AIB turns to Santander for SRT tied to project finance

Demand remains strong despite concerns that inflation, the debt-fueled AI boom, and slumping government bonds could lead to greater credit risks for banks.

AIB Group Plc is working with Banco Santander SA and Howden Group on a significant risk transfer as the Irish lender expands the use of the hedging instrument across its loan book.

The Dublin-based bank, its advisers and potential investors are discussing an SRT tied to about €2.5bn of project finance transactions, according to people familiar with the matter. The deal is set to be completed later this year, the people said, asking not to be identified because it is private.

SRTs transfer some of the default risk on a portfolio of loans to investors in exchange for chunky coupons that can mean double-digit returns. They free up regulatory capital, allowing banks to lend more or make payouts to shareholders.

Demand remains strong despite concerns that inflation, the debt-fueled AI boom, and slumping government bonds could lead to greater credit risks for banks.

AIB completed its debut SRT in November 2024, hedging a €1 billion portfolio of capital markets loans, while a year later it carried out a similar deal tied to a €2bn portfolio of residential mortgage assets.

When reporting interim earnings in July, AIB said it planned to execute an additional transaction in 2026, including project finance loans, that would generate an anticipated benefit of about 25 to 30 basis points of core tier 1 equity.

A representative of the bank declined to comment on any other details of the potential transaction. Representatives for Santander and Howden, an insurance broker, declined to comment.

While the majority of SRT deals are tied to corporate loans, banks — mostly in Europe and North America — have been progressively diversifying the type of assets hedged in such deals.

Sales of SRTs are set to hit a new record of $45 billion this year, up from $41 billion in 2025, according to Crescent Capital Group LP’s estimates.

ING Groep NV and National Bank of Canada are among lenders which have recently considered hedging portfolios of project finance portfolios via SRT transactions.

Last month, AIB upgraded its full-year guidance as it grew income and its loan book in the first half of the year. The bank posted profit after tax of €939m for the first half, with earnings per share of 42.2c.

Total income rose 2% with net interest income (NII) remaining flat at €1.8bn and total other income of €411m up 15%. AIB said NII is now expected to be above its previous guide of €3.8bn for the year.

Chief Executive Colin Hunt said the bank's performance reflects the resilience of the Irish economy.

Bloomberg