David López: Good morning and welcome to Bankinter 4Q 2023 Earnings Call. Our CFO, Jacobo Diaz will now talk you through the main details of our last 12 months’ performance. Jacobo, the floor is yours. Thank you.

Jacobo Diaz: Hello, good morning.

Good morning to everyone and welcome to Bankinter’s earnings presentation for the fourth quarter and full year of 2023. The related financial statements, as usual, were posted on the website of the CNMV before market opened. As usual, all documents can also be found on our corporate website. 2023 has been another year with outstanding commercial performance in the regions where we operate. This is clearly shown by the differential and almost unique performance in volume growth in all balance sheet and off-balance sheet items that, together with the interest rate new scenario, have become the driving forces for the relevant growth in our operating income and pre-provisioning profit of 28% and 43%, respectively.

This outstanding performance, together with the maintained solid asset quality and capital levels, has made 2023 a record year in Bankinter’s 58-year story. 2023 will not be the peak year for Bankinter. We are committed and driving all our commercial efforts to make this 2024 a better year than ‘23 in terms of net profit and maintaining growth rates in volumes. Let me be more specific about some of the achievements during this record year. We have closed the year showing a solid growth in our loan portfolio, also retail deposits with a manageable cost increase, and finally in assets under management, thanks to the very positive commercial activity and customer acquisition during the year.

Second, the strong increase shown in our NII is mainly due to a 4% loan growth in the year, and the impact of the ECB rates basis in our variable rate loan book, that resulted in an increase of 44% of growth in NII, in the higher range of last guidance provided. Third, fee income has been able to achieve the growth rate that we have guided for the year and with no extraordinaries. Our mutual funds under management and distribution, together with pension funds and other wealth management products reaching 2023 record level at €44 billion, growing 18% in the year and 10.5% annual cumulative rate of growth during the past 5 years. This remarkable performance that will make fee income to improve the upward trend in future years is driven by the growth in our customer wealth in both private and retail banking, that together adds to €103 billion at the end of 2023, growing by €11 billion in a year. And fourth, our improved efficiency jumped to reach levels close to 37% and drives pre-provisioning profit to grow a strong 43% year-on-year, above the guidance of the year.

And fifth, asset quality continued to show stable balances with an NPL ratio with no variation, as well as a provision coverage in the year. Our solvency remains on comfortable levels of CET1 fully loaded ratio at 12.3% and below 12.5%. Okay, so let’s move on. These are the key financial indicators for the year. Group’s total loan book grew 4% to €77 billion, thanks to corporate lending in Spain and Portugal and mortgage production in Ireland and EVO and in Portugal.

Also, consumer finance loan book showed healthy growth in the three geographies. Customer deposits and off balance sheet results grew by 9% and 18% respectively in another very good year in our private and our retail banking business. Gross operating income grew by 28% with respect to last year, showing improved trend in the customer margin and fees. Despite some one-off extraordinary cost increase in the last quarter, we posted a strong efficiency improvement and operating cost at the upper end of our guidance, making possible to grow pre-provisioning profit by 43%, a new record. NPL ratio remained stable in the year, in line with our all asset quality indicators, at 2.11%.

Group’s net profit closed at €845 million. Like-for-like that is excluding the extraordinary banking tax in the year, net profit has grown by 65% or €362 million. Our capital ratio ended the year at 12.3% with a 50% dividend payout and the risk-weighted assets growth in the quarter. This is 44 basis points above last year and comfortable within our long-term guidance. And our return on equity jumped to 17.1%.

That reflects the improved performance of the year and stands 510 basis points ahead of that of last year and clearly above cost of capital. We will now go through the usual agenda. So, moving to our full year income statement, it continues to show strong growth in the most important revenue lines, the NII and the fees. Fee income reaches our demanding guidance from the year. It grew by 3% from 2022, and this is without any one-off or extraordinary taxes fee.

Other operating income and expenses at minus €177 million were €119 million larger than a year ago due to the €77 million banking tax, together with the absence of dividends from Linea Directa. Total gross operating income went up 27%. This growth has been possible in part thanks to the good diversification of our incomes and with increased contribution from all of them, Portugal, Consumer Finance, Avant Money and EVO, as we will see later. Group operating cost in a hyperinflationary year went up by 8%, but as we have mentioned in previous presentation, always below income growth and despite the seasonal fourth quarter increase with some extraordinary or one-off cost that I will mention later, mainly in personal expenses. Despite this, efficiency has improved the Group to 37.3%, and not only in Spain, but also in Portugal, in Ireland and in EVO.

This very positive income and cost performance drives pre-provisioning profit to grow 43%. Loan loss provisions went up 34% from 2022, in line with the cost of risk guidance of 40 basis points that we maintained the whole year. Other provision, as expected, had another good reduction ahead of our guidance. And after provisions, profit before tax stands 57% above last year and Group net profit, as I mentioned €845 million. In our quarterly comparison of the P&L, we can see the impact of last quarter extraordinaries, apart from deposit guarantee fund annual contribution in other expenses and provisions, also the strong performance in NII and its evolution every quarter with a 22% increase over the same quarter of last year, also a very resilient pattern in fee income, up 7% in respect to the same quarter last year.

