By Geoff Wilson
APRA’s retail hybrid ban is an attack on retail investors who trust the bank regulator and the Australian banks and invested in bank hybrids in good faith.
APRA’s decision to abolish bank hybrids defies logic and is an attack on Australian retail investors and the franking credit system. The decision comes months out from what is expected to be a highly contested federal election.
Unfortunately, retirees and those with self-managed superannuation funds will pay the greatest price. In the name of protecting investors from a potential failure of Australian banks’ capital structure, APRA may well be pushing investors up the risk curve.
If these retail investors are forced to divert their hybrid investment towards equities in search of investments that generate a comparable yield, they will be taking on more risk. Bank hybrids are stable and have historically displayed less than half the losses of bank stocks during drawdowns, and around a quarter of the return volatility.
This decision by APRA also comes at exactly the wrong time in the valuation cycle. Being forced into common equity when the bank sector is trading at all-time high valuations poses additional risks.
Take Commonwealth Bank, which is trading on 26 times FY2025 earnings and 3.5 times price-to-book value. If APRA genuinely wanted to de-risk the system for retail investors, they need to allow retail investors to move up the capital debt structure into senior debt or subordinated debt.
With the banning of bank hybrids, the regulator is effectively saying that retail investors are not smart enough to understand the risks involved with these investments.
If anyone should be looking at the risks to retail investors, it’s ASIC. There’s more than $40 billion invested in bank hybrids, which will now requires a new home. Will APRA direct the more than $20 billion of retail money currently invested in bank hybrids on where it should be invested?
Rather than make changes to overall capital through hybrids, APRA should consider whether risk weightings for various assets are fit for purpose.
At the same time, if APRA believes hybrids are too risky to be sold to retail investors, why does APRA allow bank equity to be invested in, as it sits below bank hybrids on the capital stack? It is our view that retail investors should be able to invest wherever they want and should not be stripped of a critical source of secure and reliable franked income with an appropriate amount of risk.
This is an attack on retail investors who trust the bank regulator and the Australian banks and who invested in bank hybrids in good faith.
In large part thanks to APRA, the Australian banking system is among the strongest and best-rated in the world. The Australian bank hybrid market has been a safe and secure funding vehicle for the bank sector for decades, and it should continue.
The Credit Suisse example provided by APRA as the reason for the proposed removal of Australian listed bank hybrids is not comparable to the Australian context – Credit Suisse’s hybrids were structured differently, and Australia’s regulatory framework is much more conservative compared to its global peers.
Credit Suisse, in the quarter before its bailing out, had 18 per cent of its assets funded by deposits compared to 70 per cent for Australian major banks. Financial institutions live or die by their stability and a run on deposits or credit risk concerns will lead to an inability to fund themselves, not whether they have hybrids or not.
Perhaps what has been most disappointing is the consultation process. We understand the industry is against this proposal. We lodged a submission and argued for the status quo to remain. Also, not one of the investors, consultants, research teams, associations or universities advocated for a hybrid phase-out in their responses.
Rather than make changes to overall capital through hybrids, APRA should consider whether risk weightings for various assets are fit for purpose.
We believe that all shareholders should be treated equitably. APRA must not make these changes to remove bank hybrids from retail investors’ investment universe without suitable alternatives.
Hybrids are an important instrument that helps fund the entire Australian banking system while providing critical franked income for a significant number of Australians. This should be a moment of pause and meaningful consultation rather than one of pushing through changes that defy logic and treat retail shareholders unfairly.
