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Bank of Ireland uses Santander to insure €1.4bn of loans to reduce capital drag

Rival AIB has also been considering entering similar insurance deals for some time

Myles O'Grady, chief executive of Bank of Ireland, which has now completed seven significant risk transfer deals since 2016 to release capital. Photograph: Nick Bradshaw

Joe Brennan Markets Correspondent
Tue Jun 18 2024 - 15:51

Bank of Ireland has moved to lower the level of expensive capital it must hold against part of its loan book by entering a deal that will see Spain’s Santander insure $1.5 billion (€1.4 billion) of leveraged financing loans.

Santander has agreed to acquire notes from Bank of Ireland that would see it take on the credit risk for millions of euro of potential losses on the portfolio, according to sources. It comprises loans – typically issued alongside a group of banks – to companies internationally going through a buyout or capital reorganisation.

The deal was first reported by Bloomberg and subsequently confirmed by sources who declined to be named. A spokesman for the bank, which is led by chief executive Myles O’Grady, declined to comment on the deal.

The bank has carried out six other so-called significant risk transfer deals since 2016, covering mortgages, Irish business loans, project finance loans, and UK corporate and leveraged acquisition finance exposures.

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Its rival, AIB, has been considering entering similar insurance deals for some time. Its chief financial officer, Donal Galvin, said in March the lender was looking to carry out an initial significant risk transfer transaction in the second half of this year “in the corporate space”, followed by a deal on a portion of its mortgage book.

Significant risk transfers, also known as synthetic risk transfers, allow banks to insure their loans against default by selling notes to pension, sovereign wealth and hedge funds.

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It equates to borrowing part of the balance sheet of other companies for a period of time and enables banks to tie up less of their own capital to meet regulatory requirements. Two of the insurance transactions that Bank of Ireland has entered into since 2016 have since matured.

Significant risk transfers have become a fast-growing part of credit markets, totalling more than €206 billion in 2023, up from about €97 billion in 2020, according to data compiled by Axa Investment Managers.

The deals carried out by Bank of Ireland – and planned at AIB – will support the lenders’ plans to return large amounts of excess capital to shareholders over the coming years.

Bank of Ireland paid out €635 million in dividends last month to shareholders and is in the middle of a €520 million share buyback programme – driven by a surge in earnings amid heightened interest rates.

AIB has returned €1.7 billion to shareholders in recent months, with €1 billion of this spent on repurchasing some of the State’s stake in the bank.

The Government owns just under 31 per cent of AIB, having seen this reduced from 71 per cent at the start of last year through a combination of drip-feeding shares into the market, placing larger blocks of stock and participating in share buy-backs. – Additional reporting, Bloomberg

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times

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