Like a packet of Winfield cigarettes, ASX-listed hybrids are distinctly Australian, and have been around long enough and with enough scare campaigns and hazard labels to assume that consumers know the dangers.raised the distinct possibility that bank hybrids will be put behind the counter – if not removed from the retail shelves altogether.
APRA’s entire focus is to solidify the financial system so that depositor funds are subject to as little risk as possible. The better capitalised the system, the safer it is, and hybrids are an enhancement to typical shareholder capital that banks can use to build up that protective layer.
But the counter-argument is that APRA is going too far and is fixing something that ain’t broke. The prudential regulator lays out carefully what is required of a security to meet its definition of regulatory capital. But is it APRA’s role to decide who actually provides that capital? It’s a tricky one.
If APRA does, however, engineer a migration of tier one capital from the ASX-listed investor base to institutions, that process will involve a lot of friction and some high cost.It will also have implications for the cost of bank capital. Hybrids are an extraordinarily cheap form of financing for the banks, in part because they are considered as equity by the tax office, which allows them to pay those highly coveted franked distributions to holders.
The consequence of this is that if Australian banks are forced to raise their tier one capital from institutions that can’t access franking credits, the costs are going up, and they might require a tax ruling that makes the interest payments deductable. But some would argue that direct access to securities should be encouraged, especially in the period ahead, in which fixed income offers compelling returns to equities.One sector that will not welcome this development is stockbrokers. The steady stream of hybrid deals from the big banks has been a source of fee income for brokers and wealth managers in all market conditions. Brokers are paid a 0.75 per cent selling fee and a 0.5 per cent joint manager fee on deals.