Ways to invest in a bank

Different ways to invest in a bank can be separated into two broad categories:

Each category and the investments within the category have different features and different levels of returns and risk. Investors should carefully consider which investments are appropriate depending on their individual circumstances. Further information for each different investment is on this page, as well as a comparison of the different features between these investments.

Transaction and Term deposit accounts

Transaction accounts and term deposit accounts are investments with a bank where interest is earned on the amount deposited. 

Interest: The interest rate typically varies according to the term to maturity with higher rates for longer terms.

Term: The term maturity varies from being at call to a fixed term.

Protected under the Financial Claims Scheme: Deposits are protected under the Financial Claims Scheme - this means that the Australian Government will repay the first $250,000 invested by each depositor if the bank fails.

Bank securities

Bank securities include:

Dividends and interest: Bank securities are securities issued by a bank where dividends or interest is paid. Subsidiaries of a bank may also issue bank hybrid securities. Dividends paid on ordinary shares are based on the profit of the bank and not the face value. Interest paid on bank hybrid securities and retail bonds is based on the face value of the security.

The dividend or interest rate varies according to the risks of the securities.

Term and repayment: The term to maturity varies from no maturity date or perpetual (for example, ordinary shares and some bank hybrid securities) to a set maturity date (for example retail bonds). If listed on a stock exchange, an investor can sell their bank securities on market.

The face value and amount you expect to be repaid may not be the same as the amount you paid for the security.

Not protected under the Financial Claims Scheme: Bank securities are not protected under the Financial Claims Scheme - the Australian Government will not repay the investment if the bank fails.

Further information on each bank security is below. 

Retail bonds

Retail bonds are typically securities that have a maturity date and pay interest.

  • Payment of interest is not discretionary or subject to payment conditions
  • Retail bonds sometimes appear to be the same as deposits but are not the same
  • Retail bonds are not protected under the Financial Claims Scheme

Tier 2 hybrid capital securities

Tier 2 hybrid capital securities are typically securities that have a maturity date.

  • Interest is calculated on a predetermined formula. Interest is paid but is subject to solvency conditions (this is referred to as interest being "deferrable"). If interest is not paid, it will accrue and become due and payable when the bank is deemed solvent (this is referred to as interest being "cumulative")
  • The face value may be repaid early on a specific date (called a "call date")
  • They may be issued by a bank or a subsidiary of a bank

The terms of each bank hybrid security are different. It is important that investors read the relevant prospectus and understand the particular features of each security before investing.

Tier 1 hybrid capital securities

Tier 1 hybrid capital securities are typically securities with no maturity date but are scheduled to exchange into ordinary shares in the bank on a fixed date.

  • Interest is calculated on a predetermined formula. Interest is paid but is subject to the bank's absolute discretion and certain conditions. If interest is not paid, the bank does not have an obligation to pay it (this is referred to as interest being "non-cumulative")
  • If interest is not paid, the terms of these securities generally restrict the bank from paying ordinary share dividends. This protects investors because banks will attempt to pay the interest to avoid such restrictions
  • The face value may be repaid early on a specific date (called a "call date")
  • They may be issued by a bank or a subsidiary of a bank

The terms of each bank hybrid security are different. It is important that investors read the relevant prospectus and understand the particular features of each security before investing.

Equity (ordinary shares)

Equity (also called ordinary shares) are securities with no maturity date. 

  • Dividends are discretionary
  • The term "discretionary" means that the bank can decide whether it wishes to pay a dividend and the amount of that dividend

Comparison of investments in a bank 

Feature
Tier 1 hybrid capital
Tier 2 hybrid capital
Transaction account
Term deposit
Retail bonds
Ordinary shares
Guarantee under Financial Claims Scheme
No
No
Yes, up to $250,000
Yes, up to $250,000
No
No
Typical term
Perpetual
Varies
At call
1 month to 5 years
Varies
Perpetual
Distribution rate
Floating
Floating
Variable (usually)
Fixed (usually)
Floating
Variable
Typical distribution payment dates
Quarterly
Quarterly
Monthly
End of term or per annum
Quarterly
Semi-annually
Distributions are subject to conditions
Discretionary
Yes
No
No
No
Discretionary
Transferrable
Yes - via stock exchange
Yes - via stock exchange
No
No
Yes - via stock exchange
Yes - via stock exchange
Issuer exchange
Yes
No
No
No
No
No
Issuer early redemption
Yes
Yes
No
No
No
No
Exchange into ordinary shares or write down of security
Yes - if a bank becomes non-viable (called a 'non-viability' trigger event) or a certain capital level is breached (called a 'capital trigger event')
Yes - if a bank becomes non-viable
No
No
No
N/A

Things you should know

The information in this module is not investment advice and has been prepared without taking into account your investment objectives, financial situation or particular needs (including financial and taxation issues). If you have any questions, you should seek advice from your financial adviser or other professional adviser.