Reduction of problem assets

Credit risk is the possibility of loss resulting from a debtor's failure to meet their contractual obligations. Trends in credit risk are shaped by the economic and financial environment.

Trade and geopolitical tensions in 2019 (USChina trade dispute, Brexit, the situation in the Middle East) undermined the international economic landscape to some extent. The global economy lost steam and monetary policies were eased further. In Spain, economic growth slowed. Once again, private sector indebtedness decreased for both individuals and businesses, with the growth of new loans to the private sector easing throughout the year.

Against this backdrop, lending at Bankinter continued to show moderate growth. Loans and advances to customers rose by 7.1% and eligible exposures (which include off-balancesheet exposures) by 8.9% (5% in Spain excluding the acquisition of EVO Banco). As the following table illustrates, asset quality improved further during the year, while problem asset ratios fell again.

Decrease in non-performing loans

The non-performing loan ratio ended the year at 2.51%, down 39 basis points or 13% from the year before. The non-performing loan ratio in Spain at the close of the year accounted for 51% of the sector average (5% according to Banco de España data from November 2019). The balance of foreclosed assets decreased by 17% in the year to 291 million euros at 31 December 2019, equal to 0.4% of total credit risk.

A balanced portfolio

Over the years, the Bank has tried to balance the distribution of its loan book between individuals and legal entities. At the end of 2019, eligible exposures to individuals represented 49.9% of the total and exposures to legal entities 50.1%. The key features by segments are described below:

Individuals. Lending to individuals increased by 5.6% in 2019, driven by consumer finance and Private Banking. The individual lending portfolio totalled 28,872 million euros at the close of the year, with an NPL ratio of 2.3%.

The residential mortgage loan book for individuals showed a loan-to-value (the ratio between the loan amount and the value of the mortgaged asset) ratio of 58% at the close of 2019, with 90% of the loans secured by the borrower's primary residence. The non-performing loan ratio of the portfolio was 2.2%. The average effort (the proportion of income that the customer allocates to paying mortgage loan instalments) remained extremely low (23%).

Consumer finance, operated in Spain through Bankinter Consumer Finance, grew by 19.3% to 2,197 million euros at the close of the year, with 3.7% credit risk. Risk-adjusted margins, coverage and NPL ratios remained under control.

Corporate Banking. Credit risk in this area grew by 3.8% to 15,823 million euros with an NPL ratio of 0.8%. In this segment, where the business activities are more international and less exposed to Spain’s economy, Bankinter boasts a solid competitive position based on specialisation, KYC, flexibility and quality of service.

Small and medium-sized enterprises. The portfolio grew by 8.2% to 13,205 million euros with an NPL ratio of 6.3%. The Bank uses automated decision-making models to manage this segment, along with centralised teams of highly-experienced risk analysts.

Portugal. The area contributed risk of 6,523 million euros, with growth of 12.7% and an NPL ratio of 2.41%. The Bank's usual high lending standards are applied in carrying out the business in Portugal, where the NPL ratio is now in line with that of the business in Spain. The business in Portugal is 69% individuals and 31% legal entities.

EVO Banco has a credit risk of 913 million euros, 96% of which is with individuals, while Avantard contributes 451 million euros, 100% with individuals.

Risk calculation models

Bankinter has used internal models as a tool for supporting its decisions regarding credit risk since the 90s. These models enable the Bank to assess the credit quality or solvency of transactions and customers, providing quantitative measurements of its credit risk. They are used mainly to support approvals, set prices, quantify impairment allowances or provisions, estimate regulatory capital, monitor loan books and support recovery, all of which facilitates the active management of the loan books' risk profile.

Internal rating models provide standardised classes of solvency that group together customers/transactions with comparable probability of default. They are calibrated to assess expected and unexpected losses. These metrics are essential for managing and monitoring credit risk at Bankinter.

Bankinter has rating models both for retail segments (mortgages, consumer spending, SMEs and so on) and wholesale segments, such as Corporate Banking. These statistical models are developed using customer, operational and macroeconomic information, combined in the wholesale segment with expert analysis. The models are updated and monitored on a regular basis to ensure their power of discrimination, stability and accuracy under a strict governance structure. The models committee and executive risk committee are responsible for their approval. The risk committee also receives information periodically on the status and monitoring of these models.

The distribution of exposure at default (EAD) by internal segments or categories is shown below.