Hybrids - Why The Government Moved The Goal Posts Away From You.
There’s always another Hybrid coming. That’s been the way for a decade or so now.
But recently APRA changed the rules, moved the goals posts in favour of the banks and you’re probably not going to see the hook hidden behind the bait.
The latest Hybrids are now offering to give you a higher dividend – that’s the bait. Explained in more detail in this video here
But this disguises the new terms of the Hybrid, the hook. In summary these are:
- More risk
- More volatility
- Less certainty in distributions
These changes are a by-product of international banking regulation/requirements we’ve seen endless media headlines of Basel III, soon to Basel IV.
Australian’s banking regulator (APRA, the government body overseeing the Australian Banks) responded to these requirements by hacking away investor’s benefits sitting with Hybrids. More explanation here
The banks are now in the middle of and ‘out with the old and in with the new’ campaign. Which means any Hybrid offering you see today is definitely ‘don’t make ‘em like they used to’.
Today’s hybrid is an inferior investment to those of previous years, and what’s worse is that the distributions have a lot less certainty in being paid – actually they’re more like dividends now, as Richard Murphy of XTBs explains here
Dividends can fall, just ask any BHP shareholder whose September dividend was cut from $0.87 to $0.18 a share. After APRA’s changes, the risk of Hybrid holders not receiving their distributions, or dividends, has increased dramatically.
So investors will want to read the fine print when a bank offers to convert and old Hybrid into a new Hybrid, especially a new Hybrid with a baited hook – oh, I mean higher yield.
Learn more about the changes to Hybrids in this interview with Richard Murphy , XTBs CEO.
Christopher is head of equites at Spring Financial Group. Christopher has over 10 years' experience managing equities desks with thousands of retail clients and responsibility for maintaining and servicing retail and wholesale relationships.