Income Report / Income Note: New hybrids hit the market – how do the new notes in BOQ, BEN & WBC stake up?

Another strong session for stocks today, recovering much of the declines from yesterday morning’s high, the buying more broad-based today than yesterday with the line we wrote in AM note today ringing true. My “Gut Feel” is the buying in the banks and resources will continue but the aggressive selling of some tech names will abate slightly pushing the underlying index higher. IT has actually bounced back strongly today while the Material stocks are having a rest.

Sector Performances Today

Source; Bloomberg

Overall, the ASX 200 is currently trading up +92pts / 1.46% to 6433.

ASX 200 Chart

The Income portfolio had a strong week with equity markets carrying the portfolio up +3.62%.There were no dividends for the week so performance came from gains from SYD (+14%), SIQ (+12%), NAB (+12%), IFL (+11%) and TCL (+10%).. The portfolio remains well ahead of its benchmark for the current financial year, up 7.58% vs the RBA + 4% target of 1.53%.

New hybrids hit the market – how do the new notes in BOQ, BEN & WBC stake up?

Three new bank hybrids have hit the market in the last few weeks in addition to the higher risk, higher yield Challenger Financial (CGF) note which was also out.

The notes are all tier 1 issues, all have the same conditions with different durations and yields. As a refresher, the quality of the underlying issuer, the structure of the note and the duration are the main influences on the yield paid at issue, from there the market will price it based on other more fluid factors that can see the notes move around. For example, in February the average financial hybrid on the ASX was trading at a margin around 2.9% (i.e. prices were relatively high), however as global market conditions turned on the virus, the risk premium investors demanded blew out to around 4.70% (i.e. prices were relatively low)

The market is now back in the mid 3% range which is ‘middle of the road’ from a historical context. As a broad rule of thumb, we view 3% as expensive and 4% as cheap when it comes to a typical tier 1 major bank hybrid.

Solactive Hybrid Index Chart

MM views all 3 securities as solid for those investors looking for yield, with lower volatility than shares.

1 Bank of QLD Hybrid – Capital Notes – new offer

Key points:

·         Bank of QLD Capital Notes (BOQPF)

·         $200m with the ability to raise more or less

·         3.80% margin over the bank bill rate

·         Optional Call Date 22 March 2027 i.e. 6.2 years

·         No reinvestment

·         Offer closes 17th November

MM is positive this hybrid

2 Bendigo Bank Hybrid – Capital Notes – new offer

Key points:

·         Bendigo Bank Capital Notes (BENPH))

·         $350 with the ability to raise more or less

·         3.80% margin over the bank bill rate

·         Optional Call Date 15 June 2027 i.e. 6.5 years

·         Reinvestments offer for the BENPE

·         Offer closes: 24th November

MM is positive this hybrid

 

3 Westpac Hybrid – Capital Notes – new offer

Key points:

·         Westpac Capital Notes WBCPJ

·         $750m with the ability to raise more or less

·         3.40% margin over the bank bill rate

·         Optional Call Date 22 March 2027 ~ 6.25 years

·         Re-investment Offer for the WBCPF

·         Offer closes: 30th November

MM is positive this hybrid

Earlier this month Challenger Financial launched a new issue offering a juicy 4.6% over bank bills, however that is a higher risk issuer.

The chart below looks at the current landscape for financial hybrids with more than 3.8 years to run. The AMPPB (which we covered here) continues to offer an attractive yield in our view.

Conclusion

We are positive the 3 hybrids listed above

We view the Challenger note as higher risk

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate.  All prices stated are based on the last close price at the time of writing unless otherwise noted. Market Matters does not make any representation of warranty as to the accuracy of the figures or prices and disclaims any liability resulting from any inaccuracy.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers.

If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.