Bank of Ireland takes out insurance to ease capital drag on risky mortgages

Bank of Ireland has opened up a new front to ease the burden of expensive capital tied up against its mortgage book, by effectively taking out insurance against €1.4 billion of higher-risk owner-occupier and buy-to-let loans.

The bank said that a group of unnamed institutional investors and insurance companies had taken on the credit risk for €265 million of potential losses on the portfolio for an initial cost of €12 million a year, reducing over the lifetime of the transaction. The so-called credit risk transfer deal has a lifetime of as long as 15 years, but can be cancelled after 9½ years, according to a spokesman.

The deal has the effect of reducing the average risk weight of its Irish mortgages to 22 per cent of all home loans from 26 per cent at the end of June. The risk-weighting of a loan portfolio is a key determinant to how much expensive, rainy day capital a bank needs to hold against loans, in the event of a spike in loan defaults.

Irish banks must hold much higher levels of capital against mortgages than the average European lender, a legacy of the losses sustained by lenders following the property crash. This is part of the reason why average new Irish mortgage rates – at 2.74 per cent as of August, according to the Central Bank – are more than double the European average.

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“There is no customer impact from the transaction. No assets will be derecognised from the group balance sheet and the reference portfolio of loan assets and related customer relationships will continue to be managed by the group,” the bank said of the credit risk transfer deal.

Portfolio

The loans in the portfolio were included as they attract higher risk-weights because the majority of the portfolio was either restructured previously, after running into trouble, or are buy-to-let mortgage products, according to the spokesman.

The bank has carried out three credit-risk transfer deals since 2016, covering Irish business loans, project finance loans and UK corporate and leverage acquisition finance exposures. However, this is the first time it has carried out such a deal involving home loans.

The bank said that the latest deal would boost its key common equity Tier 1 (CET1) capital ratio by 0.3 percentage points. The bank had a 14.1 per cent CET1 ratio at the end of June, comfortably ahead of regulatory requirements. It had a medium-term goal of having a ratio of at least 13 per cent before the Covid-19 pandemic and is expected to outline a fresh target when it issues a strategy update early next year.

The transaction involved two elements. Firstly the bank set up a special purpose vehicle, called Glen Securities Finance DAC, which issued notes to institutional investors accepting some of the risks in the portfolio. Unnamed insurance and reinsurance firms took up the rest of the agreed exposure.

A report written by credit ratings firm Kroll Bond Rating Agency on the deal said the portfolio involved 14,657 loans, almost two-thirds of which were owner-occupier mortgages, with the rest secured against buy-to-let properties. Some 76 per cent of the loans have been restructured in the past, most of these occurring more than five years ago.