Investing in Australian Banks

There are a number of ways to invest in Australian banks.

From highest to lowest ranking, these include: savings accounts, term deposits, senior bank debt1, Tier 2 capital instruments1, Additional Tier 1 capital instruments or Bank Hybrids and ordinary shares.

1. Generally only available to wholesale investors

2. Also called capital notes or convertible preference shares 

Comparing Australian Bank Hybrids to other Australian bank investments

Bank Hybrids differ from other bank investments in terms of their features and risks. The table below outlines the different investment options in Australian banks, such as Westpac, some of their key features.
 

Comparing Australian Bank Hybrids to other Australian bank investments
Investment type Legal Form Government Guarantee and Statutory Protection Typical Term
Savings account Deposit
Subject to a limit per account holder per ADI of $250,000.
 At call
Term deposit Deposit
Subject to a limit per account holder per ADI of $250,000.

 Fixed term, 1 month to 5 years
Tier 2 capital instrument Unsecured subordinated debt obligation   Fixed term, greater than 5 years
Bank Hybrid Unsecured subordinated debt obligation or preference share   Perpetual
Ordinary share Ordinary share   Perpetual
Investment type Form of return Typical rate of return Potential for franking credits? Typical payment frequency Are payments at the bank’s discretion? Do missed payments accumulate? Potential for capital growth
Savings account Interest Variable   Monthly      
Term deposit Interest Fixed   At intervals or at the end of term      
Tier 2 capital instrument Interest Floating   Quarterly  
(Cumulative)

However, if sold on ASX the price may be higher or lower than the purchase price.
Bank hybrid Interest or Distribution Floating   Quarterly or semi-annually  
(Non-Cumulative)		 

However, if sold on ASX the price may be higher or lower than the purchase price.
Ordinary share Dividend Variable dividend (as determined by the issuer)   Semi-annually   N/A  
Investment type Can an investor withdraw or redeem their investment? Can investors sell on ASX
Savings account
Conditions may apply for some savings accounts based on bonus interest conditions		  
Term deposit
Subject to conditions		  
Tier 2 capital instrument   

Can be sold on-market if quoted on the ASX
Bank Hybrid   

Can be sold on-market if quoted on the ASX
Ordinary share   

Can be sold on-market if quoted on the ASX
Investment type Bank's right of early redemption Scheduled or mandatory conversion into ordinary shares Conversion on occurrence of a Non-Viability or Capital Trigger Event?
Savings account      
Term deposit      
Tier 2 capital instrument 

Subject to conditions and APRA approval (There can be no certainty that APRA will provide its prior written approval)		  

If the bank becomes non-viable (a Non-Viability Trigger event)
Bank Hybrid 

Subject to conditions and APRA approval (There can be no certainty that APRA will provide its prior written approval)
Subject to the satisfaction of the Conversion Conditions

If the bank becomes non-viable (a Non-Viability Trigger Event) or capital falls below certain levels (a Capital Trigger Event)
Ordinary share   N/A N/A

Assessing the strength of a bank

The risk of an investor losing some or all of their investment in Bank Hybrids depends on, amongst other things, the financial strength of the issuing bank. The stronger the bank, the less risk there is of an investor losing some or all of their investment.
 

The table below lists a number of key measures that may be used to assess the strength of a bank (this table is not an exhaustive list).

 

Capital levels

  • How much capital is held
  • Whether capital levels meet or exceed minimum regulatory capital requirements

Profitability and earnings

  • Consistency of earnings and returns
  • Stronger return on equity may indicate a more profitable bank

Loan portfolio quality

  • Quality of loan portfolio
  • Lower risk activities

Funding and liquidity

  • Ability to manage liquidity risks having regard to liquidity levels
  • Access to a broad range of funding markets and debt investors

External influences

  • Political and financial stability of the country the bank operates in
  • Supervision and regulation
  • Economic activity

Where to find performance-related information for Australian banks

Listed Australian banks report their performance to the market at least every six months on the ASX. This information is also generally available on a bank’s website.
 

Information provided to the ASX includes:
 

  • Financial results announcements;
  • Investor presentations;
  • Annual reports; and
  • Pillar 3 reports (providing detailed information on a bank’s capital, risks and loan portfolio quality.

 

Westpac’s financial results, including results announcements and annual reports, may be found here.

Before you invest

Bank Hybrids

Case Studies

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 Bank Hybrids you should ensure that you understand the features and risks. You should read the relevant prospectus carefully, paying attention to the investment risks. If you need further information, you should seek professional guidance from your stockbroker, solicitor, accountant or other independent and qualified professional adviser.