## Distributions on Tier 1 Hybrids

• are scheduled to be paid periodically (typically quarterly or semi-annually) and may carry Franking Credits
• may vary due to Market Rate movements (if distributions are payable at a floating rate)
• are discretionary and will not be paid if Payment Restrictions exist
• are non-cumulative, meaning unpaid distributions do not accumulate over time and investors have no claim over any unpaid distributions
• if not paid, typically restrict the Bank from paying dividends on Ordinary Shares

### Calculating distributions

Tier 1 Hybrids may pay a floating or fixed rate distribution, usually on a quarterly or semi-annual basis. This will be set out in the Prospectus.

Generally, Tier 1 Hybrids pay a floating rate distribution which is based on the Face Value of the Hybrid. The total distribution amount will typically be calculated as follows:

Total distribution amount = (Market Rate + Margin) x (number of days in Distribution Period/365) x Face Value

Where Franking Credits are available, the cash distribution amount will typically be calculated as follows:

Cash distribution amount = Total distribution amount x (1 – Tax Rate)

The amount of Franking Credits attached to the distribution will typically be calculated as follows (assuming the distribution is fully franked):

Franking Credits = Total distribution amount x Tax Rate

### Examples

#### 1. Distribution Amount – with full franking

If the distribution is fully franked, Hybrid investors will receive a combination of cash and Franking Credits. Assuming a Market Rate of 4.00% per annum, a margin of 3.00% per annum, a Tax Rate of 30%, 92 days in the Distribution Period and a Face Value of \$100, the distribution would be calculated as follows:

##### Total distribution amount
Market Rate plus Margin (4.00% + 3.00%) 7.00% per annum x92/365 x\$100 =\$1.7644 per Hybrid
##### Cash distribution amount (franked)
Total distribution amount \$1.7644 per Hybrid x0.70 =\$1.2351 per Hybrid

This means the Distribution Rate on a franked basis is 7.00% x 0.70 or 4.90%

##### Franking Credits attached to the distribution (assuming distribution is fully franked)
Total distribution amount \$1.7644 per Hybrid x0.30 =\$0.5293 per Hybrid

#### 2. Distribution Amount – with partial franking or without franking

If the distribution is partially franked or not franked at all, Hybrid investors will receive a greater proportion of the distribution as cash to compensate for the reduction in the amount of Franking Credits received. If no Franking Credits are available, the total distribution amount will be paid in cash.

### Market rate movements

The Distribution Rate for a floating rate Tier 1 Hybrid is driven by a Market Rate (which is likely to vary over the life of the Tier 1 Hybrid) and a Margin (which will not vary). Movements in the Market Rate will result in changes to distributions. As the Market Rate fluctuates, there is a risk that a Tier 1 Hybrid may become less attractive when compared to other investments.

It is possible for the Market Rate to be negative. If this occurs, the negative amount will be taken into account in calculating the Distribution Rate. Even if the Distribution Rate is calculated to be negative there will be no obligation on Holders to pay the Bank.

### Distributions may not be paid

Whilst distributions on Tier 1 Hybrids are scheduled to be paid on specified dates set out in the Prospectus, the Bank may not always pay a distribution to investors when scheduled.

Distributions are paid on Tier 1 Hybrids at the discretion of the Bank, and failure to pay a distribution will not give a Tier 1 Hybrid investor any right to the missed distribution or to require their investment to be returned. Many Tier 1 Hybrids will include terms preventing the Bank from paying dividends on Ordinary Shares if it has not paid scheduled Tier 1 Hybrid distributions in full, although, the inclusion of such a feature does not guarantee that distributions will be paid.

In addition, a Tier 1 Hybrid distribution cannot be paid to Tier 1 Hybrid investors if a Payment Restriction exists.

Tier 1 Hybrid investors face the risk that scheduled distributions will not be paid if the Bank does not elect to pay them, or if any Payment Restrictions exist.

## Understanding Tier 1 Hybrid terms

Tier 1 Hybrids are perpetual instruments, which typically have an Optional Redemption and Optional Conversion features that apply at least five years from the Issue Date. Mandatory Conversion features apply at least seven years from the Issue Date, if the Tier 1 Hybrid has not been Redeemed, Resold or Converted earlier.

### Optional Redemption or Resale

Even though Tier 1 Hybrids have no fixed maturity date, typically there are two circumstances when the Bank can, at its option, redeem or resell the Hybrid by repaying the Face Value (typically \$100 per Hybrid) in cash, subject to certain conditions (including APRA approval).

