 billion by delivering to its shareholders, 82.6% of the share capital of its fully owned subsidiary, Linea Directa Aseguradora. This transaction was announced after Bankinter's Board meeting held in December 2019 and subsequently approved by the 2020 Annual General Meeting, subject to the required regulatory authorizations being obtained. On March 22, 2021, this authorization from the ECB has been obtained and the admission to trading of the Linea Directa Aseguradora shares has been requested, thus after the short regular approval by the CNMV, we expect the final listing of the share in the last days of April 2021 or very early in May. First, let me briefly go over Linea Directa's profile for those who have been less familiar with this company, which has been operating autonomously and with considerable growth and profitability over the last 25 years. Undoubtedly, Linea Directa is a story of success since it was founded in 1995 as a 50% joint venture with Direct Line Group with all the milestones you can see in the graph. Reinforced with the purchase of the RBS-held stake in March 2009, reaching in 2018 over 3 million customers launching new loan like products, et cetera. And more relevant, it has even more provisioned future, as we will see now. Linea Directa has been able to maintain a unique business model through all these years and with a differential pattern that assures outperforming in growth rates its domestic peers in the future, thanks to these unique characteristics: A leading direct motor insurance in Spain with recurring growth always outperforming the market, a highly recognized brand with its own cutting edge technology for its industry with an excellent underwriting of risk management and cost control that brings solvency above 200% with an enormous potential for growth and further diversification, a real highly profitable business, return on equity over 35%, that we will be able to maintain a high payout policy. And lastly, very important, with almost no reliance on Bankinter to manage their business and generate their revenues. Here we see what Linea Directa has achieved in growth terms for premiums and risk insured with 31% from 2010 to reach EUR 900 million in 2020. In number of customers, an increase of 1.4 million since 2010 to 3.2 million in 2020. And above all, its robust growth of almost 2x in profit before taxes throughout this period. This has been possible based on a proper underwriting and claims cost management reflected in the strong combined ratio kept under 90% for the last 10 years. I think it's important to emphasize once more that Linea Directa represented a great financial investment for all Bankinter shareholders with an investment of EUR 36 million at inception and EUR 426 million in 2009 to buy the remaining 50% from RBS. Shareholders will obtain a return of EUR 2.362 billion including both extraordinary dividend paid to Bankinter prior to the launch and the cash dividends paid since 2009 as well as the increased market value of the financial shareholding retained by Bankinter. In regard to the final transaction implication, I will point out some details on this slide. Before the share premium is distributed amongst Bankinter shareholders, the current number of Linea Directa shares has been adjusted with the split to slightly over 1 million so that each Bankinter shareholder will receive 1 Linea Directa share for each Bankinter share currently hold. The Board maintained evaluation based on the independent advisor, has been maintained at EUR 1.434 million by Citigroup, the financial advisor as of December 2020. Thus, the reference price of the Linea Directa new shares will be EUR 1.318 per share, based on this valuation and the total number of shares. The Board of Directors of Bankinter will approve as per article 41 of the Corporate Bylaws, an extraordinary noncash dividend to be distributed to all shareholders against the share premium totaling EUR 1.184 billion in the form of 82.6% of the Linea Directa shares. Out of the new Linea Directa shares, Bankinter will return 17.4% as a financial investment in the newly listed Linea Directa. Lastly, before shares are delivered to shareholders, an extraordinary EUR 120 million dividend will be approved and distributed from Linea Directa to Bankinter solely to the bring the company's Solvency II ratio just above 210%, in line with its European peers in these times. On this slide, we summarize the accounting effects of the transaction in Bankinter's P&L account and shareholders' equity. Shareholders' equity will drop by EUR 1.2 billion owing to the share premium amortization to fund the extraordinary dividend to be paid in shares. Then, due to the revaluation of the 17.4% shareholder in Linea Directa, the P&L account of Bankinter in 2Q '21 will be positively impacted by EUR 1 billion, approximately will be fully returned as reserve in Bankinter balance sheet. In regard to the impact of the group's capital ratio, here's a breakdown of the various impacts on CET1 ratios of December 2020, starting with our 12.29%. First, we have a positive 35 basis-point impact from the initial dividend from Linea Directa. Then we have a negative 349 basis points impact from the amortized share premium. And at the same time, the value adjustment of the shareholding in Linea Directa plus reduction in equity deductions that account for a positive 350 basis points. Lastly, both the new 17.4 shareholdings in risk-weighted assets of minus 24% -- sorry, 24 basis points and other small effects such as taxes, brings a negative 5 basis points to a final pro forma CET1 ratio of 12.37%, up by 8 basis points. We think that the new Bankinter group without Linea Directa has never been in a better position in terms of earnings, profitability, efficiency, capital adequacy and even diversified revenues as to recover the pre-COVID and Linea Directa levels in a short period of time. We can do this right now. The recently -- now we will briefly review our strategic priorities and efforts in our different banking businesses to continue to be a differential proposition for growth, profitability and value creation for our shareholders. This is a new era for Bankinter without Linea Directa. However, we will remain with our DNA pretty similar to what we've seen in the past. Bankinter Group's strategic priority haven't changed much. There