Security Price: $72.80
Industry: Banking
Forecast distribution: $3.40
National Income Securities (‘NABHA’) are non-cumulative, unsecured, perpetual securities that pay quarterly interest distributions at a 1.25 per cent margin above the 90-day bank bill swap rate. In this sense, the distribution rate paid by NABHA is a floating rate, in that it is influenced by prevailing cash rates. As cash rates continue to decrease, so too do distributions. However, this is reflected in the discount to face value NABHA currently offers.
The current 90-day bank bill swap rate is tracking at around 2.15 per cent. Adding NABHA’s 1.25 per cent margin, the hybrid is currently paying out annual interest of about $3.40 on the face value of $100 per security. However, with the securities trading at about $73, this equates to a running yield of around 4.7 per cent.
NABHA’s prospectus effectively contained a “dividend stopper” that provides holders with some protection against lapses in distribution.
Given the sound level of capital, together with the dividend stopper in place, the perceived risk of non-payment is relatively low. In fact, NABHA has paid a distribution every quarter since listing back in 1999.
Further, NABHA is usefully classified as noncompliant with current Basel III Common Equity Tier 1 (CET1) capital requirements. As a result, NABHA securities are incrementally losing their usefulness as capital for NAB and are increasingly dilutive to return on equity (ROE).
This makes redemption of the securities more likely in the medium term, particularly as it would be ROE accretive for the Bank. As the security is currently trading at a steep discount to its face value of $100, should NAB decide to redeem, NABHA offers the longer-term possibility of potential capital upside.
NABHA goes ex-interest on July 29, at which point we expect the income securities to trade back below $72, good value in the current environment.
Although an investment in NABHA brings with it more risk on a relative basis, the solid yield of 4.7 per cent compares favourably to returns being offered by term deposits, and carries additional upside due to the ­increasing likelihood of redemption at face value.
NABHA is likely to be of interest to income-seeking investors, paying a reliable and predictable interest distribution in excess of the cash rate.