Westpac’s Guide to Bank Hybrids

What is this Guide for?

This Guide has been developed to help investors understand some of the features and risks associated with investing in Australian hybrid capital securities (Hybrids). In particular, the Guide focuses on Additional Tier 1 Bank Hybrids typically issued by Australian banks to wholesale and retail investors (Bank Hybrids).
 

Australian banks issue Hybrids to meet their funding and capital requirements. Banks need to ensure that they are well capitalised to support their lending activities and meet regulatory capital requirements set by APRA.
 

Hybrids are complex instruments and it is important for potential investors to fully understand the features and risks before investing to ensure they are a suitable investment. There are risks associated with investing in Hybrids, including that Bank Hybrids may be converted into ordinary shares or written-off where the bank is no longer viable (including where the bank suffers significant losses) and this could result in the loss of the entire investment.

Capitalised terms used throughout this Guide are defined in the Glossary
 

What is a Bank Hybrid?

The term Hybrid is generally used to describe securities that have features of both debt instruments (fixed income) and equity instruments (shares). Although the terms may vary considerably from one Hybrid to another, Hybrids are generally issued by well-known companies and banks, like Westpac. In addition, Hybrids tend to have complex terms and, due to the higher risks associated with an investment in Hybrids, generally pay higher rates of interest or distributions than bank deposits (savings accounts and term deposits) and vanilla corporate bonds. (See Bank Hybrids for further details on the features and risks of Bank Hybrids).

Bank Hybrids are not guaranteed by the issuing bank or the government whereas bank deposits may be protected by a government guarantee under the Australian Government's Financial Claims Scheme. An investment in Bank Hybrids is generally considered to have less risk than an investment in a bank’s ordinary shares (although unlike ordinary shares, they can be Written-Off) but more risk than a bank deposit or other forms of senior unsecured bank borrowings (e.g. senior bank debt or bonds). 

Another feature that adds to the risk and complexity of Bank Hybrids is that, if the issuing bank is in financial difficulty, investors in Bank Hybrids may lose some or all of their investment because their Bank Hybrids may be converted into ordinary shares or Written-Off in those circumstances (see Conversion or Write-Off). This can lead to a change in the Ranking of an investor's investment or the loss of the entire investment. 

Important information for retail investors

From October 2021, new product design and distribution obligations (DDO) laws became effective for issuers of financial products (including Bank Hybrids).
 

The new DDO laws require issuers of Bank Hybrids to determine a target market of investors for those products, and set conditions under which those products can be distributed to help ensure that persons who invest, or are likely to invest, are within the target market. The target market for each offer of Bank Hybrids by Westpac will be set out in the “Target Market Determination” and can be found here.
 

If you are a retail investor who is interested in participating in future offers of Bank Hybrids, you must be within the target market for that offer. You must seek professional advice as to whether you are within the target market, and that an investment in Bank Hybrids is suitable in light of your investment objectives, financial situation and particular needs.