The Bank of Ireland has made a move to reduce the costly capital reserves it is required to set against part of its loan portfolio, by striking a deal with Spain’s Santander to underwrite $1.5 billion (€1.4 billion) of its leveraged financing loans.
Santander has consented to purchase notes from the Bank of Ireland, effectively taking on the credit risk linked to millions of euros in potential losses on an assortment of loans. This batch largely consists of loans usually issued as part of banking groups to global companies undergoing buyouts or capital restructuring.
This agreement was initially brought to light by Bloomberg before being confirmed by undisclosed sources. Myles O’Grady, the CEO of the bank, decided not to comment on the deal.
There are six other risk transfer operations – deemed significant – that the bank has implemented since 2016, offering coverage for Irish business and project finance loans, mortgages, as well as UK corporate and leverage acquisition finance risks.
A contender of Bank of Ireland, AIB, has also contemplated engaging in similar insurance agreements. AIB’s CFO, Donal Galvin, revealed plans in March for an inaugural risk transfer transaction later this year in the corporate arena, followed by a mortgage book deal.
Synthetic risk transfers (SRTs), as they are known, enable banks to secure their loans against defaults by selling notes to pension plans, sovereign wealth and hedge funds. Through these operations, banks can borrow from other companies’ balance sheets for a designated period, tying up less of their own capital to comply with regulatory conditions.
Two such insurance operations struck by the Bank of Ireland since 2016 have meanwhile, matured. There’s been a surge in SRTs as part of credit markets, amassing over €206 billion in 2023, a drastic increase from approximately €97 billion in 2020, based on AXA Investment Managers’ data.
The SRT initiatives that the Bank of Ireland has executed, along with those planned by AIB, are expected to pave the way for both institutions to give back sizeable excess capital to shareholders in the foreseeable future.
Last month, Bank of Ireland distributed dividends totalling €635 million to its shareholders and is now midway through a share buyback scheme worth €520 million. This has been facilitated by a significant increase in profits due to higher interest rates.
Meanwhile, AIB has recently recompensed its shareholders with €1.7 billion. Of this, €1 billion was utilised to redeem a portion of the State’s investment in the institution. Currently, just shy of 31 per cent of AIB is held by the Government. There has been a significant decrease from the beginning of the prior year when it held a 71 per cent stake. The Government achieved this reduction through releasing shares slowly into the marketplace, allocating large chunks of stock and involving itself in share buybacks. Additional facts provided by Bloomberg.