Bank of Ireland has hiked its risk profile ahead of new standards for eurozone banks
The bank has taken on an insurance contract against potential losses on its €3bn business loan portfolio.
AHEAD OF THE European Central Bank’s review of financial institutions within the Europe next year and the introduction of new standards, Bank of Ireland has revealed a more cautious view of the riskiness of its mortgage book.
Banks within the eurozone are required to make assessments of the risks posed by various assets on their books and calculate the capital that is required to be held against unforeseen losses.
The review by Bank of Ireland of its risk weight assessment (RWA) on its Irish mortgage portfolio was undertaken after the bank analysed a number of new technical standards and proposals that are forthcoming from the European Central Bank and European Banking Authority in the New Year.
As a result of this assessment, the bank has moved to take on an insurance contract against potential bad loan losses. The deal will involve a group of international investors taking a share of loan loss risks that the bank could face on its €3 billion business banking and corporate loans portfolio.
In a statement released today, the bank said the deal “reduces the group’s credit risk exposure, and consequently the risk weighted assets on the reference portfolio of loan assets, through a risk sharing structure”.
It added that the buyers of the notes will assume the credit risk for €185 million of potential credit losses on a portfolio of loan assets and none of the assets will be “derecognised” from its balance sheet.
According to Davy analyst Diarmaid Sheridan, this credit risk transfer (CRT) transaction is common measure used in the industry, but this is the first type of contract taken on by a retail lender in Ireland.
He added that the revision “is in anticipation of new standards and reviews which will occur early in 2017 – an area that is likely to be a significant focus across the European banking system next year”.
The deal will result in an added interest expense of €21 million to be paid per annum to the international investors involved in the insurance contract.
This move by Bank of Ireland has reduced the bank’s capital ratios and could have a potential impact on the board’s decision to pay a dividend in 2017 for the first time in nearly a decade as it was expected.
However, Sheridan noted that the “impact to capital is unlikely to materially alter dividend considerations into year-end”.