are 6 shown in this slide. Always focus on long-term creation of shareholder value with historic sustained and proved track record on balance sheet and customer activity growth. Even after the spin-off of Linea Directa, we will maintain a good business diversification and even geographical in 4 EU countries. We are best-in-class asset quality coming from a historic prudent and recognized risk management. And last but not least, a recurring and unparalleled operating efficiency, thanks to our mantra of cost always growing below incomes. On diversification of revenues, here, we can see the contribution by business segments compared with that in 2015 and how the contribution for our new banking operation has improved in recent years to the current well diversified banking revenues that generates 99% of the group's earnings in 2020. We can see the contribution to revenues from the various banking businesses, which now altogether account for more than 22% contribution from Linea Directa back in 2015. We have been able to maintain a sweet -- sorry, en suite contribution from corporate and commercial banking. They together represent 65% of total income. Consumer Finance now represent 15% last year, somehow impacted by the new pricing and revolving credit cards, but well ahead of that in 2015. Portugal represents today 8% and growing every year. Investment Banking launched only in 2016, now represent 6% of revenues and will remain as a third contributor on the future. The recently acquired EVO Banco and Avantcard business in Ireland represent now altogether, 4% of total group income and is expected to grow in contribution in the medium term. All in all, the investments in banking business represent more than 33% of total income. Sources of income doubled in the period and also are relevant to mention that 30% of the corporate banking revenue is now coming from international trade business rather than our traditional corporate lending. As I have said before, we think that Bankinter has never been in a better position in terms of income, earnings, profitability, efficiency and diversified revenues as to perform the awaited LDA spin-off. Here, you can see a view of our operating income with the second to none performance in Spain of a 7% cumulative annual growth rate over the past 10 years. This is basically 2x what we had in 2010. Let's have a quick look at our priorities in terms of customer segment, business lines and key geographies. In our traditional customer segments and focus, nothing has changed as the new addition of Consumer Finance and EVO Banco. We will continue to focus our efforts, capital allocation and investments in private banking now followed by a large and very promising personal banking as well as our traditional corporate and enterprise banking, well diversified and weighted towards large corporates, as always has been. Consumer finance business done through our 100% subsidiary, Bankinter Consumer Finance, is a promising business and growth engine once the credit quality conditions are restored, hopefully soon, and with a much better portfolio diversification geographically, with over EUR 200 million in Portugal and close to EUR 500 million in Ireland and by products with majority of our loan book in personal loans and mortgages rather than credit cards. EVO Banco is in the middle of a management restructuring to become a profitable unit in the midterm, working on efficiency and to use more of Bankinter's expertise in consumer finance, asset management and mortgage lending. Out of our 8 priority business lines, most of them are also not new, and we have been investing in -- in all of them over the last years. Mortgage lending, now with yearly total production over EUR 5 billion from the group, these levels are higher than the ones in 2008 and pre-crisis levels. Insurance business, not only Linea Directa has been our sole provider on insurance revenues, our JV with MAPFRE for life insurance products come from the '90s and with a very successful track record, complemented with our Portugal acquisition 4 years ago. Even more, now we will be free to develop additional new nonlife insurance agreement with any other type of partner in insurance. In Corporate Banking, we have promising business lines and growth trends in international trade business, like supply chain financing for large customers with double-digit growth rates or in investment banking with a strong dedicated team and a promising pipeline. On our other important area of focus that is affluent banking, private banking and asset management, our investment done over the last years are bearing its fruits. And finally, geographically, where we are very pleased with all 3 investments done over the last 5 years: Luxembourg, Portugal and last year, Ireland. All of them with a promising future and clear expectations to improve their current 11% contribution to the group's income. Let me finalize for some internal commitments and targets for 2023 and second, some final conclusions. On the targets, here, you see the most relevant, some of them already disclosed by our CEO in some interviews. Our aim is to recover the pre-COVID and pre-Linea Directa spin-off level of profitability by 2023 in net profit, return on equity, efficiency and capital ratio. And as a conclusion or final remarks, I would mention that Bankinter, in addition to realize a great financial investment, it will continue with its robust and diversified banking operation and its exceptional growth trends that should make possible to recap group's profitability prior to the spin-off in 2019 by 2023. Bankinter's shareholders will finally realize our successful investment in the insurance business with Linea Directa. And from now on, will enjoy the option of choosing to invest in the banking business or the direct insurance business in Spain. And finally, Linea Directa has been able to achieve a relevant business size, a strong solvency level and an unparalleled profitability. After the transaction, it will become an independent company, quoted in the stock market to maintain that leadership in direct insurance in Spain, thanks to its outperformance in growth over its peers and with a promising future ahead. It's been a short presentation. Anyway, we will -- we are open and keen to answer any questions that you might have. Thank you very much.

