How does securitisation help a bank grow its loan portfolio?

In its traditional form, securitisation enables banks and other financial institutions to release capital and liquidity tied up in loans they have issued as part of their normal business activities.

To do this, loans can be grouped into a separate portfolio, sold off the bank's balance sheet and refinanced through the issuance of securities backed by that portfolio. This is where the term "securitisation" comes from: a loan portfolio is used to create a security whose risks and returns depend on the underlying loans, but which is a separate, potentially tradable instrument that investors can invest in.

Traditional securitisation therefore involves selling a loan portfolio off the bank's balance sheet (true sale) and raising funding through the transaction (funded). However, other forms of securitisation also exist.

For example, a bank may keep the loan portfolio on its balance sheet while still raising funding against it. Alternatively, it may retain the loans on its balance sheet and transfer only the associated credit risk to an investor or guarantor. This is known as synthetic securitisation and can also constitute a significant risk transfer (SRT) when a significant portion of the credit risk is transferred.

Coop Pank entered into this type of synthetic securitisation transaction with the EIB Group. The bank retained its loan portfolio and the income generated by those loans without raising additional funding. Instead, part of the credit risk associated with the underlying portfolio was transferred.

Why is synthetic securitisation used?

In a synthetic securitisation transaction where assets remain on the bank's balance sheet and no additional funding is raised, the main objective is to reduce the risks borne by the bank and make more efficient use of its existing capital.

Under the agreement between Coop Pank and the EIB Group, the EIB Group provides a guarantee covering part of the credit risk associated with the loans in the underlying portfolio. This reduces the credit risk Coop Pank must bear for regulatory capital purposes and, in turn, lowers the amount of capital the bank needs to hold.

Synthetic securitisation therefore allows a bank to reduce its risk exposure and optimise its use of capital without having to sell its loan portfolio or raise additional funding.

What impact does the transaction have on Coop Pank?

As part of the transaction, the EIB Group provided guarantees covering approximately €200 million in loans, reducing Coop Pank's risk-weighted assets (RWA) by approximately €135 million.

Put simply, all else being equal, this means the bank can grant additional loans and expand its business without having to raise new capital from shareholders.

The €135 million reduction represents approximately 10% of Coop Pank's credit risk exposure. The transaction therefore gives the bank additional capacity to expand its business volumes by approximately 10%, alongside its normal organic growth.

It is important to note, however, that the guarantee provided by the EIB Group is not free of charge. The bank must pay a guarantee fee for transferring the credit risk. Nevertheless, considering the amount of capital released, this is a more cost-effective solution for Coop Pank than raising additional equity capital from shareholders, who expect a return on equity of approximately 15%.