Bank Hybrid Securities Basics

Welcome to
BANK HYBRID
SECURITIES

BASICS

Welcome to this module on basic things we think you should know about investing in bank hybrid securities. This is an interactive module and you will have an opportunity to answer questions to test your understanding.

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Welcome to this module on basic things we think you should know about
investing in bank hybrid securities.

After completing this module, you should understand:
  • How you can invest in a bank
  • Differences between investments in a bank
  • Key risks and benefits of investing in bank hybrid securities
  • How to monitor a bank's financial position using relevant financial ratios

You will have an opportunity to answer questions to test your understanding.

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Would you like to answer some questions to test your understanding on investing in a bank before proceeding to the next topic?

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The correct answer is "all of the above". Bank hybrid securities are used by banks to borrow money from investors but they have complex features of both debt and equity which you should ensure you understand before investing in them.

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Correct. Bank hybrid securities are used by banks to borrow money from investors but they have complex features of both debt and equity which you should ensure you understand before investing in them.

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Correct. Ordinary shares are riskier for investors to invest in because there is no maturity date and dividends are discretionary. Hybrid Tier 1 Capital securities are less risky for investors to invest in because interest is paid at a pre-determined rate and, if interest is not paid, the bank cannot pay dividends on its ordinary shares. In addition, investors should receive ordinary shares in the bank worth a fixed value on a fixed date. Hybrid Tier 2 Capital securities are less risky again for investors to invest in because interest will not be paid in limited circumstances and investors should receive their money back on a fixed date.

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Would you like to answer some questions to test your understanding on the risks of bank hybrid securities before proceeding to the next topic?

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Incorrect. The bank has an option to repay your bank hybrid securities after 5 years but they are not required to repay your them until the mandatory conversion date in 7 years' time (subject to certain conditions being satisfied). You cannot ask for early repayment or conversion. On the mandatory conversion date, they will deliver ordinary shares with a value equal to the face value. If you would like to sell your investment before the mandatory conversion date, you may sell them on a stock exchange but there is no guarantee they will be trading at exactly the same amount as you invested.

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Incorrect. Bank hybrid securities are not secured. If the bank becomes insolvent and is liquidated, the securities rank for payment behind other creditors. This means that creditors such as depositors will be paid first and some or all of your investment may not be repaid.

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Incorrect. Bank hybrid securities have loss absorbing features such as non-viability triggers and capital triggers. If the bank experiences financial difficulty, the bank may not pay the interest or repay the face value. The securities may be converted into ordinary shares which are a different type of investment. Bank hybrid securities are not deposits and are not protected by the government guarantee.

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The correct answer is "all of the above". Bank hybrid securities have complex features of both debt and equity which you should ensure you understand before investing in them.

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Incorrect. Every bank hybrid security is different, even if issued by the same bank (for example, they may have different maturity dates). If they are issued by different banks, the risks of each bank's business is different from another bank's. The prospectus for bank hybrid securities contains information about a bank's business risks to assist you to compare banks, and you should also understand their key ratios.

Finish

Correct. The bank has an option to repay your bank hybrid securities after 5 years but they are not required to repay them until the mandatory conversion date in 7 years' time (subject to certain conditions being satisfied). At that time, they will deliver ordinary shares with a value equal to the face value. If you would like to sell your securities before the mandatory conversion date, you may sell them on a stock exchange but there is no guarantee they will be trading at exactly the same amount as you invested.

Next Question

Correct. Bank hybrid securities are not secured. If the bank becomes insolvent and is liquidated, the securities rank for payment behind other creditors. This means that creditors such as depositors will be paid first and some or all of your investment may not be repaid.

Next Question

Correct. Bank hybrid securities have loss absorbing features such as non-viability triggers and capital triggers. If the bank experiences financial difficulty, the bank may not pay the interest or repay the face value. The securities may be converted into ordinary shares which are a different type of investment. Bank hybrid securities are not deposits and are not protected by the government guarantee.

Next Question

Correct. Bank hybrid securities have complex features of both debt and equity which you should ensure you understand before investing in them.

Next Question

Correct. Every bank hybrid security is different, even if issued by the same bank (for example, they may have different maturity dates). If they are issued by different banks, the risks of each bank's business is different from another bank's. The prospectus for bank hybrid securities contains information about a bank's business risks to assist you to compare banks, and you should also understand their key ratios.

Finish
Bank hybrid securities are generally less risky for investors to invest in than ordinary shares.

Bank hybrid securities provide a regular and defined income stream in the form of distributions.

Investors should receive ordinary shares in the bank worth a fixed value, or their money back, on a fixed date.

Bank hybrid securities provide an opportunity for investors to diversify their investments. Investors should invest in a diversified portfolio of equity and other securities.

You should do these:
  • Read the prospectus
  • Ask for advice from your professional adviser
  • Answer the questions in this module to test your understanding
  • Look at ASIC's MoneySmart Website

Questions:

You have reached the end of the bank hybrid securities basics module.

If you would like to answer some questions relating to how to invest in a bank, click here

If you would like to answer some questions relating to the risks of bank hybrid securities, click here

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