The economic context of 2020 was more complex than usual. The pandemic had a global impact on world economies. Throughout the year, domestic authorities took measures to alleviate the effect of the health crisis on the economy.
Regarding the financial system, the European Parliament and the European Council approved Regulation 2020/873 (CRR Quick Fix) that makes it more flexible and facilitates compliance with the capital requirements set by the European supervisory authorities. This includes measures such as the new support factors for SMEs and infrastructures, which reduce capital consumption and the level of risk-weighted assets (RWAs). The European Central Bank (ECB) announced that banks may temporarily operate below the capital level defined as Pillar 2G (Pillar 2 Guidance) and the capital conservation buffer. The ECB also stated that banks could partially cover the requirement of 'Pillar 2G' and 'Pillar 2' with lower quality instruments, i.e. additional tier 1 capital (AT1) or Tier 2 capital.
In addition, the national governments approved public guarantee programmes for corporate financing, with the aim of promoting the flow of credit necessary to protect companies and self-employed workers, and to mitigate the potential effects of the pandemic.
Given the persistent uncertainty about the future of the economy, the ECB recommended that credit institutions exercise extreme caution when paying out cash dividends and paying variable remuneration to their employees.
All of these measures and Bankinter's business model and its prudent risk and capital management policy have enabled the Group to operate with comfortable levels of capital, of high quality and far above that the requirements of the regulatory authorities and supervisors.
In 2020, one of Bankinter's strategic priorities remained unchanged: active management of its capital. The aim was to reinforce its position in terms of capital adequacy and to be able to face the economic effects of the pandemic, while preserving the flow of credit to the real economy with no major impact on its capital levels.
The Group's highest-quality capital, the CET1 ratio (the quotient between Common Equity capitalTier 1 and risk-weighted assets), stood at 12.29% at close of 2020, 68 basis points up from 2019 and the highest in its recent history. This level of capital exceeded by almost five percentage points the minimum requirement demanded by the ECB for Bankinter Group in 2020, i.e. 7.675% (8.2% in 2019).
As per the ECB's recommendations, the Bank has modified its usual shareholder remuneration policy, reducing the pay-out level (portion of profits allocated to dividends) for the 2020 financial year from 50% to 15%. As a consequence, the highest-quality capital was reinforced by 80 basis points.
Demand for credit grew steadily throughout the year, largely thanks to the launch of public guarantee programmes, which led to an increase in exposures. However, this impact was mitigated with regard to calculating capital consumption because of said guarantees. A mention should also be made of the increase in the level of provisions for credit risk to alleviate the potential future effect of loans in difficult situations. Business performance and the creation of new provisions made it possible to shore up the CET1 capital by 8 basis points.
The latent capital gains of the ALCO portfolio (fixed income) declined sharply in the first quarter of the year, due to the impact of the health crisis on the markets. Although this negative effect gradually faded throughout the year, the levels of the previous year were not reached, and CET1 was down by 11 basis points.
Línea Directa Aseguradora did not distribute dividends to the parent company against its 2020 results. This prudent approach increased the holding's value and, consequently, increased the capital consumed by the Group to maintain the investment. This higher consumption, and other factors such as the activation of investments in technology, had a negative impact on capital of 50 basis points.
Finally, the regulatory changes brought about by the implementation of the CRR Quick Fix (e.g. the reducing factor for SMEs and infrastructures and the new method for calculating the deduction for investments in technologies) added 41 basis points to CET1.
The Single Supervisory Mechanism, integrated into the European Central Bank, has made no changes to the minimum capital requirements with which European banks must operate in 2021. As such, Bankinter must have a minimum CET1 level of 7.675%. This ratio is made up of 4.50% of the capital required by the so-called Pillar 1 of the rules (which sets the minimum threshold for all banks), 0.675% of Pillar 2 (the result of the specific supervisor judgement for each bank's risk profile) and a capital conservation buffer of 2.50%. In terms of total capital (CET1 plus lower-quality capital), the supervisor's requirement for 2021 stands at 11.70%.
Once again, the minimum capital requirements imposed on Bankinter by the supervisor are the lowest of all Spanish banks and among the lowest in Europe
In December 2020, the Single Resolution Board informed Bankinter of the Minimum Requirement for Eligible Liabilities (MREL), a new buffer of own funds and liabilities with the capacity to absorb losses if the Bank were to struggle. From 1 January 2022 (binding intermediate requirement), Bankinter must reach a volume of instruments amounting to 16.18% of the Group's consolidated riskweighted assets and 5.28% of the exposure to the leverage ratio.
The final MREL requirement, which the Bank must meet no later than 1 January 2024, stands at 17.26% of the risk-weighted assets and 5.28% of the exposure to the leverage ratio. Throughout 2020, the Group built up a buffer of eligible liabilities to comply with the MREL requirement. In addition to generating organic capital and managing its balance sheet, in January 2020 Bankinter launched its first issuance of senior non-preferred green debt for a total of 750 million; and, in July, it placed a Tier 1 capital issuance (Additional Tier 1) of 350 million. At the close of 2020, the level of instruments eligible as MREL stood at 21.62%, and 8.44% of the exposure to the leverage ratio
For financial year 2021, the Bank's objectives are: organic generation of capital to be able to operate comfortably above the levels established by the supervisor; and a return to its usual dividend policy, which would enable it to recover its 50% cash pay-out, if advisable considering the economic situation and following the ECB's recommendations at all times. The Bank also hopes to obtain authorisation from the supervisor to distribute Bankinter, S.A.'s share premium to its shareholders, as approved at the last annual general meeting, by distributing shares of Línea Directa Aseguradora, scheduled to go public in 2021. This operation is expected to have a neutral or positive impact on Bankinter Group's capital levels.
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