23 December 2016: The Group has executed a credit risk transfer transaction on a portfolio of business banking and corporate loan assets effective 29 December 2016. Separately, the Group is revising its calculation of capital requirements under the Internal Ratings Based (“IRB”) approach on its Republic of Ireland (“ROI”) mortgage portfolio.
On a pro-forma basis, the Group expects the combined net impact from these capital developments on the Group’s transitional CET1 ratio to be a reduction of c.15bps (fully loaded CET1 ratio: c.20bps).
Credit risk transfer transaction
The Group has executed a credit risk transfer transaction effective 29 December 2016 on a reference portfolio of c.€3 billion of loan assets originated by the Group’s Business Banking and Corporate Banking divisions in the Republic of Ireland. On a pro-forma basis, the transaction is expected to benefit the Group’s transitional CET1 ratio by c.50bps, the Group’s fully loaded CET1 ratio by c.40bps and the Group’s transitional Total Capital ratio by c.65bps.
The transaction involves the execution of a credit default swap backed by c.€185 million of credit linked notes issued by Grattan Securities DAC to a small group of international investors. The transaction 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 whereby the buyers of the notes assume the credit risk for c.€185 million of potential credit losses on the reference portfolio of loan assets in return for an initial annual coupon (interest expense) of c.€21 million.
No assets will be derecognised from the Group’s balance sheet. The reference portfolio of loan assets and related customer relationships will continue to be maintained by the Group.
Revision of calculation of capital requirements on the Group’s ROI mortgage portfolio
The Group is revising its calculation of capital requirements under the IRB approach on its ROI mortgage non-defaulted loan portfolio. The revision is in advance of the ECB’s targeted review of internal models (TRIM) due to commence early next year and increases the pro-forma average credit risk weighting on ROI mortgages to 34%.
On a pro-forma basis, the revision is expected to reduce the Group’s transitional CET1 ratio by c.65bps, the Group’s fully loaded CET1 ratio by c.60bps and the Group’s transitional Total Capital ratio by c.85bps.