(Bloomberg) -- UniCredit SpA is selling a significant risk transfer linked to a €1.5 billion ($1.6 billion) credit portfolio, a move that would likely free up capital.
The Italian lender is marketing an SRT worth €144 million that’s linked to domestic residential mortgages, people familiar with the matter said. The talks are at an advanced stage but not final yet, they said, asking not to be named discussing private information.
The deal is part of Chief Executive Officer Andrea Orcel’s effort to boost risk-adjusted returns on the bank’s assets. Earlier this week, he vowed to step up the amount of money he will return to shareholders, potentially further increasing some of the highest payouts in European banking.
SRTs enable banks to reduce credit risk by paying investors for agreeing to help cover potential future losses, which reduces the amount of capital the bank is required to hold as a backstop. The deals are an important element in Orcel’s plan to cut risk-weighted assets and free up capital, which can be invested or returned to shareholders.
Orcel is considering a takeover of Commerzbank AG after taking a major stake in the German lender. He has said the higher profitability of UniCredit’s existing operations in the country is proof that Commerzbank’s investors and clients would benefit from a combination.
Commerzbank CEO Bettina Orlopp has pushed back, saying the overlap between the two banks would result in client loss.
UniCredit’s RWA efficiency, which measures how much revenue a bank makes on its risk-weighted assets, hit 8.9% at the end of the third quarter, according to data compiled by Bloomberg. That compares with about 6.1% for Commerzbank.
Orlopp recently unveiled a similar plan that seeks to curb expected RWA growth. She said earlier this week that SRTs will play a role in achieving that goal.
UniCredit is marketing the current SRT to insurance companies, the people familiar with the matter said now. The transaction is structured as an unfunded credit protection one, meaning the buyers will only provide guarantees, instead of buying credit-linked notes. As a result, they will only have to fork over money to offset actual defaults.
A representative for the bank declined to comment.
SRTs have surged in popularity as banks seek capital relief, with loans tied to the transactions reaching about $1 trillion globally as of end-September, according to data compiled by Chorus Capital Management. Banks that have recently worked on transactions include Banco Santander SA and Deutsche Bank AG, Bloomberg has reported.
The rising supply means that the fees banks need to offer to entice buyers will likely starting going up soon, S&P Global Ratings said in a recent report.
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