These circumstances are:

1. an Optional Redemption Date or Optional Resale Date occurs (this date must be at least 5 years after the Issue Date); or
2. a Tax Event or Regulatory Event occurs (these events could occur at any time).

If one of these circumstances occurs, the Bank may choose to redeem or resell all or some of the affected Tier 1 Hybrids, subject to satisfying the Conditions to Optional Redemption or Optional Resale. Tier 1 Hybrid investors have no right to request Optional Redemption or Optional Resale and should not assume that the Conditions to Optional Redemption or Optional Resale will ever be satisfied, or that the Bank will exercise its discretion to redeem or resell any Hybrids, even if one of the circumstances described above occurs.

Hybrid investors face uncertainty as to whether the Bank will decide to redeem or resell a Tier 1 Hybrid and whether APRA’s approval, if requested, will be given. A Bank’s decision as to whether or not to redeem or resell a Tier 1 Hybrid may not suit all Hybrid investors.

### Optional Conversion

There are a number of circumstances in which the Bank can, at its option, Convert a Tier 1 Hybrid, subject to certain conditions (including APRA approval). Hybrid investors do not have the right to request the Conversion of a Hybrid.

The number of Ordinary Shares that a Hybrid investor receives following Optional Conversion will be determined by a formula set out in the Prospectus. The formula is based on the trading price of Ordinary Shares (VWAP) during a period leading up to the Optional Conversion Date, and is designed to ensure that Hybrid investors receive approximately \$101 worth of Ordinary Shares per Hybrid (assuming a Face Value of \$100) to compensate for brokerage and other costs associated with selling Ordinary Shares.

The Bank may choose to Convert a Tier 1 Hybrid when:

1. The Optional Conversion Date occurs (this date must be at least 5 years after the Issue Date)
2. A Tax Event or Regulatory Event occurs (these events could occur at any time)
3. Certain steps are taken to acquire the Bank, for example, a takeover bid or scheme of arrangement

If one of these circumstances occurs, the Bank may choose to Convert all or some of the affected Tier 1 Hybrids, subject to satisfying the Conditions to Optional Conversion (including APRA approval).

Conversion may occur on dates not previously contemplated by Hybrid investors, which may be disadvantageous in light of market conditions or individual circumstances and may not suit Hybrid investors.

There is a risk that the Conditions to Optional Conversion will never be met and the Hybrid will remain on issue indefinitely.

Hybrid investors have no right to request Conversion and should not assume that APRA approval will be given or that the other Conditions to Optional Conversion will be satisfied.  If a Tier 1 Hybrid is Converted, the investor will cease to have any rights as a Tier 1 Hybrid investor.  Instead, they will hold Ordinary Shares in the Bank and have the rights (and bear the risks) associated with that investment.

### Mandatory Conversion

Tier 1 Hybrids typically include a feature for Mandatory Conversion on a scheduled date, which is at least two years after the last Optional Redemption Date (“Scheduled Mandatory Conversion Date”), subject to the Conditions to Mandatory Conversion (which may never be satisfied).

If the Conditions to Mandatory Conversion are satisfied on the relevant date (which may never occur), Tier 1 Hybrids will be Converted, and Tier 1 Hybrid investors will receive Ordinary Shares in return for their Tier 1 Hybrid investment.

The Conditions to Mandatory Conversion are designed to ensure Hybrid investors receive a minimum value of Ordinary Shares for each Tier 1 Hybrid Converted, and that those Ordinary Shares are capable of being sold on the ASX. The Conditions to Mandatory Conversion typically provide that Hybrid investors receive no less than approximately \$101 worth of Ordinary Shares per Tier 1 Hybrid Converted (assuming a Face Value of \$100) to compensate for brokerage and other costs associated with selling Ordinary Shares.

Conversion will not occur in certain cases where the Ordinary Share price has decreased significantly since the Tier 1 Hybrid was issued, or if the Ordinary Shares have been de-listed from the ASX.

There is a risk that the Conditions to Mandatory Conversion will never be met and the Tier 1 Hybrid will remain on issue indefinitely.

### Tier 1 Hybrids may remain on issue if Conversion or Redemption conditions are not satisfied

If the Bank does not choose to Convert or redeem a Tier 1 Hybrid, if APRA approval is not provided, or the applicable conditions to redemption or Conversion are not satisfied, the Tier 1 Hybrid will remain on issue. It could be Converted or redeemed in the future if the applicable conditions are satisfied, or remain on issue indefinitely.

