Bank Hybrids

Bank Hybrids contain terms that enable them to be Converted into ordinary shares, or Written-Off completely in certain circumstances, for example, if the bank is no longer viable (including where the bank suffers significant losses), see Ranking and Conversion or Write-Off. There are a number of measures that may be used to assess the strength of a bank and the risk that a bank may become non-viable. Investors should seek to understand these measures and the level of risk they present.

Perpetual – Bank Hybrids do not have a fixed maturity date and could exist indefinitely. The Face Value of a Bank Hybrid may never be repaid.
Bank Hybrids typically convert into ordinary shares on a fixed date, usually between 7 and 12 years from the issue date. This is called the Scheduled or Mandatory Conversion Date and is subject to the Conversion Conditions being satisfied. However, there is a risk that the Conversion Conditions are never satisfied and the Bank Hybrid remains on issue indefinitely.
Bank Hybrids may contain options for the bank to redeem the Bank Hybrid where the Face Value may be repaid in cash on specified dates. This is known as the call date or the optional redemption date and is at the election of the issuing bank. To repay a Bank Hybrid early, a bank requires prior approval from APRA (there can be no certainty that APRA will provide its prior written approval).
Investors cannot request conversion or redemption of Bank Hybrids. However, if quoted on the ASX, an investor may choose to sell their Bank Hybrids at the prevailing market price to realise their investment. The market price may be less than the Face Value of the Bank Hybrid or the price at which the Bank Hybrid was purchased for on the ASX, or there may be no liquid market in the Bank Hybrids (i.e. there may not be enough buyers or sellers in the market), which may result in investors suffering loss or not being able to realise their investment on the ASX.

Bank Hybrids pay regular distributions that are subject to Distribution Payment Conditions. They typically have Franking Credits attached.
The cash distribution rate on Bank Hybrids, assuming they are fully franked, is typically a floating rate determined as the sum of BBSW plus a Margin, together multiplied by (1 - tax rate).
For an explanation of how distributions on Bank Hybrids are calculated, see Case Study 1.
The ability of an investor to use Franking Credits, either as an offset to a tax liability or by claiming a tax refund, will depend on the investor’s individual tax position.
Distributions may not always be paid as they are at the bank’s absolute discretion and are subject to the Distribution Payment Conditions which include, for example, that the payment of the distribution will not result in either a breach of APRA’s regulatory capital requirements or the bank becoming insolvent.
If a distribution is not paid, the missed payment will not be made up. This is referred to as being Non-Cumulative. However, to provide some protection to investors, if a distribution is not paid, the bank will be restricted from paying dividends on its ordinary shares or from buying-back its ordinary shares for a specified period. These restrictions are sometimes referred to as "dividend stoppers" or "capital stoppers" respectively.

If a bank’s capital falls below certain levels, a Capital Trigger Event may occur or where APRA may have concerns about a bank’s capital, funding and liquidity levels or any other matter affecting a bank’s viability, a Non-Viability Trigger Event may occur. In these circumstances, a bank may be required to convert some or all of its Bank Hybrids into ordinary shares.
Conversion of Bank Hybrids following a Capital Trigger Event or a Non-Viability Trigger Event is not subject to Conversion Conditions being satisfied. If the Bank Hybrids are converted into ordinary shares, the value of ordinary shares an investor receives may be significantly less than the Face Value of their Bank Hybrid. This is because the number of ordinary shares an investor will receive in these circumstances is limited by a Maximum Conversion Number, see Case Study 2.
If for any reason conversion does not occur following a Capital Trigger Event or a Non-Viability Trigger Event and if the ordinary shares are not issued within 5 business days, all rights in relation to the Bank Hybrids will be terminated and investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions.

Conversion or Write-Off

Bank Hybrids may be converted into ordinary shares or Written-Off in the following circumstances:

Scheduled or Mandatory conversion

Bank Hybrids are Perpetual but typically have a set date, called the Scheduled or Mandatory Conversion Date, on which they are scheduled to convert into ordinary shares. Whether conversion occurs depends on the Conversion Conditions being satisfied, see Case Study 3 for an example. If the Conversion Conditions are not met on the Scheduled or Mandatory Conversion Date, then conversion will not occur until the next distribution payment date on which the Conversion Conditions are met.

The Conversion Conditions operate to ensure that if the value of ordinary shares an investor would receive on conversion of each Bank Hybrid would not be less than $101.01¹ (being broadly equal to the Face Value each Bank Hybrid) This protects the investor from suffering loss on conversion.

There is a risk that the Conversion Conditions are never satisfied and Scheduled or Mandatory Conversion never occurs. In this case, investors will continue to hold the Bank Hybrid indefinitely.