As we have mentioned before on operating cost, they are increased by 19% in the quarter and by 12% year-on-year, including €17 million of extraordinary expenses, mainly in personal that went up by the short-term, long-term variable retribution after a unique year in financial results. Excluding this one-off, operating cost would have increased by 12% over last quarter and by 5% compared to a year ago. So despite these and a more conservative provision effort, net income has been €160 million, 23% up from previous year in the same quarter and down from the third quarter like every year due to deposit guarantee fund that I just mentioned. Let’s move to the balance sheet. The Group’s total loan book grew by 3.6% from a year ago, bringing over €2.6 billion in new business.

Growth in the year was driven by our corporate lending in Spain and Portugal, together with a strong mortgage production in Portugal, EVO Banco and Ireland. At the same time, as expected, mortgage lending in Spain was impacted by slowdown in demand. After another seasonal good quarter in corporate lending as the last quarter of every year, our loan book grew by €2 billion in the quarter, thanks mainly to working capital activity and mortgages. In Spain, the corporate and consumer lending production were able to offset the small reduction of the mortgage loan book, posting a 1% growth, including EVO, and again gaining market share since the sector has contracted by more than 3.5% with the latest data of November. Our Group total loan book grew by close to 4%, probably the only group able to grow in this shrinking market.

In Portugal, lending is up by 16% from a year ago to reach €9.2 billion, clearly ahead of our business. Retail deposit performed strongly ahead of plan. They grew by 8.5% year-on-year and bring €6.4 billion to reach €81.6 billion. During the last quarter, an increase of over €3 billion in deposits occurred, due in part to some commercial activity, seasonality in Spain, and to a closing gap strategy in the Portuguese business. Deposits were up by 6.3% in Spain, while the market was shrinking by 1.3% as of November, those again gaining market share in deposits.

In Portugal, deposits continued to grow strongly in the year at 32% to reach €8.4 billion. Moving to the NII, NII has been growing at very positive trend during the previous 5 years with a 10% cumulative growth rate. This good performance is not only a consequence of the rate increases, but also of being able to grow our loan book by close to 4% every year, together with our successful management of the customer margin, as we can see in the right-hand side chart. I want to emphasize the increased contribution of our different business to our NII, starting with Portugal that grew by 85% with respect to 2022, in part due to the growth in all books, mortgages, corporate and consumer finance. Also in Ireland, Avant Money NII reaches €94 million, growing 21%; and EVO Banco in Spain grew by 82%, reaching €70 million.

As for the customer margin has increased in the year to 3%, this is 95 basis points above that of the previous year in a clear upward trend initiated in 2022. Credit yield jumped 174 basis points to 3.89%. For 2024, the key to customer margin resilience is to shorten duration in new production deposit and to reduce the front book prices below the back book, something which is already currently occurring. The ALCO portfolio in the year has remained almost stable with a small reduction of €500 million to close to €11.1 billion, now split 90% under healthy maturity and 10% at fair value. The portfolio’s metrics improved with an average maturity of 9 years with an average duration of 4 years and an average yield, which is reaching now 2.3%.

At the end of the year, post-tax unrealized losses were reduced by more than 50% to approx. €300 million. Moving into fees, fee income shows growth. It grew by 3% in the upper range of the low-to-mid single-digit guidance that we provided across the last quarters. So, fee income has been growing at a 7% annual cumulative rate of growth during the past 5 years, and we expect this run rate to improve in the following years, thanks to our effort and market share gains in Private Banking and in Corporate Banking, both very profitable businesses.

In the fourth quarter, we have been able to increase fees by 6% from September to a better commercial activity in mutual funds and continued commercial activity in economic transactions in the corporate segments. Quarterly fees were up by 7% from the previous year. The largest contributor to fee income with €196 million is Asset Management, and finally came up with 1% up in the year, despite the negative effect of the reduction in average fees that we mentioned across previous quarter. But it has been offset by an increased commercial activity in investment fund subscription that finally brings AUMs to record levels once again. The second contributor to fees, payments and collections growing at 10%.

The third, fees from brokerage and custody is up 10%, and other fees related to risk-related transactions and life insurance and pension funds, etcetera, growing by 8% and 3%, respectively. In other operating income and expenses, the most relevant components are €83 million of trading income plus dividends in equity method that compressed negatively from last year due to a lower trading and dividends in Linea Directa, and €212 million in regulatory charges increased by 52% due to the new banking tax. Gross operating income for the year increased by 28% from ‘22. This is again clearly ahead of the compounded growth rate in previous years. All geographies and all the businesses showed growth.

Moving into cost, Group operating costs totaled €993 million. They’re up 8% from previous year. This growth includes €17 million approx. due to the extraordinary expenses booked in the last quarter, which in majority are in personal expenses, but also are related to the JV in Portugal. Personal expenses up 6.4%, excluding this impact due to the increase of fixed remuneration and a small increase in staff during the year.

