Investing in Australian Banks

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.
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.
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.