Integrated Report
Governance Report
Financial Statements
Special 50th anniversary
annual report 2015
01. Letters

“Bankinter is well equipped for handling great banking challenges”

Pedro Guerrero, Chairman

What assessment can be made at a macroeconomic level of the 2015 financial year?

I believe that we can be reasonably satisfied about how things went last year in our country. 2015 was undoubtedly a good year, registering growth rates of the economy over 3%, which are similar to rates before the crisis and among the highest in the European Union. The recovery of domestic consumer spending and investment is what sustained the GDP increase pace. Both variables relieved foreign trade as growth engines. As a result, the job market improved noticeably. The registered number of unemployed fell during the year by 354,203 and the year ended with 17,308,400 more people registered with the Social Security Institute. The balance of payments also behaved favourably and public deficit continued to correct, although maybe less than would have been desirable.

Less positive was the evolution of the European economy,which did not manage to leave the moderate revival range, despite monetary policy stimuli. From a more global point of view, the world economy went through some delicate moments in 2015. The reduction of growth expectations in China slowed down some emerging economies that largely depend on consumption in this Asian giant. The activity suffered most notably in Latin America, which barely grew at all, burdened by Brazil's entry into recession. In the world as a whole, average GDP growth was a bit above 3%, one of the lowest rates in the century to date.

And if we look ahead, what is the outlook for 2016?

I believe that we can be moderately optimistic for 2016 about macroeconomic prospects in Spain. After the unknown is resolved that is always present in parliamentary elections, the pace of growth should remain high--close to 3%--which will let the unemployment rate be reduced to 20%, which continues to be very high, but is positive compared to the 26% at the end of 2012.

In the European Union, we expect for 2016 a slight acceleration of the growth, as a result of the weakening of monetary policy and of the price of crude oil. Here I would like to mention the situation in Portugal, given our recent entry into the country's retail banking and insurance market. Almost five years after being bailed out by the IMF and by the European Union, the Portuguese economy is still digesting the weight of its debt. Its growth rate, under 2%, is still weak, but there are positive signs pointing to its recovery. Tax and foreign trade imbalances are balancing out, so that if the political arena stabilises and internal demand is reactivated, I think Portugal can enter a sustained recovery phase.

On a global scale, the expectations for 2016 are relatively modest. The IMF and other international organisations believe that the global GDP will grow less than in 2015 and withoutmajor changes in its geographical composition. The big question now is how China's economy will be untangled, whose cooling down in 2015 had a strong impact on other emerging economies, especially due to the drop in raw material prices. Similarly, the rise of interest rates in the USA in December 2015 (the first in almost ten years) raises questions on its potential repercussions on developing economies and generates uncertainties due to the lack of synchronicity with the monetary policy in Europe and Japan. All of these factors, added to the plummet in oil prices, have generated uncertainty, drops, and high volatility in the markets at the beginning of the year.

In this future scenario, what are the expectations for the banking sector?

We could say that the sector finds itself at a crossroads. In Spain, specifically, the legacy of the financial crisis has caused not only a reduction in the number of companies, but also a shrinking of the volume of assets, something that has never occurred in recent history and in general an extremely noticeable drop in the sector's capacity. In parallel, poor practices carried out during the crisis have worsened the financial industry's reputation.

The new regulation and supervision systems, which have improved companies' solvency levels and corporate governance practices, are helping the sector overcome this situation. But the challenges that lie ahead are very complex. The new regulatory requirements have a high cost in capital and in resources, and simultaneously margins have been narrowed as a result of low interest rates. Furthermore, technological advances have generated new ways of engaging with the client. Therefore, the sector has to find another way to do banking, to make security, profits and adaptation compatible with their customers' new needs.

In this complex sectoral context, what role does Bankinter play? How has it solved the problems posed in the past and how does it plan to respond to the challenges of the future?

The first thing that we must take into account is that Bankinter is starting from a differential positive position. The financial crisis affected us less than it did other companies, thanks to our smaller exposure to the real estate sector; and the quality of our credit risk management let us maintain a non-performing loans rate much lower than that of the sector. So the legacy of the crisis has been less severe for Bankinter than for other Spanish banks, and we have even continued growing in credit volume and number of employees, against the general trend.

Of course, that does not mean that the situation of the sector does not affect us. Like all the other entities, we have to deal with very significant challenges related to strong competition, the business model, the technological revolution and the changes in customers' behaviour. But our solvency and the strength of our value proposition cause us to be optimistic.

