Investing in Australian banks

There are a number of ways to invest in an Australian bank. These include:

A dollar sign. Savings accounts
A clock icon. Term deposits
A fraction showing half. Bank Hybrids

Additional Tier 1 capital securities (typically called capital notes or convertible preference shares)

and

Tier 2 capital securities (typically called subordinated notes)
A graph icon. Ordinary shares

Comparing Australian Bank Hybrids to other Australian bank investments

Bank Hybrids differ from other bank investments in terms of their features and risks.

For example, in some circumstances an investment in a Bank Hybrid may be converted into ordinary shares or written-off Write-off If Bank Hybrids are written-off, investors will lose all of the value of their investment and they will not receive any compensation or unpaid distributions or interest. (see Conversion events for further details). In addition, holders of bank deposits (savings accounts or term deposits) will rank ahead of holders of Bank Hybrids in a winding-up and may also be protected by a government guarantee under the Australian Government’s Financial Claims Scheme Financial Claims Scheme A government guarantee for deposits up to an amount per account holder per ADI of $250,000. .

To compensate for the higher risk associated with an investment in Bank Hybrids, interest / distribution rates paid on Bank Hybrids are typically higher than interest paid on bank deposits.

The table below outlines some of the key features of different investment options in Australian banks (such as Westpac).

 

Relative Risk
LowerHigher
Investment type
A dollar sign.Savings Account
A clock iconTerm deposit
A graph icon.Ordinary share
Legal form
Deposit
Deposit
Unsecured subordinated debt obligation
Unsecured subordinated debt obligation or preference share
Ordinary share

 

Relative Risk
LowerHigher
Investment type
A dollar sign.Savings Account
A clock iconTerm deposit
A graph icon.Ordinary share
Typical term
At call
One month to five years
Fixed term not less than 5 years
Perpetual Perpetual If a security is perpetual, it does not have a fixed maturity date and could exist indefinitely.
Perpetual Perpetual If a security is perpetual, it does not have a fixed maturity date and could exist indefinitely.

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Relative Risk
LowerHigher
Investment type
A dollar sign.Savings Account
A clock iconTerm deposit
A graph icon.Ordinary share
Form of return
Interest
Interest
Interest
Interest or distribution
Dividend
Typical rate of return
Variable
Fixed
Floating
Floating
Variable
(as determined by the issuer)
Is there a potential for returns to include Franking Credits Franking credits Franking credits represent each holder’s share of tax paid by the issuing company on the profits from which distributions or interest are paid. ?
No
No
No
Yes
Yes
Typical payment frequency
Monthly
At specific intervals or at the end of the term
Quarterly
Quarterly or semi-annually
Semi-annually
Are payments at the bank’s discretion?
No
No
No
Yes
Yes
Will missed payments accumulate?
Yes
Yes
Yes – Cumulative Cumulative If interest is not paid in full, unpaid interest will accumulate and compound for payment at a later date if certain conditions are met.
No – Non-cumulative Non-cumulative Unpaid distributions will not accumulate or be made up by the issuing bank.
N/A
Is there potential for capital growth?
No
No
Generally, no. Investors do not ordinarily acquire Bank Hybrids in order to obtain capital growth. However, if sold on the ASX ASX The Australian Securities Exchange. the price may be higher or lower than the purchase price or face value Face value The face value is typically the issue price, which will be reduced by any partial conversion or write-off. .
Generally, no. Investors do not ordinarily acquire Bank Hybrids in order to obtain capital growth. However, if sold on the ASX ASX The Australian Securities Exchange. the price may be higher or lower than the purchase price or face value Face value The face value is typically the issue price, which will be reduced by any partial conversion or write-off. .
Yes - but if sold on the ASX ASX The Australian Securities Exchange. the price may be higher or lower than the purchase price or issue price

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Relative Risk
LowerHigher
Investment type
A dollar sign.Savings Account
A clock iconTerm deposit
A graph icon.Ordinary share
Can an investor withdraw or redeem their investment?
Generally, yes.
Subject to conditions.
Generally, yes.
Subject to conditions.
No
No
No
Can an investor sell?
No
No
Yes – if quoted on the ASX ASX The Australian Securities Exchange.
Yes – if quoted on the ASX ASX The Australian Securities Exchange.
Yes – if quoted on the ASX ASX The Australian Securities Exchange.

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Relative Risk
LowerHigher
Investment type
A dollar sign.Savings Account
A clock iconTerm deposit
A graph icon.Ordinary share
Protection under the Banking Act or Financial Claims Scheme Financial Claims Scheme A government guarantee for deposits up to an amount per account holder per ADI of $250,000.
Yes. Protection under the Financial Claims Scheme is limited to deposits up to an amount per account holder per ADI ADI An Australian Deposit-taking Institution under the Banking Act. of $250,000.
Yes. Protection under the Financial Claims Scheme is limited to deposits up to an amount per account holder per ADI ADI An Australian Deposit-taking Institution under the Banking Act. of $250,000.
No
No
No

