Abu Dhabi Banks Lay Groundwork for Potential Risk Transfer Deals

The global SRT market is set to expand 11% annually on average in the next two years

Two of Abu Dhabi’s biggest commercial banks are weighing a foray into the market for significant risk transfers as lenders across the United Arab Emirates face higher capital requirements.

First Abu Dhabi Bank and Abu Dhabi Commercial Bank have been in talks with advisors that specialise in such transactions, according to sources familiar with the matter. Preparations are at early stages and any potential deals are subject to regulatory approvals, said the sources, who did not want to be identified because the matter is private.

A representative for First Abu Dhabi Bank declined to comment, and Abu Dhabi Commercial Bank did not reply to a request for a comment.

SRTs, frequently referred to as synthetic risk transfers, are a way for banks to insure loans against defaults. The transactions, which are often structured as credit-linked notes, allow lenders to boost their solvency ratios and reduce their reliance on less shareholder-friendly options like issuing new equity or cutting dividends. They also increase their leeway for new lending, acquisitions or shareholder payouts.

First Abu Dhabi Bank’s common equity tier 1 ratio, a key metric of financial strength, is currently at 13.7 per cent. While it is above its self-imposed target of over 13.5 per cent, the metric declined from 14.3 per cent a year earlier and follows its increase of lending activities. Meanwhile, Abu Dhabi Commercial Bank, whose largest shareholder is Mubadala Investment Company, is issuing new stock, which will bolster the bank’s CET1 ratio by about 120 basis points.

UAE banks will face a slight increase in the total capital requirement by 50 basis points to accommodate for the countercyclical buffer from next year, according to Bloomberg Intelligence analyst Edmond Christou. Major banks already operate at higher capital levels than the new threshold.

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If the two banks go ahead with SRT deals, it would help cement these transactions as additional options for Middle Eastern lenders to manage regulatory capital, alongside tools including issuance of common equity and Additional Tier 1 securities. A potential SRT transaction out of a lender in the UAE would require approval from the central bank, which is in charge of banking regulation, said the sources.

A representative for the Central Bank of the UAE referred questions to the two banks.

Loans tied to SRTs reached 700 billion euros (S$1 trillion) at the end of last year, according to a survey from the International Association of Credit Portfolio Managers in July. Around 97 per cent of them were generated by European and North American banks.

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Lenders issuing SRTs typically require their regulators’ approval to record a capital relief. Authorities, including the European Central Bank, have been generally supportive of such deals as they move credit risk out of the sector. However, they have also been cautious about the risk coming back into the system, for example, if banks loan money to SRT investors.

The global SRT market is set to expand 11 per cent annually on average in the next two years, according to a recent Bloomberg Intelligence survey. JPMorgan Chase, Banco Santander, HSBC Holdings and Deutsche Pfandbriefbank are among lenders that are currently discussing or finalising such deals. BLOOMBERG