Bank of Ireland boosts capital levels with risk sale deal

Move is likely to ‘bulletproof’ the group’s plans to return to paying dividends next year

Bank of Ireland had a CET1 ratio, which fully reflects incoming capital rules, of 12.5 per cent at the end of September

Bank of Ireland had a CET1 ratio, which fully reflects incoming capital rules, of 12.5 per cent at the end of September

 

Bank of Ireland said on Tuesday it has boosted its capital levels through a deal to sell risk related to a portfolio of $1.7 billion (€1.4 billion) of acquisition finance loans to a group of international investors.

The move is likely to “bulletproof” the group’s plans to return to paying dividends next year for the first time in a decade, according to Davy analysts Diarmaid Sheridan and Stephen Lyons.

Insurance

The deal, which essentially amounts to taking out insurance against potential bad losses on the $1.7 billion of loans, will increase its common equity Tier 1 capital (CET1) ratio, a key measure of a bank’s ability to withstand a shock loss, by 0.45 percentage points. It comes a year after Bank of Ireland carried out a similar transaction on €3 billion of loans from its business banking and corporate banking divisions in the Republic.

The new deal – which involves the execution of a credit default swap (CDS) backed by $205 million of credit-linked notes to a group of international investors – “reduces the group’s credit risk exposure, and consequently the risk weighted assets of the reference portfolio of loan assets,” the bank said.

CDSs are a form of insurance on debt.

Loans

The loans will continue to be counted on the group’s balance sheet, though its net interest margin will fall by 0.02 percentage points as a result, it said.

Bank of Ireland had a CET1 ratio, which fully reflects incoming capital rules, of 12.5 per cent at the end of September, including the impact of up to €175 million of additional provisions relating to an industry-wide tracker mortgage scandal. While there had been some speculation that the move may throw a question mark over the bank’s plans to resume dividends, the capital-improving transaction announced on Tuesday bolsters shareholders’ hopes of a payment next year.

Shares in the bank closed 0.8 per cent higher at €6.40 in Dublin on Tuesday.