If not Converted, Hybrid investors could only realise their investment by selling their Tier 1 Hybrid on the ASX at the prevailing market price (if this is possible), which may be less than the Face Value.

Hybrid investors face uncertainty as to whether the Bank will decide to redeem or Convert a Tier 1 Hybrid, whether APRA’s approval, if requested, will be given and whether Conditions to Mandatory Conversion will ever be satisfied. A decision as to whether or not to redeem or Convert a Tier 1 Hybrid may not suit all Hybrid investors.

A Tier 1 Hybrid may also be impacted by Conversion on acquisition of the Bank.

## Loss Absorption

Conversion or Write-Off may occur at any time due to the occurrence of a Common Equity Trigger Event and/or Non-Viability Trigger Event.

### Common Equity Trigger Event

#### If a Common Equity Trigger Event occurs, Tier 1 Hybrids will be Converted or Written-Off in full.

A Common Equity Trigger Event occurs if, at any time, the Bank’s Common Equity Tier 1 Capital ratio is equal to or below 5.125%. The Common Equity Tier 1 Capital ratio is a measure of a Bank’s financial strength, based on the amount of Common Equity Tier 1 Capital it holds proportional to the risks it bears.

If a Common Equity Trigger Event occurs, the Bank must Convert or Write-Off some or all of the Tier 1 Hybrids on issue to restore its capital ratio to the required level. These actions are likely to result in Hybrid investors suffering a loss on their Tier 1 Hybrid investment.

### Non-Viability Trigger Event

#### If a Non-Viability Trigger Event occurs, Tier 1 Hybrids will be Converted or Written-Off to the extent required by APRA.

In summary, a Non-Viability Trigger Event occurs when APRA has provided a written determination to the Bank that:

• a Conversion or Write-Off of Hybrids is necessary because without the Conversion or Write-Off, APRA considers that the Bank would become non-viable, or
• without a public sector injection of capital into, or equivalent support with respect to, the Bank, APRA considers that the Bank would become non-viable.

If a Non-Viability Trigger Event occurs, the Bank must Convert or Write-Off some or all of its Tier 1 Hybrids (as required by APRA). These actions are designed to help the Bank absorb losses and are likely to result in a Hybrid investor suffering a loss on their Tier 1 Hybrid investment. If Tier 1 Hybrids are Written-Off, Tier 1 Hybrid investors will have no claim on the Bank (even though Ordinary Shares may still be on issue) and Tier 1 investors are likely to be worse off than holders of Ordinary Shares.

Investors should note that APRA will not approve partial Conversion or partial Write-off in those exceptional circumstances where a public sector injection of funds is deemed necessary.

#### What does “non-viable” mean?

In relation to Non-Viability Trigger Events, APRA’s prudential standards do not define non-viability and APRA has not provided specific guidance as to how it would determine non-viability. However, APRA has indicated that non-viability is likely to arise prior to the insolvency of an ADI. Non-viability could be expected to include serious impairment of a Bank’s financial position. However, it is possible that APRA’s view of non-viability may not be confined to solvency or capital measures and APRA’s position on these matters may change over time. Non-viability may be significantly impacted by a number of factors, including factors which affect the business, operation and financial condition of a Bank. For instance, systemic and non-systemic macroeconomic, environmental and operational factors, domestically or globally, may affect the viability of a Bank.

### Loss Absorption: Conversion or Write-Off

#### What is a Tier 1 Hybrid investor likely to receive if a Tier 1 Hybrid is Converted due to a Common Equity Trigger Event and/or Non-Viability Trigger Event?

If a Tier 1 Hybrid is Converted due to a Common Equity Trigger Event and/or Non-Viability Trigger Event, the Tier 1 Hybrid investor will receive Ordinary Shares in exchange for their Tier 1 Hybrid.  The number of Ordinary Shares that a Tier 1 Hybrid investor receives is determined by a formula based on the trading price of Ordinary Shares (VWAP) during a period leading up to the Common Equity Trigger Event and/or Non-Viability Trigger Event and is capped at the Maximum Conversion Number.  Details of the formula will be set out in the Prospectus.

The Maximum Conversion Number will apply if the VWAP at the time of the Conversion has fallen to or below 20% of the Issue Date VWAP.  If the Maximum Conversion Number applies, this is likely to result in Tier 1 Hybrid investors receiving significantly less than \$101 worth of Ordinary Shares per Tier 1 Hybrid (assuming a Face Value of \$100) and losing a significant amount of the money they invested in the Tier 1 Hybrid as a result.

