Australia’s major banks have long provided attractive investment opportunities – and they should continue to do so. However, as he Australian Prudential Regulation Authority (APRA) aims to bring the domestic banking sector into the top quartile of banks globally in the years ahead, Australia’s major banks will be required to issue more equity-like capital.

As a result, the most attractive opportunities for investors in the banking sector are shifting: Equity investors are likely to bear the burden of banks’ higher capital requirements in the form of less reliable dividends and lower returns on equity, while improved capital ratios and the better credit profiles that result should benefit investors in other securities ranked higher in the capital structure issued by banks, including bonds.

In our view, Australian investors should consider diversifying into a broader selection of global bank securities in their portfolios to potentially improve risk-adjusted returns in the years ahead. In particular, the debt and capital securities that banks in developed markets around the world are issuing to raise capital generally offer attractive yields and high credit quality. Investing in a global portfolio of bank capital securities can offer investors the added advantage of diversification at a time when Australia’s banking sector has increasing exposure to the domestic property market.

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