Over the past decade, ANZ, CBA, NAB and WBC (Big Four) have issued hybrid securities as a means of satisfying capital requirements required by APRA. In 2015, there was a resurgence in the issuance of these securities by the banks as they came under increasing pressure from the regulatory authority to increase their equity Tier 1 capital in accordance with the new Basel III requirements. These standards are to be adopted by participating nations by 2019. The attached table lists the current hybrids on offer by the Big Four.
CBA Perls VIII is the most attractive hybrid currently on the basis of gross yield and term to maturity (5.20%, 7.55 years). If we compare this against shorter-dated hybrids however, their superior trading margins suggest that investing in CBAPE is irrational. For example, ANZPD is at 5.68% and WBCPF is at 5.42% (as at February 2016). These alternatives have shorter redemption dates and hence less repayment risk.
The worst performer award would go to CBA Perls VII which was issued in October 2014 with a margin of only 2.80% above the 90-day BBSW, followed closely by Westpac Capital Notes 2 which has a margin of 3.05%. Both their terms to maturity are longer than most others at 10.21 and 10.26 years respectively.
Investors have become more critical of such hybrids that have offered little compensation for the longer term to maturity. As such, recent hybrids have responded with a shorter average term of 8.03 years as well as a higher yield of 4.08% average (compared to 3.31% for hybrids issued between 2009-12). It is worth noting that the hybrid credit curve still remains relatively flat once you go past four years so you aren’t necessarily being compensated for the additional term risk.