Bank shares or Bank Tier 1 hybrids – a question of choice!

The last two weeks have seen a severe decline in the price of bank shares, a steepening in the yield curve and a slight widening in Tier 1 regulated Bank hybrid securities. As an example CBA’s PERLS VII is off 6.5% from its issue price and the common equity is off 15% from its high ($96.30). This gives investors the following yield choices:

CBA special deposit rate 3.10%
PERLS VII (Hybrid) 6.91%
CBA Equity 7.17%

(all yields grossed up for franking)

PERLS VII are off a whopping 1.1% from their issue margin (now 3.91% over 90-Day BBSW) and very close to the franked yield on the common equity which is more volatile and down the capital structure. As discussed in a related article we believe the new capital requirements of the banks benefits investors up the capital structure, not equities. In our opinion this looks like an oversell in the hybrid market in sympathy with bank share sell off.