General and administrative expenses also went up by below 6%, somehow well managed, taking into consideration the current hyperinflationary environment that we will expect to slow down in 2024. With all this efficiency continued to improve and reaching 37.3%. For 2024, we plan to be able to maintain these relevant efficient gains and keep our cost-to-income within the 37%, 38% range. Our Spanish business standalone runs at a second-to-none efficiency ratio of 34%, excluding the banking tax. With all this, PPP showed a stunning 43% increase, almost 2x ahead of 4 years ago.

Let me highlight now that the growth rate of our pre-provisioning profit has multiplied by 10 in the period, a clear reflection of the strength of our customer base business from a 4% in 2019 to a remarkable 43% this year. Moving to cost of risk, cost of risk finished the year at €359 million, or 39 basis points of total credit exposure, 5 basis points up from last year and 1 basis point below our guidance for the year. As we see things today, we can anticipate that cost of risk will remain, during 2024, in the range of 35 basis points to 40 basis points. While we see the recurrent cost of risk maintained the same level of that in 2022 in Spain, in Portugal and Ireland, and the only small growth occurred in our consumer finance business in Spain and Portugal. Last quarter increase is just due to product provisioning within our 40 basis points guidance that we’ve mentioned every quarter of the last year.

Looking ahead, we are optimistic for 2024, taking into consideration the measures we have been taking during 2023 that, together with the fact that the most potential risk activity bears with the ICO guarantee. In the other provisions, you will see again the downtrend that we will continue in 2024 with the already known 10% to 20% additional reduction year after year. So group net income reached €845 million, a new record. It compares with a net income of €560 million in 2022. And this includes the banking tax.

So the 10% compound average rate of growth over the last 5 years shows a very strong performance, most probably not mirrored by any other bank in the country. So return on equity, we reached 17.1%, and ROTE reaches 18.1%, clearly above the cost of capital and most probably best-in-class in the sector. After closing a very good year and clearly above our target set in 2019 of reaching double-digit return on equity by ‘23, we expect for these new years to obtain return on equities in the mid-teens mark, very close to the figure that we have obtained this year. Bankinter’s tangible book value per share ended the year at 5.59% – sorry, €5.59 per share after starting the year at €5.15, showing a growth of €0.44, plus dividends paid of €0.45, up 61%. The value added to the shareholders has grown 11%.

I will now go through the credit risk, quality and solvency management. So NPLs continue on their stable trend with the total NPLs finishing the year at €1.81 billion, just €78 million more than December and just €20 million lower than September. The small NPL variation in the year of €63 million came half from the consumer finance business and the rest from other type of business, mostly corporates. In Portugal – moving into Portugal NPLs, they came up €11 million in the year, in Avant Money, just €2 million, and in EVO just €2 million. Group NPLs ratio remains at 2.11%, 8 basis points lower from September, thanks to the impact of some small sales on NPLs.

In Spain, NPL ratio ends at 2.4%, just 10 basis points up from last year and 10 basis points down from September. This ratio continued to be clearly below the sector average. In Portugal, NPL ratio stands at 1.31%. As shown in the chart on the right, the NPL ratio in Spain went down to 1.7% for households, and slightly up to 3% for corporates and SME. Total provision for non-performing loans stands at €1.32 billion, up 1% from last year.

So, coverage – provision coverage stands high at 65%. If we see now the Group’s foreclosed assets portfolio, it’s 31% smaller than a year ago. It decreased by €38 million from the previous year. This small portfolio now accounts for only €85 million. So, moving into capital, CET1 ratio finished the year at 12.3% with a decrease of 18 basis points in the quarter, mainly due to the already well-known transaction in Portugal that took 16 basis points at the year-end ratio.

So CET1 ratio stands very comfortable, 44 basis points above that of December ‘22. In the year, our retained earnings contributed with a total of 118 basis points, 41 basis points more than ‘22. Capital consumption of risk-weighted assets growth has been 32 basis points, and 20 basis points come just from operational risk that you know, this is a consumption that is recorded only in the fourth quarter of every year and is relating to the income to the level of growth of the income. Intangibles and other regulatory parameters bring 1 basis point negative to reach 12.51% CET ratio. And other valuation adjustments, the new banking tax and the Sonae transaction bring the ratio down to 12.30%.

Capital ratio finished the year at 16.1% and the leverage ratio at 4.9%. And the year end ratio of risk-weighted assets for MREL at 22 from – 22.86% remain well above our regulatory requirement. Moving into liquidity, our commercial gap after the relevant reduction since 2018 from a positive €3.7 billion 5 years ago to a negative €5.2 billion in 2023, this is €8.9 billion. As a result, loan to deposit ratio moved to 94.3% from 97.2% a year ago, owing to more growth in deposit than in loans this year, after the quite exciting beginning of the year. Wholesale maturities calendars looks pretty much balanced.

Liquid assets stand at €27.6 billion, with high-quality liquid assets at €21.2 billion. LCR ratio of 206% are quite above the average in the system. Now, let’s review the performance of our business lines very quickly. Here, we can compare the improved diversification of our operating income from 5 years ago with better balance between the main recurring contributors and the new businesses, which continue to gain share of income. So this is a quite positive evolution of our business model in terms of diversification.