The Ordinary Share price at the time of a Common Equity Trigger Event and/or Non-Viability Trigger Event is likely to be substantially lower than the Ordinary Share price at the time when the Tier 1 Hybrid was issued. Hybrid investors may lose all or a significant amount of their investment.  In addition, there may be no market for Ordinary Shares received on Conversion.

If a Tier 1 Hybrid is Converted, the Tier 1 Hybrid investor will cease to have any further rights as a Tier 1 Hybrid investor.  Instead, they will become a holder of Ordinary Shares in the Bank and have the rights (and bear the risks) associated with that investment.

Where Hybrids are required to be Converted following a Common Equity Trigger Event and/or Non-Viability Trigger Event, Tier 1 Hybrid investors will not have the benefit of the protections offered by the Conditions to Scheduled Mandatory Conversion or the Conditions to Optional Conversion. Therefore, there is no guarantee that investors will receive a minimum value of Ordinary Shares for each Tier 1 Hybrid Converted or that those Ordinary Shares will be capable of being sold on the ASX.

#### Example - number of Ordinary Shares that a Hybrid investor would receive on Conversion following a Loss Absorption Event (Common Equity Trigger Event or Non-Viability Trigger Event)

Assumptions:
Face Value: \$100
Issue Date VWAP: \$25
Current VWAP: \$1

The number of Ordinary Shares issued on Conversion following the Loss Absorption Event is calculated as the lesser of: the Maximum Conversion Number (1) and the number given by the Conversion formula in the Prospectus (2).

(1) Maximum Conversion Number:

Face Value/(Issue date VWAP x 20%)
= 100/(\$25 x 20%)
= 20 Ordinary Shares per Hybrid.

(2) Conversion formula:

Face Value / 99% x Current VWAP.
= \$100/ (0.99% x \$1)
= 101 Ordinary Shares per Hybrid.

In this example, the Maximum Conversion Number is less than the number given by the Conversion formula, so the Maximum Conversion Number would apply and Hybrid investors would receive 20 Ordinary Shares per Hybrid. A Hybrid investor with 100 Hybrids would be allocated 100 x 20 = 2,000 Ordinary Shares.

At an Ordinary Share price of \$1, the total market value of those Ordinary Shares would be 2,000 x \$1.00 = \$2,000, compared to the original \$10,000 investment on the Issue Date.  Assuming the Ordinary Shares are able to be sold at \$1 (which may not be possible), the Hybrid investor would incur an \$8,000 loss (excluding any brokerage costs).

#### What is a Tier 1 Hybrid investor likely to receive if a Tier 1 Hybrid is Written-Off?

If, for any reason, Conversion does not occur within 5 days of a Common Equity Trigger Event and/or Non-Viability Trigger Event (for example, due to a court order or action of a government authority), Tier 1 Hybrids must be Written-Off. If a Tier 1 Hybrid is Written-Off, all of the Hybrid investor’s rights in relation to their investment are terminated. The Tier 1 Hybrid investor will lose their entire investment and will have no further rights in respect of their Tier 1 Hybrid. If this occurs, Ordinary Shares may still be on issue, and Tier 1 Hybrid investors are likely to be worse off than holders of Ordinary Shares.

#### Example – Write-Off

If a Hybrid investor’s 100 Tier 1 Hybrids issued to that investor on the Issue Date at \$100 per Hybrid are Written-Off, their entire investment in the Tier 1 Hybrid will be terminated and the Hybrid investor will incur a 100 x \$100 = \$10,000 loss.

### Order of Conversion of Tier 1 Hybrids and Tier 2 Notes

There are some cases in which APRA may require a Bank to Convert or Write-Off all of its Tier 1 Hybrids and Tier 2 Notes due to a Non-Viability Trigger Event. In other cases, APRA may determine that the Bank only needs to Convert or Write-Off a proportion of Hybrids on issue.  If APRA requires the Bank to Convert or Write-Off less than all Hybrids on issue, the Bank must Convert or Write-Off all Tier 1 Hybrids before Converting or Writing-Off Tier 2 Notes.  This means that, in certain circumstances, Tier 1 Hybrids may Convert before Tier 2 Notes and Tier 1 Hybrid investors may suffer losses before Tier 2 Note investors.

