Bank hybrids end as income option
Bank hybrids are being called, closing a familiar income option for retirees and self-managed super funds (SMSFs). As call dates arrive, the issue is which parts of the job each client still needs done – and what can do that job now.
After serving as a stable income source for nearly two decades—where investors benefited from floating rates above cash returns, consistent payouts, and the backing of Australia’s robust banking sector—the era of retail hybrid securities is ending.
Hybrids Retire Amid Budget Reforms
Hybrids are retiring just as the focus in Australian portfolios falls squarely on real income. The 2026–27 Budget reforms to negative gearing and capital gains tax, effective 1 July 2027, have made deferred capital growth a harder case to run.
The role hybrids played in client portfolios
With approximately $32 billion of major bank hybrids outstanding and retail investors holding an estimated 25 per cent of these, hybrids became one of Australia’s most widely held income securities. They answered four needs at once: regular income, franking credits, familiar names, and rollover certainty.
As these hybrids retire, they may leave a noticeable void in investor portfolios, especially as demand for reliable income grows. The phase-out of Additional Tier 1 (AT1) capital, confirmed by APRA in late 2024, is the primary driver behind this change.
APRA Phases Out AT1 Capital
The 2023 Credit Suisse resolution tested the design of AT1, with AT1 holders written off as regulators engineered the bank’s rescue. This mismatch between how the security is built and who came to own it sits behind APRA’s decision to phase out AT1.
APRA has suggested Tier 2 subordinated debt as a more straightforward replacement, though the transition will take time. The phase-out runs from 2027 to 2032.
Already, about $2 billion in hybrids are set to be called back in September and October alone, forcing investors to act during their annual portfolio reviews. Delaying decisions, however, comes with its own financial consequences.
Hybrids trading above their face value often dip toward that benchmark as redemption nears, meaning investors may not keep the premium reflected in their current market price if the securities are repaid at par. As the market shrinks, liquidity dwindles, leaving cash proceeds earning minimal returns at current rates.
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Proactive planning can help investors assess their options before funds are returned. With the rollover market closing, banks are replacing hybrids mostly with Tier 2 debt, which is typically sold in bulk and off-limits to retail buyers.
Replacing Lost Income Streams
When each hybrid matures, cash flows back into portfolios, creating gaps in three areas: floating-rate income exceeding cash yields, franked distributions, and a familiar investment experience that clients have relied on for years.
Replacing all three from one source is unlikely, so three key considerations frame the conversation: income now or growth later, how much notice does the client need, and how much of the after-tax return leaned on franking rather than yield?
Clients may resist, as a hybrid that is still paying looks like it is working. However, comparable income is still on offer outside the hybrid market, with granular diversification and, in certain structures, an exposure that sits at the top of the capital stack.
Alternative Income Solutions Emerge
The La Trobe Australian Credit Fund speaks to many of the same needs: regular income, a trusted name, and transparency. La Trobe Financial has helped Australians invest for 74 years and manages approximately $25 billion.
As at 30 June 2026, the La Trobe Australian Credit Fund managed approximately $14.7 billion across seven Investment Accounts. Allocation can be matched to each client’s needs and time horizon, with options including notice accounts, the 12 Month Investment Account, and the 2 Year and 4 Year Investment Accounts.
Loans are diversified by borrower, property type, industry, and geography, with an average loan-to-value ratio of 67.8 per cent as at 30 June 2026. Investors in the 12 Month Investment Account have received 100 per cent of their invested capital since inception in 2002.
Some clients held hybrids precisely because they were listed, bought through a broker, visible on a portfolio statement, able to be sold on market. For them, the La Trobe Private Credit Fund (ASX: LF1) may fit better, with monthly distributions and a current target cash distribution yield of the RBA Official Cash Rate plus 3.25 per cent per annum.
Each has its own structure, risk profile, and tax treatment, and suitability will depend on the client’s objectives and circumstances. To talk through whether either may suit, contact your Business Development Manager or the Investment Centre on 1800 818 818, as around $2 billion is scheduled to be called across September and October alone.