So, moving into specific business, the corporate and SME loan book increased by €1.4 billion or 4.6% in a year with negative growth in the sector for corporate loan book. We think that once again, this is a remarkable performance and only slightly below our mid-single-digit guidance at the beginning of the year and 6% compounded for the last 5 years. So in Spain, after a strong last quarter, like every year, loan book reaches €29.3 billion, growing by 2.8%, while the sector still declines by 5%. Therefore, we’re continuing to gain market share in this business, now at 6.1% from 5.3% just 2 years ago. In Portugal, our corporate loan book grew by 27% in the year to reach €3.1 billion.

This includes €400 million of the financing of the Sonae transactions booked in the Corporate Banking book. Without this, the growth would have been 12%, which is also a double-digit growth. International trade and supply chain finance enjoyed another good year and continued to grow its activity in financing, working capital and international trade, exports, etcetera. And in Next Gen generation EU financing with corporates, we have seen a clear improvement in volumes to reach €388 million signed in financial risk guarantees and similar instruments. And finally, regarding the ICO finance for corporates and SME, the outstanding at year-end was €4.7 billion, out of a total of €8 billion signed between ‘20 and ‘21, and the NPL ratio portfolio is low at 3.4%.

Once again, as every year in the fourth quarter, we have some mentions to our Investment Banking business. Another good year. Operating income reached €233 million, growing by 50% and without any extraordinary fees. Key indicators of Bankinter investment in the year are management of 23 different vehicles of alternative investment for €4.7 billion from close to 10,000 clients. And here, you can see the current status of the different vehicles for alternative investment that provides you a level of knowledge about the number of vehicles, the level of diversification and the value of this business.

In wealth and retail banking, customer assets under management had continued to grow, thanks to the strong commercial activity and an increased number of customers. And in both businesses, wealth and retail banking, assets under management increased by 11% or €11 billion to reach the first-time history, more than €100 billion in patrimony under management, split between €58 billion in wealth banking and €46 billion in retail banking. So this strong track record of the last 5 years shows a 62% growth in AUMs since 218 in wealth banking. The strong commercial activity can be measured by net new money in the year that brings €6 billion increase in patrimony, split €3.2 billion new money in wealth banking and €2.8 billion new money in retail banking. Again, an extraordinary commercial year in those businesses.

So in assets under management, very good year. As you see in the case of own managed funds, net new money was up by 15%, third-party funds 18% and pension funds 12%. Patrimonial services and SICAVs also enjoyed a very good year, growing by 30% in assets to reach over €6 billion. This very successful and profitable business, which was growing at 18% last year or €6.7 billion in net new money, is not new, and has been growing at a rate of 10% every year over the last 5 years. So we expect this rate to improve in the coming years with increasing customers and market share in these segments.

Moving to the retail business, our retail banking activity continues a strong measure among other things, but the customer acquisition in Spain, very strong, over 122,000 customers in this year. In products, salary accounts increases by 4%. Mortgage origination in the year of €5.8 billion represent a decrease of 14% from a year ago. EVO contribution is €900 million and Avant Money is €750 million. So despite this reduction, Bankinter continues to increase market shares in the mortgage origination business, clearly above our natural market share.

Our total mortgage book grew again. It reaches €34.9 billion. And once again, this is a very important business, very profitable to us. Moving into Portugal, so they have closed a very good year, outstanding year. In 2023, their loan book grew by 16% to €9.2 billion, and retail deposit at €8.4 billion grew by 32% from a year ago with an exceptional fourth quarter trying to close their commercial gap.

Growth in loan book was split between corporate banking €3 million and retail banking €6 million. Corporate banking grew by 27% and retail banking by 11%. As for income statement, operating income grew by 61%, while operating expenses grew by 8%. Therefore, efficiency improved dramatically to 33% and pre-provisioning jumped by 112%. Finally, after €39 million of loan provisions – loan loss provisions, Portugal before taxes reaches a new record of €166 million.

The continued Portuguese performance is clearly reflected in the operating income evaluation that has been growing at 21% cumulative annual growth for the last 5 years. This is almost seen – since the beginning, it was acquired from Barclays in half year 2016. So, steady growth year-by-year, demonstrating their success in the implementation of their business plan that can be resumed, in the right-hand graph, following the improvement of the efficiency ratio to end at 33.4%. Moving into consumer finance, they reached a total loan book of €6.8 billion, €400 million up from September, improved by the solid mortgage origination in Ireland and despite the contraction in revolving credit cards business in Spain. The breakdown of the loan book by product is on the right hand.

Personal loans represent 46%, growing 19%. Household mortgages in Ireland reached €2.2 billion, represent 32% of the total book, and they have grown 41%. The revolving credit cards in Spain are now less than 6%. Total number of customers grew by 9% to more than 2 million customers. NPL reduced to 3.9%.

And as you can imagine, we continue to see this business with great opportunities. In Ireland, the underwriting of mortgages, as I just mentioned, has been running well. This activity keeps as the main driver of loan book in that country that grew by 34%. The mortgage loan book ended at €2.2 billion with a new production of €700 million, as I mentioned before. This growth came with very stable asset quality ratios.

