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Potential changes to Bank Hybrids – Should we be concerned?

APRA released a discussion paper last week looking at the current structure of tier 1 hybrid securities, with a specific focus on how they absorb losses in times of stress. There has been some press on this, with Chris Joye from Coolabah writing in the AFR on the topic here. There are multiple parts to this and a lot of water to go under the bridge until something might change, however, our initial thoughts are as follows, and sorry, it’s a bit dry!

  • Importantly, if any changes are ultimately made to the structure of hybrids to be issued in the future, existing hybrids on issue cannot have their terms altered.
  • If these changes are less ‘investor friendly’ existing Hybrids on issue may then become more sort after – pushing prices higher, not lower.
  • In the paper, APRA flagged issues offshore whereby cancelling hybrid distributions was problematic, as it raises questions re banks viability and undermines confidence in the system.
  • They also referred to the very low level for the Australian Hybrids’ Capital Trigger at 5.125%, which is unlikely to be reached until the point of an issuer’s non-viability. In other words, if the current securities do get ‘bailed in’ and converted to equity, the bank may already be in a lot of trouble. This capital trigger level is probably the most likely part to be ‘tweaked’.
  • APRA went on to note that Australia is an outlier internationally as a large proportion of Hybrids are held by domestic retail investors,  “which makes it particularly challenging to use hybrids here to facilitate the recapitalisation of a bank, as APRA would be concerned that imposing losses on these investors would bring complexity, contagion risk and undermine confidence in the system in a crisis”.
  • That statement is not totally true, as Chris pointed out in his article, with a higher proportion of institutional investors now participating in the Hybrid market.
  • In the past, we have seen APRA “Discussion Papers” ignite robust discussion and feedback, but in practice, not result in any significant fundamental change to the efficiently functioning status quo.
  • They are seeking feedback on this with submissions due by 15 Nov 2023, before more industry consultation. They intend to ponder any proposed amendments during 2024 and make (or not make) any changes thereafter.

The Bottom Line:  We view any changes as the less likely outcome, given the market is working well,  however, it is a possibility that capital trigger levels could edge higher and/or new hybrids move to an unlisted market, for future issues only. If this does happen, the flow-on impact will be a higher cost of capital for the banks, which ultimately we (bank customers) will pay for!

MM remains comfortable with our Tier 1 Bank Hybrids but will monitor future changes
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Major Bank Tier 1 Hybrid yields
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