I also believe that we have a strategy that works, which is centred on the business, to private banking and private insurance sectors. We also have a natural inclination, I would almost say a genetic one, to take action and to innovate in products, in service channels and in processes. And of course we guide ourselves by the basic principles that must govern our activity: rigour, prudence, ethics and responsibility. I consider, therefore, that Bankinter is well equipped to face the great challenges of the industry.

Are the 2015 results the consequence of that line of work?

I believe so, I think they are a very good demonstration of what we are capable of.

I do not want to speak much about this topic, because the managing director explains it in detail in this same report, but I would like to emphasise the quality of the results. It is not only that profits were the highest in the company's history, which they were, but that we also have an extremely solid foundation for handling customers' recurrent and ordinary businesses. 87% of the total profits came from business with customers, which is the best guarantee that the income statement is healthy and sustainable over time, since it is not affected by rebounds or extraordinary rises.

Similarly, the return on invested capital was among the top in the sector, with an ROE of 10.9%, and we upheld our traditional competitive edge in terms of asset quality and solvency level. The non-performing loans ratio continued dropping and, at the close of 2015, it was 4.1%, compared to the 10.3% average of the banking sector. The CET1 top quality capital ratio is also among the best in the sector in Spain, both with regard to current regulations, at 11.8%, and especially with regard to fully loaded, or the regulatory requirements for 2019, which stand at 11.6%.

This figure is almost three points higher than the minimum CET1 we were recommended by the ECB, which was 8.75%, the lowest in Spanish banks and one of the lowest in Europe.

I would also like to talk about the dividend. Last year we distributed 50% of the financial year's profits in the form of a cash dividend, which represented 0.23 euros per share. For this year, the Board of Directors proposed to the General Shareholders' Meeting to distribute the same percentage, naturally in cash, as usual. It is a high pay-out, but within the framework of a prudent policy that contributes to the conservation of capital and lets the company maintain a suitable solvency level, with which European Central Bank criteria are roundly fulfilled.

The development of the Banking Union, which is already underway, represents a major transformation of the European banking system and the culture of its companies. How is Bankinter tackling this process?

The Banking Union is one of the great advances of the European Union's process. However, in parallel it represents a very significant challenge that requires all eurozone banks to become firmly involved in spreading the risk culture to their entire organisation and improving corporate governance practices. Fortunately, they are two concepts that are very present in Bankinter's history and culture.

With regard to the bank's equity situation, the exercises that have been carried out up to now within the framework of the Banking Union have been very positive. In the tests conducted in 2014, the company obtained outstanding results, both for the assessment of asset quality and on the stress test. At the end of 2015, the European Banking Authority completed a comparison exercise which highlighted that our solvency indicators, profits and quality of assets are well above the sector average in Europe. Therefore we are satisfied, although we also know that there is still much to do to complete the Banking Union process and we will keep up our hard work in the next few months to adapt to the new requirements.

And how do all these corporate projects and strategies fit with the bank's commitments on sustainability?

They fit completely naturally. It said it earlier: ethics, integrity and responsibility are the guiding principles of conduct for all our actions. The body of this integrated annual report contains detailed information on what we do in these areas, which is proof that we understand sustainability not as a separate activity but instead as a value that is fully incorporated into our daily work.

From this point, our commitment with the various interest groups of Bankinter is articulated in two ways. On the one hand, we have an advanced corporate governance model, in line with international best practices. This year, we have once again fulfilled nearly all the recommendations in the Code of Good Governance. Moreover, our Sustainability Plan, which we call 'Tic Tac Toe' aligns the business with how we manage the three corporate core areas: the economic, the social and the environmental.

In the economic sphere, during 2015 we strengthened our policy of supporting entrepreneurs, as a group that is fundamental for invigorating the economy, developing various initiatives especially aimed at the youngest ones. From the point of view of the social dimension, we identify people with disabilities as a priority interest group. The goal is to provide all of the bank's service channels the maximum degree of accessibility, in an attempt to eliminate the physical and technological barriers and those derived from knowledge.  With regard to the environmental sphere, in 2015 Bankinter registered its carbon footprint with the Spanish Office for Climate Change, becoming the first Spanish bank to do so.

From another angle, the bank's commitment to sustainability was also specified via the projects of the Bankinter Innovation Foundation. In 2015, it continued advancing with its three core programmes, which are the FTF (Future Trends Forum), Akademia and Entrepreneurs. And the new programme started up during the year merits mention, named the Cre100do project (meaning cre-ciendo, or growing). This project aims to contribute to improving the size of Spanish companies by working with successful, albeit mid-sized companies, to give them tools and knowledge to assist them in approaching the mythical figure of 1000 million euros turnover. In 2015, 15 companies participated in the programme and this year 15 or 16 more have joined, all highly satisfied with their contributions.

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