We will keep growing mortgages in 2024 in Ireland. Our money – current market share of drawdowns in mortgages is close to 6%, and we maintained our expectation to continue growing operating income last year by 22%. And then, EVO Banco has continued to grow. New mortgages granted in the year were €873 million. This is only 11% down from a year ago.

The book reaches €3.4 billion. And of liabilities, they have €3.9 billion in retail deposits, up 4% compared to a year ago. NPL very low, 0.46%. Cost of risk, again very low, 12 basis points. So, the promising evolution of the operating income based on increased customer acquisition, robust mortgage lending and good prospects for consumer finance made possible the recovery of positive results at EVO and fully in line with our business plan to achieve profitability.

Last but not least, I want to emphasize some of the relevant achievements made in our 2021-2023 ESG strategic plan called 3D Dimensions, that has been developed through 20 different strategic lines, distributed in 50 programs and 580 actions. This new plan – there is a new plan for ‘24 and ‘26 recently approved that will reinforce our privileged position in ESG by focusing in three new pillars, which are responsibility, differentiation and sustainability of the business. So now, let’s move to the recap and the guidance for next year, which is also very important. The recap again, I think we are closing a strong commercial – a strong year with a very strong commercial activity, reflected in solid volume growth, client acquisitions, every business and in every geographies. This is quite differential.

Best-in-class in asset quality with a provision coverage enough to manage potential future risks, together with our existing good-quality loan book, operating income growth enough to improve our PPP by 43%. Net profit at €885 million with the extraordinary banking tax, and strong set of management ratio with return on equity at 17%, ROTE 18%, efficiency 37%, NPL at 2%. So in our opinion, it has been a quite brilliant year. But as I did mention in my introduction, this is not a peak. Next year, we do expect a better year in net income.

So basically, our target for 2024 is to increase net income compared to 2023. Related to growth, we do expect continued growth in all geographies and

all businesses: so Portugal in all three, mortgage, corporate and consumer loan books; Ireland, continue focus on mortgages and growth in personal loans and in credit cards; EVO Banco, focus on mortgages but continue developing personal loans and consumer finance business. Bankinter Spain expects recovery in the mortgage lending. Also the corporate loan book should do better than in 2023, with increased activity after this good second half of the year. We aim to be able to grow our loan book again by mid-single digit, and customer deposits has slightly below that rate in 2024.

We do expect NII to keep stable with resilience in client margin and loan growth. Deposit beta will be maintained and in control, thanks to shortened duration and reduction of deposit cost, aligned with yield reduction as interest rates start some downward trend at the end of next year. Fee income is expected to grow. We set our guidance as high-single digit, in part thanks to the rise of average fees of mutual funds under management seeking for more value-added services, the attractive alternative investment and brokerage activity as rates go down, and increase in corporate activity. Group costs will grow again in this persistent inflationary environment but should be close to rate of growth of incomes that is most probably around low-to-mid single-digit by the end of the year.

And finally, as I did mention before, cost of risking should be some sort of flattish in asset quality and with comfortable level of quality. We do expect to finish the year in 2024 in the range of 35 basis points to 40 basis points. So now, I’m happy to take your questions. Thank you. A -

David López: Thank you, Jacobo.

As usual, in the interest of time, we will try to do our best effort to group all the questions in their most relevant topics. Let’s just start with the NII. As usual, focus on this topic. For example, what is your – what are your assumptions behind our NII guidance in terms of rates, deposit beta and loan growth mainly?

Jacobo Diaz: Okay. So we do expect, as I did mention, client margin resilience.

Basically, there is still some positive repricing to come in the first couple of quarters of 2024. We do see that rates are volatile, as you might see. We do have expectation of average ECB rates quite different, depending on if we expect one cut or we expect more cuts. So, in our case, we do expect one cut in the middle of the year. We do expect a reduction in the ECB rates somewhere in June, potentially in June and July.

We do not expect a large reduction in these rates. I know that at the end of 2023, there is been some high expectation of multiple cost reduction or type of rate reduction. We are not in that environment right now. And Euribor is very similar. Euribor, we’ve seen some volatility, but now, we see it’s some stable.

It today is at 3.65%, 3.67%. That gives us a good resilience in terms of repricing of our book and in terms of management of our beta. We have ended the beta in average below 20%, and at the end of the year, somewhere close to 30%. We do expect that percentage of term deposits to stay stable. We’ve seen around 20%, 25% range of term deposits composition in the following quarters.

And we do see already that the front book in term deposits is below the back book. That means that in the coming quarters, the management of cost of deposits is under control. So, these are basically the main drivers, of course, in addition, growth that I did mention, around mid-single digit of growth in all the businesses and in all geographies. They will provide some support in that client margin resilience in this INI growth. I think the first half of 2024 should be a good opportunity for good growth.

And in average, we do expect quite a good resilience in the client margin for the entire year.

David López: Thank you, Jacobo. In terms of sensitivity to rate movements, what is our sensitivity to 100 basis points rate cuts for 12 months?

