Bawag mulls plan to free up capital in PTSB to ease cost of €1.62bn deal

Bawag's proposed acquisition of PTSB is shaping up to be a shrewd financial maneuver, with the Austrian bank signaling plans to optimize capital through a significant risk transfer (SRT) deal. This move, which involves institutional investors sharing the risk on PTSB's loan portfolio, is designed to reduce the capital Bawag must hold, thereby lowering the net cost of the €1.62 billion deal.

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PTSB will work with the Vienna-based group on a potential so-called significant risk transfer (SRT) deal on part of the Irish group’s loan book.

This strategy is not new for Bawag, which has a track record of utilizing SRTs. The acquisition is further sweetened by an anticipated accounting gain of close to €400 million, termed 'badwill' or negative goodwill, arising from acquiring PTSB at a discount to its net assets. This mirrors a similar successful move by PTSB itself when it acquired loan portfolios from Ulster Bank.

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An SRT would see groups of institutional investors take on part of the risk of losses on the loans in portfolios for an extended period, reducing the level of capital the bank needs to hold in reserve against the loans.

Beyond these financial engineering aspects, Bawag has committed to significant investments in modernizing PTSB's infrastructure, including its branch network and technology, and expanding its product offerings. The bank also plans to provide more details on the funding of the deal and has given assurances regarding maintaining PTSB's Dublin headquarters and a substantial branch presence across Ireland for at least 24 months post-acquisition. This indicates a commitment to both financial efficiency and operational continuity for the Irish lender.

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This immediate profit, also known as badwill or negative goodwill, is created when a business is acquired at a discount to its inherent value.