AIB has completed a deal to shift some bad-loan risks off its balance sheet in a move that will underpin payouts to shareholders, currently led by the State, in the coming years even as falling interest rates put pressure on income.
The bank, in which the State now owns a stake of just under 20 per cent, has completed a so-called significant risk transfer agreement (SRT) on a portfolio of €1 billion of corporate loans, a spokesman confirmed.
The deal sees a group of institutional investors take on part of the risk of losses on the loans in the portfolio for an extended period of time, reducing the level of capital the bank needs to hold in reserve against the loans. The investors receive an annual interest payment for taking on the risk.
“We are examining future opportunities for SRT trades,” the spokesman said, adding that AIB’s first such deal has boosted the bank’s all-important common equity Tier 1 capital ratio – a measure of its financial strength – by 0.2 of a percentage point.
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The SRT market has become an increasingly popular route for European banks over the past decade to temporarily share the credit risk on pools of loans with global investors. AIB’s main rival, Bank of Ireland, has carried out a number of similar credit-risk transfer deals since 2016, covering Irish business loans, mortgages, project finance loans and British corporate and leverage acquisition finance exposures.
[ AIB’s capital relief plan to boost investor payouts, BofA saysOpens in new window ]
AIB had been considering the merits of SRT transactions for some time. The customer relationships and loans in any such deal continue to be managed by the bank.
AIB has cut its non-performing loans from a peak of €31 billion in 2013 to €2.2 billion, or 3.2 per cent of its lending, as of the end of June, mainly as a result of debt restructuring and loan sales.
The bank’s commencement of an SRT programme will support the level of excess capital available on its balance sheet for distribution to shareholders, led by the State. Since the start of last year, the bank has spent almost €1.72 billion buying back AIB shares from the Government as part of a multipronged approach to reducing the bailout-era stake.
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The Government has accelerated the recovery of the AIB’s €20.8 billion bailout since early 2022 by selling shares into the market through regular small trades as well as 5 per cent block sales.
Recent form would ordinarily have seen the Minister for Finance target a 5 per cent block trade at the end of November – in addition to annual sales in June. However, this is understood to be on hold, given the general election.
Shares in AIB have jumped 38 per cent so far this year, even though analysts have begun in recent times to lower their 2025 interest income – and earnings – forecasts for the sector as the European Central Bank (ECB) starts cutting official rates at a faster-than-expected pace. The ECB is widely expected to reduce rates next month for a fourth time since early June.
It is expected that AIB will disburse excess capital more widely among shareholders in the coming years, after the removal of State as a shareholder.
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