Jacobo Diaz: Yes, I think I did mention in previous quarters, our sensitivity to a 100 basis points parallel reduction in rates is somewhere around 0% to minus 3% – minus 4%. That means that the reality is that there is a lot of resilience to a reduction in interest rates currently.

David López: Thank you.

Also, we’re getting questions on whether we are changing our hedging policy to reduce sensitivity to rate cuts.

Jacobo Diaz: This is something that we do across the year, whereas there is nothing that we have changed in the short-term. So our ALCO portfolio and the way we manage the balance sheet is something that we do permanently. And of course, we have been managing to reduce the impact of the reduction in rates. Let me remind you that 2 years ago, when the question was in the opposite way, we mentioned that a 100 basis points parallel increase in rates – 100 basis points increase in rates, we are mentioning that our NII was growing somewhere between 10% to 15%.

Now, the answer for the opposite question, for a 100 basis point reduction, as I did mention, is somewhere between 0% and 4% with a parallel shift of 100 basis points down. That means that we have made our homework during this period, that we have managed the situation in the balance sheet in order to reduce the impact of any potential reduction in rates.

David López: Very clear. Thank you. Specifically, on this quarter, on the last quarter, were there any – any one-offs in NII?

Jacobo Diaz: Yes.

Basically, in NII, this quarter, what we have seen is that we have eliminated the minimum regulatory reserve, which has accounted for €5 million in the quarter, and we can consider again something which is different from the previous quarter that we have a new issue of subordinated – sorry, of senior non-prefer that we issue in September. And that amount of negative impact has amounted to €6 million. That means that putting both together, this is €10 million to €12 million of negative NII in this quarter, which are not in the third quarter. This is probably around 2% of NII that we have – not have in this quarter.

David López: Okay.

One more on the NII-related topic, what is driving our strong commercial activity in deposits in the last quarter? We are getting questions whether we are pre-funding our growth, our credit growth, or substituting any off-balance sheet items? And also, what is the duration of our deposit book? And when do you expect the migration to end between checking accounts and term deposits? Thank you.

Jacobo Diaz: Okay. Let me answer first the last question, the migration. As I mentioned, we have – today, we consider that we have a stable percentage of deposits in a range of 20% to 25% and this is something that we don’t think it will change. So, that question is clear.

The increase in deposits during the last quarter is basically due to our very strong commercial activity. Just bear in mind that we do business attracting patrimony for clients, and we do acquire as much as we can, and then we transform it. So for us, it’s doing business. So, first reason is commercial activity, acquiring new clients and bringing new patrimony to the bank to do business and to generate fees in the future. The second is related to the Portuguese business.

As you know, we have closed a JV with Sonae in Portugal. This has required additional new funding, and this is another reason why, specifically in Portugal, the number of term deposits has increased. The market is different and the situation is different. So, we have strongly closed the gap in Portugal as well, and these are the main two reasons. We are not pre-funding any specific activity for 2024.

Although, the reality is that, that we have brought to the bank a large amount of customer wealth, which is something that in our opinion is an extraordinary news.

David López: Sorry, I missed the average duration on the time deposits.

Jacobo Diaz: Sorry, I missed that answer. So, in the remunerated deposits, we need to clearly differentiate between those who are related to the corporate banking business and those who are related to the retail business, which is probably account half of them for each. So, in the corporate banking business, the duration is extremely short.

It’s probably close to one month, one month to three months maximum. In the retail business, it in average is around six months.

David López: Understood. Thank you. In terms of customer spreads, can you give us some color on how loan yields versus deposit costs will evolve in the quarterly series for ‘24? Thank you.

Jacobo Diaz: Okay. This is bringing the crystal ball. I guess that the first quarters are going to be strong in re-pricing in the asset side. Just bear in mind that we still have a large part of our portfolio of mortgages that need to re-price at higher rates. So, I do expect that there is increasing yields in the first half of the year and then more stable.

Of course, it will depend on how the Euribor 12 months will behave in the second half of the year. And in terms of costs – of cost of deposit, I will say they will move in a parallel way because now, there is the inertia of the increase in the past quarters. But as I mentioned before, the new front book now is below the back book, and this is something that will drive cost of deposits down, keeping overall margin quite resilient across the following quarters.

David López: Thank you. Why did the ALCO portfolio decrease in the last quarter? Thank you.

Jacobo Diaz: The ALCO portfolio has some amortizations, first of all, and I think that’s it.

David López: Great. Thank you. Regarding our funding plan, any color for ‘24?

Jacobo Diaz: Yes. As you see, we have ended the year in quite large and high liquidity ratios.

Our deposit to loan at 106%. Our loan to deposit at 94%. We do expect some reduction in those figures for 2024. Probably we will reach 102%, 103% in deposit-to-loan and probably 97%, 98% in loan-to-deposits. So, that will – I think that will provide you a good view on how liquidity will be managed in the year.

David López: Okay. Here we have a very long shot. Any sensitivity, any color that you can give us to – for the NII for 2025?

