Bank hybrids start to disappear for investors

Call dates for bank hybrids are arriving, closing a familiar income option for retirees and self-managed super funds (SMSFs). As these call dates arrive, it is clear that each client still needs certain services done – and other options can now do that job.

For close to 20 years, hybrids paid a floating rate at a spread above cash, distributions arrived on a predictable cycle, and the strength of Australian banks meant no client ever saw a conversion event. That era is now closing for retail investors.

The decline of hybrids coincides with a growing emphasis in Australian portfolios on generating actual income. The upcoming 2026–27 budget changes to negative gearing and capital gains tax, set to take effect on July 1, 2027, have made strategies relying on deferred capital appreciation more challenging to justify.

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.

Their disappearance may create a void in investor portfolios just as demand for income products is shifting. The planned phase-out of Additional Tier 1 (AT1) capital, announced by APRA in December 2024, is driving this transition.

In December 2024, APRA finalized its decision to phase out AT1 as eligible bank capital, with the changes fully implemented by the following year. AT1 instruments were designed to absorb losses and stabilize banks under stress, either converting to equity or being written off before failure occurred.

Bank hybrid investments are being phased out

The 2023 Credit Suisse resolution tested the AT1 design, with AT1 holders written off as regulators engineered the bank’s rescue. It is the mismatch between how the security is built and who came to own it that sits behind APRA’s decision.

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APRA has suggested Tier 2 subordinated debt as a more straightforward alternative.

About $2 billion in hybrid redemptions are expected between September and October alone, coinciding with this year’s portfolio reviews. Delaying a decision carries its own financial consequences.

Hybrids trading above their face value often return to that level as their redemption date approaches, meaning investors may not retain the premium reflected in current market prices if the securities are called in at par. As the market shrinks, liquidity dries up, leaving cash proceeds earning minimal returns until reinvested.

Proactive planning can help clients evaluate their options before redemptions occur. With the hybrid rollover market closing, banks will primarily issue Tier 2 subordinated debt, which is typically unavailable to retail investors in standard formats.

As each hybrid is called, proceeds land back in cash, leaving a gap in portfolios. The gap sits in three places: floating-rate income above cash, a franked income stream, and an experience clients are familiar with.

Replacing all three from one source is unlikely, so three questions 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. It is worth saying plainly that 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.

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La Trobe Financial has helped Australians invest for 74 years and manages approximately $25 billion. The La Trobe Australian Credit Fund speaks to many of the same needs: regular income, a trusted name, and transparency.

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.

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.

The La Trobe Australian Credit Fund offers a range of investment accounts to suit different client needs. These include notice accounts, such as the Classic, 90 Day, and 6 Month options, which provide monthly income with shorter notice periods.

The 12 Month Investment Account is the flagship option, holding approximately $11.3 billion in assets. It has been named “Best Credit Fund – Mortgages” by Money magazine for 17 consecutive years.

Alternative investment options

For clients who prefer a listed structure, the La Trobe Private Credit Fund (ASX: LF1) may be a suitable alternative. Listed in June 2025, LF1 pays monthly distributions with a current target cash distribution yield of the RBA Official Cash Rate plus 3.25 per cent per annum, net of fees, costs, and taxes incurred by the Fund.