Diversification And Digital Banking In Ireland Will Secure Future Position

Key Takeaways

• Diversification into new regions and services boosts growth, offsetting interest compression, with emphasis on fee income and wealth management.
  
• Strategic cost efficiency and low credit costs enhance profitability, protecting growth amidst economic uncertainties.
  
• The bank's revenue and profitability are at risk due to reliance on market-related fees, interest rate fluctuations, and potential impacts from trade disputes.

Catalysts

Provides various banking products and services to individuals and corporate customers, and small- and medium-sized enterprises in Spain.

• Bankinter's continued diversification in revenue streams across various regions and services is expected to drive future revenue growth, particularly through an increase in fee income and wealth management services, which partially offset interest rate compression.
  
• The legal integration of EVO Banco and the ability to roll out digital banking in Ireland are expected to enhance client acquisition and deposit gathering, supporting revenue and profit growth by expanding the bank's market reach.
  
• The expansion of the ALCO portfolio is anticipated to provide additional net interest income resilience against rate decreases, ensuring steady earnings despite the current economic uncertainty.
  
• The strategic focus on cost efficiency, resulting in a low cost-to-income ratio, supports improved net margins and profitability, with expectations to maintain a cost-to-income ratio below 36% in 2025.
  
• Bankinter's low loan loss provision, with robust asset quality and prudent risk management, particularly amidst macroeconomic volatility, is set to protect earnings through stable credit costs, allowing for sustained net income growth.

Bankinter Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bankinter's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.1% today to 31.2% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being €1.0 billion (with an earnings per share of €1.14). However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.2 billion in earnings, and the most bearish expecting €860.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the GB Banks industry at 8.1x.
• Analysts expect the number of shares outstanding to decline by 2.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Bankinter Future Earnings Per Share Growth

Risks

• The imposition of tariffs on U.S. imports has initiated a trade war, which could create economic uncertainty and impact Spain's export-driven sectors, potentially affecting revenue growth and profitability.
  
• The bank's high reliance on market-related fees (over 50% of total asset management and brokerage fees) makes it vulnerable to market volatility, which could impact fees and overall revenue growth.
  
• Interest rate fluctuations pose a risk to net interest income (NII), as the bank acknowledges uncertainty in future rate movements, which may cause margins to compress and impact earnings.
  
• The expected slow roll-out of deposit gathering in Ireland suggests that growth there may not significantly contribute to overall deposit levels or revenues in the near term.
  
• Exposure to sectors potentially impacted by tariffs, such as the automobile sector, although limited, still presents a risk, especially if the trade dispute escalates, which could influence credit quality and potential loan loss provisions.

Valuation

• The analysts have a consensus price target of €10.285 for Bankinter based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €13.7, and the most bearish reporting a price target of just €7.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.3 billion, earnings will come to €1.0 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of €10.24, the analyst price target of €10.28 is 0.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.