Investors in bank shares have enjoyed huge gains over the past three years but in the second quarter of 2015, it’s been the pain trade
This share prices of the big four banks are down between 10 and 17 percent since April 1
– a sharp correction that should unnerve the legion of retail investors who have thought of bank stocks as a sage source of income.
But what about the controversial close cousins, bank hybrids? Well, hybrids issued by the major banks have held up better but have not entirely escaped the brutal sell-off, with some hybrids declining by about half a percent.
Bank hybrids, also known as capital notes or preference shares, are a blend of equity and debt. These securities pay a set rate of interest above the bank rate until they are redeemed. Unlike bank shareholders, hybrid investors don’t share in the upside of bank’s profits through share price gains and higher dividends, but do tend to benefit from more stable price.
Hybrids do care risks. Holders rank below deposits and senior debt in the capital structure and in the event the bank suffers extreme losses, holders could see their hybrids converted equity.