^{1 Based on the Initial Face Value of $100 per Bank Hybrid and the VWAP of bank ordinary shares during the relevant VWAP period before the conversion date, with the benefit of a 1% discount.}

Capital Trigger Event

A Capital Trigger Event occurs when a bank determines, or APRA notifies the bank in writing, that the bank’s common equity tier 1 capital ratio is less than or equal to 5.125%.

If a Capital Trigger Event occurs, a bank may be required to convert some or all of its Bank Hybrids into ordinary shares. The number or amount of Bank Hybrids that are converted into ordinary shares would equal the number required to restore the bank’s common equity tier 1 ratio above 5.125%.

There are no Conversion Conditions that need to be satisfied if conversion is required following a Capital Trigger Event. If Bank Hybrids are converted into ordinary shares, investors will receive a variable number of ordinary shares, limited by a Maximum Conversion Number. Depending on the price of the ordinary shares at that time, investors may suffer loss as the value of ordinary shares received by an investor may be significantly less than $101.01¹ for each Bank Hybrid. This is because the Maximum Conversion Number is based on the bank's ordinary share price at the time of issue of the Bank Hybrid (and the bank's ordinary share price may have dropped considerably due to the bank's financial difficulty).

It is likely that a Capital Trigger Event would occur prior to a winding up and the Bank Hybrids would have been Converted into ordinary shares, in which case the Ranking of a holder’s investment will change as they will hold ordinary shares, and will rank equally with other holders of ordinary shares.

If for any reason conversion does not occur and ordinary shares are not issued within 5 business days, all rights in relation to the Bank Hybrids will be terminated and investors will lose all of the value of their investment and will not receive any compensation or unpaid distributions.

Bank Hybrids are generally required to be converted into ordinary shares (or Written-Off in certain circumstances) before Tier 2 capital instruments are converted into ordinary shares (or Written-Off).

^{1 Based on the Initial Face Value of $100 per Bank Hybrid and the VWAP of bank ordinary shares during the relevant VWAP period before the conversion date, with the benefit of a 1% discount.}

Non-Viability Trigger Event

A Non-Viability Trigger Event occurs when APRA notifies a bank in writing that it believes:

conversion of its Bank Hybrids, or conversion, Write-Off or write down of other capital instruments of the bank; or
a public sector injection of capital or equivalent support,

is necessary to prevent the bank becoming non-viable. Whether a Non-Viability Trigger Event will occur is at the discretion of APRA.

If a Non-Viability Trigger Event occurs, the bank may be required to convert some or all of its Bank Hybrids into ordinary shares.

There are no Conversion Conditions that need to be satisfied if conversion is required following a Non-Viability Trigger Event. If Bank Hybrids are converted into ordinary shares, investors will receive a variable number of ordinary shares, limited by a Maximum Conversion Number. Depending on the price of the ordinary shares at the relevant time, investors may suffer loss as the value of the ordinary shares received by an investor is likely to be significantly less than $101.01² for each Bank Hybrid. This is because the Maximum Conversion Number is based on the bank's ordinary share price at the time of issue of the Bank Hybrid (and the bank's ordinary share price may have dropped considerably due to the bank's financial difficulty).

It is likely that a Non-Viability Trigger Event would occur prior to a winding up and the Bank Hybrids would have been Converted into ordinary shares, in which case the Ranking of a holder’s investment will change as they will hold ordinary shares, and will rank equally with other holders of ordinary shares.

APRA has not provided explicit guidance as to how it would determine non-viability. However, APRA has indicated that non-viability is likely to arise prior to insolvency. Non-viability could be expected to include serious impairment of Westpac’s financial position, concerns about its capital, funding or liquidity levels and/or insolvency. However, it is possible that APRA’s definition may not necessarily be confined to these matters and APRA’s position on these matters may change over time. As the occurrence of a Non-Viability Trigger Event is at the discretion of APRA, there can be no assurance given as to the factors and circumstances that might give rise to such an event.

^{2 Based on the Initial Face Value of $100 per Bank Hybrid and the VWAP of bank ordinary shares during the relevant VWAP period before the conversion date, with the benefit of a 1% discount.}

Other conversion events

The conversion or Write-Off events detailed above are not exhaustive. Conversion into ordinary shares may occur on an optional conversion date and following an acquisition event, subject to the satisfaction of Conversion Conditions.

Things you should know

This Guide only looks at some of these features and risks. It does not provide investment advice and cannot address your individual circumstances, objectives or needs. Prior to investing in Hybrids you should ensure that you understand the features and risks. You should read the relevant prospectus carefully, paying attention to the investment risks and information about the issuer, including financial information. If you need further information, you should seek professional advice from your stockbroker, solicitor, accountant or other independent and qualified professional adviser.

Bank Hybrids

Conversion or Write-Off

Case Studies

Investing in Australian Banks

Bank Hybrids FAQS

Things you should know