(Bloomberg) -- Banco Santander SA is seeking to sell more more than a dozen significant risk transfers amid an effort to boost profitability.

The Spanish lender is marketing SRTs linked to more than €20 billion ($21 billion) of loans out of its global operations including the US, Germany, the UK and Mexico, people familiar with the matter said. The deals are at various stages in the sales process, the people said, asking not to be identified discussing the private information.

The wave of transactions is part of Santander’s push to free up capital by using transactions including SRTs, asset sales and other types of hedging transactions. The idea is to improve returns on the capital and use it elsewhere in the business, for example, to expand lending. 

Santander’s new approach to capital is “changing completely the model of the bank,” Chief Executive Officer Hector Grisi said on an earnings call last month. The lender now has “tremendous capacity” to move assets and risk off its balance sheet, he said.

According to the people familiar with the matter, the SRTs include:

• one linked to about €6 billion ($6.3 billion) of loans to large companies situated mostly in the US and Europe
• at least three attached to credit for small and mid-sized companies in Spain, including one on €2.2 billion of such loans
• an unfunded SRT linked to about €2 billion of Spanish residential mortgages
• one tied to a portfolio of around €1.3 billion in German corporate loans
• two SRTs in the UK linked to portfolios of consumer loans and mortgages, each one worth about £1 billion ($1.3 billion)
• another unfunded SRT on about €1.1 billion of Portuguese home loans.
• one linked to Swedish car loans
• at least three SRTs out Mexico and Brazil, with at least some of them likely to be placed with a multilateral development bank.

A Santander spokesperson declined to comment. Terms of the privately-placed transactions are subject to change as the marketing process evolves, the people said. Bloomberg has previously reported some of the deals.

SRTs, also known as synthetic risk transfers, enable banks to reduce credit risk by paying investment firms for agreeing to help cover potential future losses, which reduces the amount of capital the bank is required to hold as a backstop. A typical 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%.

Investors in unfunded SRTs only provide guarantees, rather than buying credit-linked notes. This means they don’t actually spend money until there’s an actual default.

Santander pays about 9% for freeing capital and reinvests it at a yield of about 23% on average, according to a presentation seen by Bloomberg that was given last month by Sergio Gamez. The executive runs the bank’s unit behind the trades, known internally as Global Asset Desk.

Record Sales

Santander is among banks putting the global SRT market on track to hit record sales in 2024. Loans tied to significant risk transfers have reached about $1 trillion this year, according to data compiled by Chorus Capital Management. 

The demand from investors for so-called capital relief deals “is enormous,” Chief Financial Officer Jose Cantera said on the Santander earnings call last month. He also said that the appetite may start cooling as interest rates continue to decline.

SRT issuance by banks “will grow and become broader based,” S&P Global Ratings analyst Richard Barnes said in a note focusing on European banks earlier this month. However, SRT pricing may become less favorable for the banks as supply increases.

Capital relief trades including SRTs helped Santander lift its Common Equity Tier 1 ratio — a closely-watched regulatory metric of capital strength — to 12.5% in the third quarter, from 12.3% at the end of last year.

--With assistance from Carmen Arroyo, Scott Carpenter and Jorge Zuloaga.

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