Wry & Dry

Bank 'hybrids' & Shakespeare

When W&D is struggling for fiscal images, readers will notice he invariably turns to Churchill, Shakespeare.  Or Monty Python.  And today, again it's The Bard, this time about bank hybrid issues.

Readers will be familiar with the great fiscal lesson of The Merchant of Venice [2].  


That lesson is Read The Fine Print.  But many investors don't read the fine print associated with investments they make.  And rely, instead, on the advice of their banker or financial planner.

So, consider this week's $1.25 billion hybrid (i.e. a variable interest-rate security that can be converted into equity or redeemed under certain circumstances) issue by the CBA.  Bankers and advisers will get a 1% commission for selling the deal to their clients.  Nice work, if you can get it [3].  But do you think that a banker or adviser is really going to tell a retail investor about the fine-print?  Especially when a couple of million in sales (entirely possible) will provide $20,000 for a few hours' work. 

W&D has two major issues with this issue that advisers might not disclose.  

Firstly, bank hybrids are listed on the ASX (no problem with that).  So whilst the yield (or income) can seem attractive, a hybrid's market price can vary with the market.  So it is possible to take a capital loss.  For example, an investor who stumped up $100,000 for CBA's Perls VII, but now needs to sell, will only get back $85,500.  That is, a 14.5% loss.  Ouch.  Yes, you can lose money on hybrids - they are not like bank deposits.

Secondly, as the AFR's Jonathon Shapiro succinctly puts it, "almost every comparable bank security in the secondary market is offering spreads that are more attractive on a 'yield to call' measure."  Or as Christopher Joye, that very astute analyst put it, "Why the new issue is another dud deal."  Investors would be better off buying similar bank issues in the secondary market.

W&D can also add that the hybrids are perpetual securities, with exposure, obviously, to the CBA.  As CBA shares are yielding (at the minute) about 8.08% (grossed up) compared to the Perls estimated 7.5%, why not buy the shares?  Unless you think the CBA is going broke, you might surely wish the upside of shares, rather than no upside with the hybrid.

Still, why let the facts get in the way of a handy commission? Or of that pound of flesh?