Own funds

A solid level of capital compatible with increased investment

The economic context of the 2022 financial year was marked by the war in Ukraine and the tightening of monetary policies by central banks. The protracted Russia-Ukraine conflict, which began in February, has pushed prices to very high levels and has also caused significant deterioration in economic growth. This deterioration has been particularly marked in Europe, which is energy dependent on Russia.

Rising inflation has eroded the purchasing power of households and businesses, with a consequent dampening effect on consumption and investment. To control rising prices, central banks have raised interest rates and pursued tight monetary policies. Looking ahead to 2023, major international agencies have cut their growth forecasts and, although inflation is expected to ease, it will remain above central banks' targets.

In this context of uncertainty, the European Central Bank (ECB), which annually assesses the institutions under its supervision and determines the level of minimum capital requirements they must maintain to face potential eventualities, carried out a specific stress test in 2022 for the main institutions in the sector, focusing on climate risk. The objective was to analyse their level of preparedness to cope with financial and economic shocks resulting from climate change. The results of these exercises are usually used by the ECB in its assessment of capital requirements, although the outcome of the 2022 climate stress test was not taken into account for the calibration.

In its Financial Stability Review published in November 2022, the ECB highlighted the good positioning of the European banking system to cope with the various risks. Given the deteriorating economic and financial outlook, specific macroprudential policies, such as capital buffers, are particularly relevant in increasing the resilience of the system.

All the aforementioned measures, together with Bankinter's business model and its prudent risk and capital management policy, enabled the Group to operate with comfortable, high quality capital levels that are well above the requirements of the regulatory and supervisory authorities, despite the current economic context

Efficient capital management

During 2022, Bankinter kept as one of its strategic priorities the active and efficient management of its capital in order to strengthen its position in terms of solvency, boosting the flow of credit to households and businesses without affecting its capital ratios and maintaining its usual pay-out level of 50%.

The Group's highest-quality capital, represented by the CET1 ratio (the quotient between Common Equity Tier 1 capital and risk-weighted assets), was 12.01% at the end of 2022, 4 basis points below the previous year's ratio. Despite the strong growth in lendings and the impact of market developments on fair value portfolios, capital ratios were kept stable thanks to the Group's strong performance and the consistency of its risk profile. The CET1 level was well above the minimum capital requirement set by the ECB at 7.726%. Similarly, the total capital ratio closed the year in a very comfortable position with respect to the minimum required level (15.27%, compared to 11.790%).

The positive result for the year allowed the retention of 77 basis points of capital after applying the group's traditional dividend policy (50% of the profit).

Demand for credit, meanwhile, continued to develop satisfactorily. Investment in companies experienced strong growth, both in national and international business. Mortgage activity (mitigated for capital purposes due to guarantees) continued to grow ahead of the sector. The rest of the businesses also recorded growth during the year, and capital consumption for operational risk also increased. Changes in the business decreased the CET1 capital by 29 basis points.

Variations in the CET1 ratio

Market developments had a strong negative impact on the fair value portfolios and resulted in a reduction in CET1 of 68 basis points, the largest among the capital components. Without this impact, the CET1 ratio would have stood at 12.69%. By contrast, changes in the IRB provisioning gap, the management of prudential provisions and other effects represented an increase in the CET1 ratio of 16 basis points.

Requirements for 2023

In December 2022 Bankinter received the result of the ECB's supervisory assessment of the Bank, including the minimum capital requirements for financial year 2023, which have not changed with respect to the previous year. Accordingly, the ECB requires Bankinter Group to hold a minimum ratio of Common Equity Tier 1 (CET1) of 7.726% and a minimum Total Capital ratio of 11.79%.

According to the communication, Bankinter's risk profile remains unchanged with respect to previous years and the Bank continues to be among the set of Spanish and European institutions with the lowest capital requirements.

With regard to the minimum requirement for eligible liabilities (MREL), in January 2023 Bankinter received the decision from the Single Resolution Board for 2023, according to which Bankinter needed, from 1 January 2022 (binding intermediate requirement), a buffer of loss-absorbing instruments of 16.18% of the group's consolidated risk-weighted assets and 5.27% of the leverage ratio exposure.

The final MREL requirement, which the Bank must meet no later than 1 January 2024, stands at 18.03% of the risk-weighted assets and 5.30% of the leverage ratio exposure.

Additionally, a new subordinated MREL requirement has been set, which must be covered only with subordinated instruments and which will be mandatory as of 1 June 2024. This requirement stands at 19.58% of risk-weighted assets and 6.18% of the leverage ratio exposure.

Throughout financial year 2022, the Group continued to build the buffer of eligible liabilities to comply with MREL through organic capital generation and balance sheet management. At year-end 2022, the level of MREL-eligible instruments stood at 21.40% (18.90% excluding the capital to be dedicated to cover the combined buffer requirement of 2.5% of risk-weighted assets), and 7.26% of the leverage ratio exposure.

Outlook

Looking ahead to 2023, the bank's objectives are to generate organic capital to enable it to operate with comfortable ratios above those established by the supervisor and to maintain its usual dividend policy, i.e. a cash distribution of 50% of profits.

In 2023, due to the economic and geopolitical context, we can expect to see a slowdown in the economy and increased uncertainties. Despite this, one of Bankinter's main objectives is to provide credit to the real economy, in order to contribute to economic development and to manage the risk-return trade-off in such a way as to enable it to maintain its solvency, profitability and risk profile.