Banks have no obligation to issue or maintain Tier 1 Hybrids on issue (subject to their terms) and Tier 2 Note investors should not assume that they will do so.

## Assessing Tier 1 Hybrids

### Investing as part of the initial offer

An eligible investor can invest in a Hybrid when it is first offered. Investors who invest at this time will pay the Face Value for each Hybrid and the Hybrid will be issued on the Issue Date.

A Target Market Determination for a Hybrid will describe who the Hybrid may be suitable for based on likely needs, objectives and financial situation (target market), and will also set out who can distribute the Hybrid, how they can do this and situations when the Bank may need to review the Target Market Determination. For further information refer to the “Before You Invest” section of this guide.

### Buying and selling Hybrids on the ASX while on issue

Hybrids may be quoted on the ASX. If a Hybrid is quoted on ASX, this means that investors may be able to buy or sell Hybrids on the ASX at the quoted price applicable at the time. This is known as the “secondary market”. There is no guarantee that the secondary market will always be as liquid, or the quoted price as stable, as buyers and sellers would like.

In addition, trading prices on the secondary market may be affected by a range of factors, such as Australian and worldwide economic conditions, prevailing interest rates, how the Distribution Rate of the Hybrid compares to that of other comparable instruments and the Bank’s financial performance.  Hybrid investors face uncertainty as to how the market price of their investment will perform over time. It may go up or down, and there is no guarantee that the Hybrid will be traded at or above its Face Value, or at all.

The market price of a Hybrid is uncertain. It may go up or down and there is no guarantee that a liquid market will exist. If a Hybrid investor wishes to sell a Hybrid on the market, they will be subject to the prevailing market price, which may be lower than the Face Value invested.

#### Example – Loss from sale on the secondary market

A Hybrid investor who purchased 100 Hybrids at \$100 per Hybrid in the initial offer decides to sell their Hybrids on the secondary market some time later, where the current ASX market price is \$95 per Hybrid.

In this example, the Hybrid investor will make a \$500 capital loss (\$10,000 - \$9,500), excluding any brokerage costs.

## Summary of Tier 1 Hybrid features

When does this happen? Is APRA approval needed? Do conditions apply? What value will Hybrid investors receive? In what form will that value be provided?
Periodic distributions
When does this happen?
On each distribution payment date
Is APRA approval needed?
No
Do conditions apply?
Yes, discretionary and subject to the Payment Restrictions
What value will Hybrid investors receive?
Amount determined by Distribution Rate
In what form will that value be provided?
Cash and any applicable Franking Credits
Secondary market sale of investment
When does this happen?
At the investor's discretion, subject to market conditions
Is APRA approval needed?
No
Do conditions apply?
N/A
What value will Hybrid investors receive?
Prevailing market price at the time of sale, less any brokerage costs
In what form will that value be provided?
Cash
Optional Redemption or Optional Resale
When does this happen?
On the scheduled date or if a Tax Event or Regulatory Event occurs
Is APRA approval needed?
Yes
Do conditions apply?
Yes
What value will Hybrid investors receive?
\$100 per Hybrid
In what form will that value be provided?
Cash
Optional Conversion
When does this happen?
On the scheduled date, if a Tax Event or Regulatory Event occurs or if certain steps are taken to acquire the Bank
Is APRA approval needed?
Yes
Do conditions apply?
Yes
What value will Hybrid investors receive?
Approximately \$101 per Hybrid
In what form will that value be provided?
Variable number of Ordinary Shares
Mandatory Conversion
When does this happen?
On the scheduled date or if the Bank is acquired
Is APRA approval needed?
No
Do conditions apply?
Yes
What value will Hybrid investors receive?
Approximately \$101 per Hybrid
In what form will that value be provided?
Variable number of Ordinary Shares
Conversion due to a Loss Absorption Event
When does this happen?
If a Non-Viability Trigger Event or a Common Equity Trigger Event occurs
Is APRA approval needed?
No
Do conditions apply?
No
What value will Hybrid investors receive?
Depending on the market price of Ordinary Shares, significantly less than the Face Value
In what form will that value be provided?
Variable number of Ordinary Shares
Write-Off due to a Loss Absorption Event
When does this happen?
If a Non-Viability Trigger Event or a Common Equity Trigger Event occurs, and Conversion of the Tier 1 Hybrid has not occurred within 5 days.
Is APRA approval needed?
No
Do conditions apply?
No
What value will Hybrid investors receive?
\$0
In what form will that value be provided?
N/A