Jacobo Diaz: As you can imagine, it’s very difficult to forecast with a level of uncertainty of the rates. But what I can do assure you is that we manage client margins. We are not just thinking about the beta of the deposit or the beta of the loans.

So, we are basically thinking about client margin, and of course, fees. For us fees is a very important business as well. So, we do expect some resilience in the client margin. And basically, because there is still a lot of liquidity in the system and there are no major players growing at the same path as we do. I think we are something unique.

We are still growing, while others are not growing. That means that there is no apparent potential pressure in increase of cost of deposits, and that will provide a good level of margin to keep client margin resilience. We have our ambition for growth, and we have strong expectations in terms of fees in the coming years. So therefore, we are very positive in terms of how we see the bank in 2024, and of course, in 2025 and 2026. Our ambition, again, needs to be clear.

We have a huge ambition for growth in all business and all countries. And growth is not just in terms of loans, growth is also in terms of deposits and wealth of our clients because these are levels that provide us profitable business to keep our return on equity very high. And I want to remind you as well that we are a very efficient bank, and this is something that we will keep in the coming years, and that we are a very prudent risk profile bank. And this is something that we will keep over the years. So, there is – I don’t know what will happen with interest rates, but whatever happens to them, we will keep preserving client margin and increase of volumes and increase of fees and increase of margin and increase of results.

David López: Thank you. Very clear. So, what should deliver in terms of ROE in medium-term?

Jacobo Diaz: As I did mention, I think our guidance is in the high-teens. I know this year we have ended up at 17%. I do expect that in the coming years, in the high-teens should be a very quite reasonable way to think where return on equity will stay.

David López: Thank you. Moving on to trading, can you explain us what happened to the trading gains in the quarter?

Jacobo Diaz: Yes. In the fourth quarter, we have done some changes in our ALCO portfolio. We have purchased some bonds, generating higher NII income or dues [ph] versus the sale of some bonds that generated lower return. And this has generated a one-off loss of €15 million.

So, basically we are generating more NII in the coming years, and we have generated a one-off of €15 million. This is something which is – I think is something which is good for the coming futures. Apart of that, there is nothing relevant in the trading.

David López: Okay. In terms of run rate, what shall we expect for trading for that line going forward?

Jacobo Diaz: I think the figure should be the one that we have seen in the past years, so around €60 million.

That will be something thing correct – more or less correct.

David López: Thank you. Okay. Now, regulatory expenses, in terms of – what are your expectations in terms of deposit guarantee fund and single resolution fund contributions? And also, what are we expecting from the banking tax for 2024?

Jacobo Diaz: Yes, very important questions. So, first of all, for the banking tax, what we do expect is some sort of increase of around 25%, basically because this is linked to the level of growth of our income, as you know.

So, we do expect a banking tax for 2024 somewhere in the range of €90 million to €100 million compared to the €77 million that we have recorded in 2023, again, somewhere between €90 million to €100 million. In – regarding the other regulatory charges, we do expect a strong reduction, somewhere between 80% to 90% lower, that the – the amount that we have charged in our accounts in 2023. So, that means that this is a good contribution to the P&L next year. So, if we combine this with a resilient client margin, some growth in fees, etcetera, that gives you some rationale for my comment regarding that we do expect a better year in ‘24 than in ‘23.

David López: Thank you.

Now, moving on to expenses, were there any one-offs in the quarter? And also, how much of the increase is related to variable remuneration?

Jacobo Diaz: Yes. As I did mention, there is almost €20 million of one-offs in these four quarter of costs. So, I would say that three quarters, 75% of this increase is related to personnel expenses. Let me just explain once again that in the bank, we have a strong variable remuneration, which are linked to financial results and commercial results. So, we set those figures at the beginning of the year.

And as you can imagine, we have more than exceeded expectations. This is the reason why there is an extraordinary variable compensation, which is a one-off. In addition to that, I just recall that we do have some extraordinary expenses related to the implementation of the JV in Portugal. So, this is more or less the other 25%, which is increasing in cost. So, basically at the end of the day, so around €20 million of one-off, the majority in personnel expenses.

And I will – again, as I did mention in my comments in the presentation, for 2024, we do expect some low to mid-single digit growth in terms of costs down from 2023.

David López: Very clear. Thank you. Now, cost of risk, what are your expectations for ‘24?

Jacobo Diaz: So again, we do have a good-quality book. We do have a great risk profile of clients.

So, basically we don’t see any deterioration in the future. We have met our guidance of 40 basis points for 2023, and I shared with you that our guidance for next year will be somewhere below 35 basis points and 40 basis points. So, there is no changes in risk profile or delinquencies or NPLs position that we expect in the future, and that’s it.

David López: Thank you. Do you expect any further declines on other provisions for this year?

Jacobo Diaz: Yes.

We continue to keep our guidance of reduction of 10% to 20% of other provisions year-after-year. So, we have ended up the year with a very strong performance, and we do expect that the following year we will again record a very good performance.

David López: Thank you. One quick clarification, is the 80%, 90% reductions in regulatory charges applies for both DGF and single resolution fund?

Jacobo Diaz: Yes, I have made the addition of both together.

