Change of tactics for savers
Alternatives to term deposits could emerge now that banks have to raise $20 billion in capital. By Tom Pullar-Strecker.
There might be a silver lining for savers from the Reserve Bank’s decision this month to require banks to raise about an extra $20 billion of capital. Banks will be able to raise up to $9b by offering investors a type of share that normally pays a dividend higher than savers can expect to earn on term deposits.
But banking experts say savers who are tempted to buy such shares need to be aware of the potential risks.
Overall, savers can expect slightly lower interest rates on bank savings and term deposits as a result of the Reserve Bank’s decision to ‘‘goldplate’’ the banking system by requiring more banks to hold more capital.
The gap between the interest rates banks pay savers and the interest they charge on loans is expected to widen by an average of between 0.2 and 0.6 percentage points over the next seven years, according to most forecasts.
But an upside of the Reserve Bank’s decision – in addition to savings hopefully being safer in the bank – is that at least some banks may consider raising a portion of the billions they require by offering redeemable perpetual preference shares to investors.
Despite their off-putting name, redeemable perpetual preference shares are a fairly straightforward investment that can provide an alternative to the likes of term deposits for savers seeking slightly higher, but still reasonably lowrisk, returns.
They can be bought and sold instantly like shares, but don’t tend to bob about so much in value.
Instead, their return comes in the form of a dividend that is commonly set at a fixed premium above wholesale interest rates.
For investors, redeemable perpetual preference shares look much like bonds.
That is except for the floating dividend rate, and the fact that the capital value of the investment is not returned until or unless the shares are bought back by the bank at their original issue price.
In the early 2000s, ASB raised $550 million through two such shares, ASBPA and ASBPB.
These could be bought and sold on the NZX before the bank bought them all back, or ‘‘redeemed’’ them, for their $1 issue price, in May.
Before they were delisted, the shares were paying a solid annual return of a little under 4 per cent, aided by a decline in their purchase price, and their redemption provided a small windfall for investors who bought-in at the right time.
ASB chief economist Nick Tuffley said it was a ‘‘maybe’’ whether the Reserve Bank’s capital decision would see a new spate of such products offered to retail investors in New Zealand. ‘‘It is going to come down to two things, one of which is whether there is investor appetite for them.
‘‘We do have a low interest-rate environment and you can see retail investors are looking hard at how they can earn more than they will get from a term deposit.’’
But the other issue was whether banks would be concerned about issuing redeemable preference shares to non-professional investors.
A downside of preference shares is that investors are second in line – after banks’ ordinary shareholders – to take the brunt of the impact if a bank runs into financial woes, Tuffley noted.
One of the practical issues for banks would be whether they were comfortable issuing such somewhat riskier investments to retail investors ‘‘in an environment where good customer outcomes has been receiving a lot of focus’’, Tuffley said.
‘‘Will people fully understand what they are buying into?
‘‘One of the learnings of the finance company disasters of 2008 and 2009 is that, much as you can try, people don’t necessarily.’’
He predicted that smaller banks might be more tempted to raise capital through redeemable preference shares.
That was because they might not have as many other options to build up capital quickly, particularly if they were cooperatives and could not rely on the alternative of retaining a bigger portion of their profits.
‘‘Then it becomes more appealing to issue those sorts of securities.’’
Massey University banking expert David Tripe said banks might choose to issue redeemable perpetual preference shares on the Australian stock exchange or through private placements. He agreed investor knowledge could be an issue. ‘‘I think the lessons will be such that New Zealand issuers will be fairly careful. The issue is always whether people understand what they are actually buying.
‘‘There have been a number of cases internationally – some Italian banks got into trouble in 2017 and 2018 because they had some subordinated debt that had been sold to clients over the counter as highest interest deposits.’’
Despite that, banks that are tempted to raise capital through redeemable perpetual preference shares may have an incentive not to linger.
Tuffley said there was a degree of ‘‘frontloading’’ in the big four banks’ need to raise $20b over seven years.
ANZ, ASB, BNZ and Westpac will be required to raise a significant chunk of their extra capital within little more than a year, because of changes to the way the Reserve Bank would calculate their risk-weighted assets, he said.
‘‘They will need to lift their capital holdings quite swiftly.’’
‘‘Will people fully understand what they are buying into?’’ ASB chief economist Nick Tuffley