Bank Hybrids FAQs
Frequently Asked Questions
Bank Hybrids may not always provide a regular income stream.
Bank Hybrids pay distributions at the absolute discretion of the bank and are subject to the Distribution Payment Conditions. If a distribution is not paid, the missed payment will not be made up (often referred to as being Non-Cumulative). As distribution payments are based on BBSW, distribution payments are likely to vary over the term of the Bank Hybrid.
For an example of how to calculate distributions on Bank Hybrids, see Case Study 1.
The distribution / interest rate is typically based on a Margin plus BBSW. As BBSW is a floating market rate of interest (usually the 3 month bank bill swap rate), any payments are likely to vary over the term of a Bank Hybrid. The Margin typically reflects the risk premium of the Bank Hybrid above a floating market rate of interest at the time of issue.
For an example of how to calculate distributions on Bank Hybrids, see Case Study 1.
If Bank Hybrids are quoted on the ASX, an investor may choose to sell their Bank Hybrids at the prevailing market price to realise their investment. That market price may be less than the Face Value of the Bank Hybrid (or the price at which the Bank Hybrid was purchased on market), 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.
If a bank’s capital falls below certain levels and a Capital Trigger Event occurs, or the bank is deemed by APRA to be non-viable and a Non-Viability Trigger Event occurs, the bank may be required to convert some or all of the Bank Hybrids into ordinary shares or completely Write Them Off. An investor may suffer loss or lose their entire investment. See Case Study 2 for conversion following a Non-Viability Trigger Event.
Bank Hybrids may have Franking Credits attached to distribution payments (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 each investor’s individual tax position.
1. Sale of the Bank Hybrid on the ASX, at the prevailing market price, assuming the Bank Hybrid is quoted on the ASX. See Case Study 4
2. Redemption or transfer at the absolute discretion of the bank. Note that redemption is subject to APRA’s prior approval. There can be no certainty that APRA will provide its prior written approval; and
3. Scheduled conversion into ordinary shares on the Scheduled or Mandatory Conversion Date (subject to Conversion Conditions), and subsequent sale of the ordinary shares on the ASX, at the prevailing market price. See Case Study 3.
There is the risk that investors may not get some or all of their money back after investing in a Bank Hybrid. See the FAQ above "Under what circumstances may an investor receive less than the Face Value of a Bank Hybrid investment?".
Bank Hybrids are Perpetual, but typically have a set date, called the Scheduled or Mandatory Conversion Date, on which the instruments are scheduled to convert into ordinary shares. Whether conversion occurs will depend on Conversion Conditions being satisfied. If the Conversion Conditions are not satisfied on the scheduled conversion date, then scheduled or mandatory conversion will not occur until the next distribution payment date on which the Conversion Conditions are met. However, there is a risk that the Conversion Conditions are never satisfied and the Bank Hybrid remains on issue indefinitely.
If Bank Hybrids are quoted on the ASX, investors may sell their Bank Hybrids on the ASX whenever they choose. Any sale will, however, be at the market price at the time of sale, which may be more or less than the Face Value of the Bank Hybrids or the purchase price of the Bank Hybrid if purchased on the ASX and may incur brokerage costs.