David López: Very clear.

Okay. Moving on to capital now, do you expect any growth in operational risk-weighted assets again in ‘24?

Jacobo Diaz: You mean, in operational consumption?

David López: Yes.

Jacobo Diaz: Yes. The operational consumption is related to the increase of margin of gross income. So, there will be some increase in 2024 because we do expect increase in gross margin in 2024, but obviously, will not be at the same level.

This quarter, as I did mention, we have recorded around 20 basis points of capital consumption due just to operational consumption. So, next year, definitely, the amount will be much lower.

David López: Okay. One more question on the movement in capital – in the capital ratio in the quarter. Do we have any impact on intangibles?

Jacobo Diaz: No.

Basically, it’s very minor amount in intangibles. As you know, Bankinter is – doesn’t have as much intangibles as others, and there is just investments in IT, nothing extraordinary, just normal, very tight, very normal.

David López: Okay. One more in capital, regulatory, do we expect Bank of Spain to impose countercyclical buffer, and will that impact your capital targets?

Jacobo Diaz: This is, again, a very difficult question. As you know, Spain and there is another country, we have not on countercyclical buffers.

So, we don’t know what will happen in the future. Hopefully, we will stay the way we are. And in the case there is implementation of this countercyclical buffer, it will just affect to the minimum levels of buffers. But our buffer, as you see, we have at 457 basis points over minimum requirement. So, I think we have buffer enough to absorb an increase in countercyclical buffers.

David López: Understood. Any thoughts about the increasing payout about 50%?

Jacobo Diaz: There is no expectation of changes in this payout policy.

David López: Okay. We have time for one final and then two more clarifications that just arrived. What is our strategy in the payment business? Do we have any plan to dispose it or anything like that?

Jacobo Diaz: No, we don’t have plan to dispose anything of this business.

This is a business which is important for us.

David López: Okay. Two quick clarifications, is the cost growth guidance adjusted already for the €20 million one-off that we have in the last quarter?

Jacobo Diaz: Yes.

David López: Okay. And whether you can repeat the interest rate assumptions that you are making for – on the 2024 NII guidance?

Jacobo Diaz: We are expecting a rate cut in the middle of the year from the ECB.

David López: Okay. Thank you, Jacobo. That was the final question. I think you have an important message to communicate now. Please, Jacobo.

Jacobo Diaz: Yes. Thank you for your attention. I just want – I have just one very relevant communication for all of you. So, before finishing this webcast, I would like to announce that our colleague and friend, Alfonso Alfaro, will end a successful professional career at Bankinter of 35 years on January 31, 2024. So, Alfonso is a reference for us – for all of us who has worked – for all of us that work at Bankinter, and especially for those of us who have worked close to him for many, many years.

Alfonso is Deputy General Manager and has held numerous positions of responsibility in the bank. And I will highlight his work as Director of Telephone Banking many, many years ago, Director of Corporate Banking, Director of the Madrid Regional Business, and finally Deputy CFO and Investor Relation Director in two different and prolonged stages. So, Alfonso is unique, very well known in the market by both financial analysts and institutional investors, both foreign and domestic. So, I am sure that all of us, we will miss him very much. I leave the floor to Alfonso for a couple of words.

Please, Alfonso. Alfonso

Alfaro Llovera: Thank you. Thank you, Jacobo. Thank you, David. Just few words to say goodbye to all of you after more than 35 years at Bankinter, 20 years of them dedicated to investors and analysts like you gents.

Last words to thank you from the bottom of my heart for all these gratifying and productive years. Thank you for your passions, your professionalism. It has been a real pleasure for me to meet you all and learn from your extensive experience and professionalism, and always enjoying the work well done. Goodbye friends. I wish you all the best.

Good windy markets, always bullish. I will remain follower of some of you as a simple shareholder and admirer of Bankinter. Thank you very much again for everything you all have given and teach me. And sorry, if I have ever unintentionally failed anyone. Goodbye now.

See you soon.

Jacobo Diaz: Thank you very much, Alfonso. Thank you for your kind words. We will miss you, Alfonso. I want to mention that Laurie Shepard, who until now has been leading the efficiency and transformation area for Bankinter Group, will take over Alfonso’s position.

Laurie, she is from Boston, Massachusetts. She has more than 28 years’ experience in financial services, starting her career in JPMorgan Chase, Morgan Stanley, both in New York and London. She moved to Spain in 1999. For the next 13 years, she worked in different commercial areas of the retail and consumer finance business in Citibank and Bank of America. Laurie joined Apollo Europe Private Equity as an Advisor, and 2 years later, she was appointed Deputy CEO in EVO Banco.

Therefore, since 2019, she joined Bankinter. She also remains a Non-Executive Director of the Avant Money Board in Ireland. And I am sure that soon, you will have the opportunity to meet her in the coming weeks. And I think that’s it. Thank you so much, Alfonso.

We will miss you again. Thank you for your kind words. It’s been a pleasure working with you. I think we all will start crying right now in a minute. But I leave you all and thank you again for your audience today with us.

Bye-bye. Take care.