Different ways to invest in a bank

Different ways to invest in a bank can be separated into two broad categories:

• Transaction and term deposit accounts
• Bank securities

Each category and the investments within the category have different features and different levels of returns and risk. Investors should carefully consider which investments are appropriate depending on their individual circumstances. Further information for each different investment is on this page, as well as a comparison of the different features between these investments.

Transaction accounts and term deposit accounts are investments with a bank where interest is earned on the amount deposited. 

Interest: The interest rate typically varies according to the term to maturity with higher rates for longer terms.

Term: The term maturity varies from being at call to a fixed term.

Protected under the Financial Claims Scheme: Deposits are protected under the Financial Claims Scheme - this means that the Australian Government will repay the first $250,000 invested by each depositor if the bank fails.

Bank securities include:

• Retail bonds
• Tier 2 hybrid capital securities
• Tier 1 hybrid capital securities
• Ordinary shares (also called equity)

Dividends and interest: Bank securities are securities issued by a bank where dividends or interest is paid. Subsidiaries of a bank may also issue bank hybrid securities. Dividends paid on ordinary shares are based on the profit of the bank and not the face value. Interest paid on bank hybrid securities and retail bonds is based on the face value of the security.

The dividend or interest rate varies according to the risks of the securities.

Term and repayment: The term to maturity varies from no maturity date or perpetual (for example, ordinary shares and some bank hybrid securities) to a set maturity date (for example retail bonds). If listed on a stock exchange, an investor can sell their bank securities on market.

The face value and amount you expect to be repaid may not be the same as the amount you paid for the security.

Not protected under the Financial Claims Scheme: Bank securities are not protected under the Financial Claims Scheme - the Australian Government will not repay the investment if the bank fails.

Further information on each bank security is below. 

Retail bonds are typically securities that have a maturity date and pay interest.

• Payment of interest is not discretionary or subject to payment conditions
• Retail bonds sometimes appear to be the same as deposits but are not the same
• Retail bonds are not protected under the Financial Claims Scheme

Tier 2 hybrid capital securities are typically securities that have a maturity date.

• Interest is calculated on a predetermined formula. Interest is paid but is subject to solvency conditions (this is referred to as interest being "deferrable"). If interest is not paid, it will accrue and become due and payable when the bank is deemed solvent (this is referred to as interest being "cumulative")
• The face value may be repaid early on a specific date (called a "call date")
• They may be issued by a bank or a subsidiary of a bank

The terms of each bank hybrid security are different. It is important that investors read the relevant prospectus and understand the particular features of each security before investing.

Tier 1 hybrid capital securities are typically securities with no maturity date but are scheduled to exchange into ordinary shares in the bank on a fixed date.

• Interest is calculated on a predetermined formula. Interest is paid but is subject to the bank's absolute discretion and certain conditions. If interest is not paid, the bank does not have an obligation to pay it (this is referred to as interest being "non-cumulative")
• If interest is not paid, the terms of these securities generally restrict the bank from paying ordinary share dividends. This protects investors because banks will attempt to pay the interest to avoid such restrictions
• The face value may be repaid early on a specific date (called a "call date")
• They may be issued by a bank or a subsidiary of a bank

The terms of each bank hybrid security are different. It is important that investors read the relevant prospectus and understand the particular features of each security before investing.

Equity (also called ordinary shares) are securities with no maturity date. 

• Dividends are discretionary
• The term "discretionary" means that the bank can decide whether it wishes to pay a dividend and the amount of that dividend