Thank you, Jacobo. As usual, we have received a few questions. Let's start with the more technical questions regarding the transaction, and then we move on to the more strategic financial questions. Okay. We have some questions regarding the profit, the realized gains that the transaction will produce around EUR 1 billion you mentioned. How is this going to be accounted for?

Okay. Thank you. The unrealized gains will be accounted in the interrupted activity, where we have seen the Linea Directa results in the past quarters. In that line, right under the banking activity results, you will see these extraordinary results.

Okay. On the same topic, are we going to take any profit on these gains? Any dividends?

No, no. All the realized gains out of these transactions will be fully returned in equity.

Thank you. On future incomes or contribution to income coming from EBITDA, how are we going to account those incomes?

Future income from EBITDA will be represented by the dividends that Linea Directa will distribute. As we account for the 17% share of Linea Directa, we will receive the dividends and those dividends will be recorded in the line dividends of our P&L.

What is the net impact on book value of the transaction?

In book value, there is a reduction of the book value of around EUR 270 million.

Okay. One more question on the transaction. We're getting -- are we -- do we have any period where we cannot sell LDA sales, the 17% we are keeping?

No. We don't have any restriction on that. But for the time being, there is no interest in selling this stake.

Okay. 2 more questions on Linea Directa. Do we have any breakdown of the different combined ratios across the different segments, business segments for home, health?

Not at this moment. It will be announced today, a new Capital Markets Day for Linea Directa, which will be on April 6, 2021, and that day will be a great day to ask any type of questions around Linea Directa and its future ahead.

Okay. Including the -- we are getting also questions on the payout expected for Linea Directa, I guess, this 6 of...

Yes, of course. That would be a comment on that info that -- I guess they will cover any type of topic, including dividends.

Excellent. We move now on questions about the bank and the strategy. We have mentioned on the last slide, the targets that we have for 2023. Can we elaborate on the assumptions and also the drivers for those targets?

Yes. As we've mentioned, we have a full commitment of achieving by 2023, the same levels that we had in 2019, which was a period without pandemia and a period with full Linea Directa contribution. As we mentioned in the presentation, we have different business lines. We have different segments of clients, and we have different geographies that will contribute to this commitment or to this target. We have of course, the new businesses from -- new income from EVO, income from Ireland, income from Portugal and income from Luxembourg, that will bring new incomes in terms of net interest income and in terms of fees. We have contribution from Spain, of course, because Spain is growing quite well. And we do expect to -- we cut levels of 2019 in Spain. And we also do expect a good efficiency ratio and good control on that -- on that job. Just bear in mind that we have a full commitment of positive jobs year after year. In addition to that, we also expect some sort of normalization of cost of risk. That will drive situation to a more normalized figure, around 35 basis points in cost of risk by 2023. Overall, we expect to reach those EUR 550 million of net income by that time. And I think that this is an ambitious program, but a realistic program, because all these new business lines that you have right in front of you right now, are business lines that still have plenty of opportunity for growth. As you know, insurance, there is a new open window for doing much more insurance, since we can reach new deals, new partnerships with third parties. And of course, we have room for deliver new types of products in the bank. Consumer finance, we are in a good period to recover levels that we used to see in the past, thanks to the recovery of the economic. We have investment banking, which is a business that is growing pretty fast, and it's reporting income even in private banking, personal banking, but also in corporate banking in medium-sized companies. We have assets under management. This is basically our focus on our private banking and personal banking activity, and it's been demonstrated our capabilities to do so. And of course, business is more traditional like brokerage of mortgages or transactional business, where we have plenty of room, and I'm sure that we will exceed your expectations.

Okay. We are also getting questions whether we have any appetite for M&A.

As of today, we do not have any additional appetite of new corporate transactions. I think the last transaction of EVO Banco and Avant Money or in Portugal, I mean, are quite recent and for the time being, we are still in a good process to consolidate those recent acquisitions.

Okay. Regarding our capital ratios and targets, what is the dividend policy that we are assuming there?

In the capital ratios that we are sharing with you, and we will follow it, and -- we'll share with you in the following quarters. We are assuming a 50% payout, which is the dividend policy that we used to have pre-pandemia.

Okay. Probably you already mentioned this, but just to make it clear. Can you please confirm that the EUR 1 billion profit is net of taxes?

Yes. It is a noncash item.

Okay. It goes into -- yes. Also, can you confirm the assumptions for the cost of risk in 2023 and provisions, not only the cost of risk, for both.

Yes. By 2023, we expect a normalized situation in provisions and other provisions. And as I did mention, normalized situation maybe around 35, 40 basis points of cost of risk by 2023. As you can imagine, it's still very early to find out when it would be a normalized situation, but we believe -- we strongly believe by 2023, this situation should be normalized by then.

Okay. Regarding the incomes, the future incomes from Linea Directa, we are getting a question whether you can repeat how are we going to account for those incomes, you already mentioned the dividend income, and obviously, the participation will be accounted as other comprehensive income with impacting capital ratios. Probably last few questions. Any updates on asset quality, moving away from the transaction today?

We will have our results presentation pretty soon. And I guess, I think it's exactly more or less in 4 weeks. Therefore, I think we can cover that topic in the next result presentation. I think today is dedicated to the Linea Directa transaction.

Thank you. Okay. That was all from us. Obviously, for any further questions you might have, please contact our Investor Relations team. Thank you, Jacobo. Thank you, everyone, for joining today.

Thank you very much. Have a nice day, and keep safe. Bye.