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CommBank PERLS IX - Are they true pearls?

Financial Advice Lismore

A client recently asked me about PERLS IX and I thought other people may be interested to know a bit more about them.

Every so often the major banks offer something that looks similar to a term deposit – you give money to the bank, they pay interest and you get your money back. The latest are the so called PERLS IX Capital Notes offered by the Commonwealth Bank. It is perhaps no coincidence that the word ‘notes’ evokes memories of past debenture notes that were quite similar to term deposits.

However, these PERLS IX capital notes are something very different to a term deposit or a debenture. They pay 5.7% which is clearly much better than a term deposit. In addition, you will be able to buy and sell the notes on the Australian Stock Exchange from April 5th onwards at any time which is much more liquid than a term deposit.

However, there are some very serious downsides to this investment. In good times, you won’t notice those downsides, you will collect your interest and get your money back. In bad times, though, you could lose some or even much of your investment and it could happen within days.

The reason is that APRA, the banking regulator who did a great job getting our banking system through the global financial crisis (APRA was still scarred from Westpac’s near failure in the 1990s and therefore didn’t allow the bad investments that brought other banks in the world to their knees), can at any time and in many circumstances order the bank to stop paying the interest on the notes.

In addition, the notes could be forcibly exchanged into Commonwealth Bank shares under certain circumstances as outlined on page 49 of the prospectus. Sometimes that is okay but the specific purpose of these notes is to protect the solvency of the bank.

If the Commonwealth Bank is ever in difficulties, the notes can be changed into shares just when the share price is dropping sharply. That is an unlikely event, but, as a recent banking scare in the UK showed, even a faint whiff of such a possibility makes a lot of investors sell these kinds of notes immediately and, well before any change into shares would be forced, the value of those notes can drop substantially overnight.

In other words, these notes combine the disadvantages of bonds (they don’t rise much when the company is doing better) with the disadvantages of shares as they both can fall sharply in value at short notice.

If you know this and consider the interest rate adequate compensation for the risk, you can go ahead but for me the interest rate is quite a bit too low to make up for those risks.

Financial Advice Christoph Schnelle Lismore


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