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Relative Risk
LowerHigher
Investment type
A dollar sign.Savings Account
A clock iconTerm deposit
A graph icon.Ordinary share
Bank's right of early redemption
No
No
Yes – subject to the terms of the Bank Hybrid and APRA APRA The Australian Prudential Regulation Authority. approval (which APRA may withhold)
Yes – subject to the terms of the Bank Hybrid and APRA APRA The Australian Prudential Regulation Authority. approval (which APRA may withhold)
No
Conversion into ordinary shares
(scheduled or mandatory conversion)
No
No
No
Yes - subject to the satisfaction of the conversion conditions Conversion conditions Conversion of some Bank Hybrids may be subject to conversion conditions set out in the prospectus for the particular Bank Hybrid. See Case Study 3, including a worked solution, for further detail.
N/A
Conversion into ordinary shares
(non-viability / capital trigger)
No
No
Yes - if the bank becomes non-viable (a non-viability trigger event Non-viability trigger event A non-viability trigger event will occur when APRA notifies a bank in writing that it believes (i) conversion to ordinary shares of some or all of its Bank Hybrids or (ii) a public sector injection of capital or equivalent support, is necessary to prevent the bank becoming non-viable. See non-viability trigger event. )
Yes - if the bank becomes non-viable (a non-viability trigger event Non-viability trigger event A non-viability trigger event will occur when APRA notifies a bank in writing that it believes (i) conversion to ordinary shares of some or all of its Bank Hybrids or (ii) a public sector injection of capital or equivalent support, is necessary to prevent the bank becoming non-viable. See non-viability trigger event. ) or capital falls below certain levels (a capital trigger event Capital trigger event A capital trigger event occurs when the issuing bank determines (or is notified by APRA) that the bank’s common equity tier 1 ratio is equal to or less than 5.125%. See capital trigger event. )
N/A

Assessing the strength of a bank

The risk of an investment in Bank Hybrids depends on, amongst other things, the financial strength of the issuing bank and how strong the issuing bank is relative to its peers. The stronger the bank, the less risk there is of losing part or all of your investment.

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

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Capital levels Profitability and earnings Quality of loan portfolio and risk profile Funding and liquidity External influences
  • how much capital is held
  • whether capital levels meet or exceed minimum regulatory capital requirements
  • consistency of earnings and returns
  • stronger return on equity may indicate a more profitable bank
  • quality of loan portfolio
  • lower risk activities
  • ability to manage liquidity risks
  • access to a broad range of funding markets and debt investors
  • liquidity coverage ratio
  • political and financial stability of the country the bank operates in
  • supervision and regulation
  • economic activity
Capital levels Profitability and earnings Quality of loan portfolio and risk profile Funding and liquidity External influences
  • capital underpins the strength of a bank
  • strong capital levels provide a buffer to absorb losses that may be incurred on a bank’s assets or if the bank experiences financial difficulty
  • in the event a bank becomes non-viable, Bank Hybrids may be converted into ordinary shares or written-off
  • higher capital may indicate a lower likelihood that the bank will fail or become non-viable and may reduce the likelihood of Bank Hybrids being converted into ordinary shares or written-off
  • a profitable bank is better placed to continue to meet its obligations, including paying interest, distributions and dividends
  • strong profitability allows a bank to generate capital and improve its common equity Tier 1 capital ratio
  • the quality of a bank’s assets (for example, home loans) is important to its financial strength
  • if a bank lends to higher risk activities / higher risk individuals / higher risk companies, it may incur higher bad debts, which in turn may impact profitability and capital
  • significantly higher risk activities, or operating in higher risk markets, may pose additional threats to long term profitability and capital position
  • access to funding is important so that banks may continue lending activities and may repay liabilities (including deposits)
  • strong liquidity management and liquidity levels may indicate a lower likelihood of a bank failing or becoming non-viable
  • external influences may impact the operating environment and economic conditions including interest rates, employment levels, business activity and consumer sentiment
  • a strong regulatory environment may contribute to a bank’s ability to remain viable and meet its commitments, including paying interest or distributions and repaying principal on Bank Hybrids
  • a strong economy is generally good for banks
Capital levels Profitability and earnings Quality of loan portfolio and risk profile Funding and liquidity External influences
  • common equity Tier 1 capital ratio
  • Tier 1 capital ratio
  • total capital ratio
  • net profit after tax
  • expense to income ratio
  • return on equity
  • earnings per share
  • loan impairments
  • bad and doubtful debt provisioning
  • provisioning coverage ratios
  • stable funding ratio
  • liquidity levels
  • liquidity coverage ratio
  • the country’s economic, fiscal and monetary position
  • strength of the regulators

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 ASX The Australian Securities Exchange. . This information is also generally available on a bank’s website.

Information provided to the ASX includes:

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

Westpac’s results (including profit announcements and annual reports) may be found here.

See Bank Hybrids for a brief overview of the typical features and risks associated with an investment in Bank Hybrids. For a complete description of the features and risks associated with a particular Hybrid, you should read the prospectus and review other information (including financial information) for the issuer. In the event you need further information, you should seek professional guidance from your stockbroker, solicitor, accountant or other independent and qualified professional adviser.