Norway’s DNB Would Like More SRTs After Debut Deal With EIB

(Bloomberg) -- DNB Bank ASA is looking to increase its use of significant risk transfers, according to its CFO, with the Norwegian lender adding to a growing list of European banks looking at the instruments to reduce credit risk.

“We would like to offer these,” chief financial officer Ida Lerner said in an interview on Wednesday, referring to risk transfers. DNB still has to decide on specific deals, and “all further SRT deals are dependent on regulatory approval,” she said.

Future deals would follow Oslo-based DNB’s debut SRT last week in a deal tied to a portfolio of 17.6 billion Norwegian kroner ($1.6 billion) of loans to companies including small and medium-size enterprises. In that deal, the European Investment Fund is providing credit risk protection on the mezzanine tranche of 1.1 billion Norwegian kroner, which is then counter-guaranteed by the European Investment Bank, according to a statement.

The deal frees up capital for DNB, enabling the bank to extend more loans specifically for climate-friendly projects, and represents the first green securitization in Norway, the statement said.

SRTs enable banks to reduce credit risk by paying investment firms to help cover potential future losses. This reduces the amount of regulatory capital the bank is required to hold as a backstop. A typical SRT deal would see a bank obtain default protection on as much as 15% of a loan portfolio and in return pay investors a rate that frequently tops 10%.

Oslo-based DNB follows European peers including Spain’s Banco Bilbao Vizcaya Argentaria SA and Amsterdam-based ABN Amro Bank NV, which are also planning to increase the use of SRTs. The transactions are currently seeing strong demand from institutional investors including from hedge funds and pension funds.

Banks use SRTs to increase their solvency ratios and reduce the need for measures such as restricting dividends or selling new shares, which are less friendly to their equity investors. DNB has said it expects a negative impact on its core equity tier 1 ratio from its planned purchase of Carnegie Holding AB.