Big Four Banks Likely To Follow CBA Lead And Issue Hybrids

Post by Sharat on August 14, 2009 · Under Australian Economy, Business News, Capital Markets, banking, investments, news · Comment

Australia’s Big Four banking groups are likely to follow the lead of rival Commonwealth Bank of Australia (CBA), who is raising $700 million in fresh capital through a Tier 1 Hybrid issue.

An unnamed banking source told The Age, that ANZ, NAB, Westpac and Macquarie would all be looking at similar issuance of hybrids.

Hybrid issuance has declined by nearly 80 per cent in 2009 as Australian financial institutions opted instead to raise finance through equity sales, increasing capital levels and reducing the need to issue hybrids.

Tier-1 Capital is a closely watched measure of lenders stability, and provides a buffer for protection of the bank’s deposits. Lenders often choose to maintain higher ratios if they are considering future acquisitions, or anticipating further credit impairment.

Hybrid Tier 1 issues in Australia typically target retail investors with franked dividends, or tax benefits and attractive returns. A hybrid offer by CBA currently yields around 8.5 per cent including the tax benefit.

Institutional investor appetite for such issues is expected to decline going forward, as ratings agencies increasingly take a more punitive view on the credit ratings of hybrid issues.

Hybrid Tier 1 issues are usually rated two notches below senior bank debt, but credit ratings agency Moody’s Investor Service has indicated that it may now rate them three to four notches below.

The terms of CBA’s Hybrid Tier 1 issue have still not been disclosed. The lender is expected to provide the prospectus for the deal to ASIC shortly, and the deal is likely to be managed by a large syndicate of banks.

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