Australian specifics · Income
Bank Hybrids After APRA's Phase-out
APRA has decided Australian banks should stop using hybrid securities as regulatory capital. Existing hybrids will mature or be called over the next several years, which leaves holders with a replacement problem. Confirm the current status and timetable with APRA before relying on any date here.
What a bank hybrid is
Listed bank hybrids (technically Additional Tier 1, or AT1, capital) pay a floating rate, usually with franking, and trade on the ASX. Many retail investors treated them as a higher-yielding cousin of a term deposit.
They were never that. Hybrids can be converted into ordinary shares or written off if the bank gets into serious trouble, distributions can be stopped, and the bank, not you, generally decides when they're redeemed. They are designed to absorb losses. That's why the bank could count them as capital.
What APRA decided
In December 2024 APRA announced it would phase out AT1 hybrids as bank capital. Its concern was that hybrids might not work as intended in a crisis, partly because so many were held by retail investors. Under the new framework, which starts from 1 January 2027, banks are expected to replace AT1 mostly with Tier 2 capital (a type of subordinated debt) and some common equity. Existing hybrids are expected to be redeemed at their call dates, with the phase-out completed by around 2032.
The replacement problem
When your hybrid is called you get your money back, and then you have to decide what to do with it. The options all differ from what you had:
- Term deposits and cash: lower risk, usually lower income, no franking.
- Bank shares: franked dividends, but full share-price risk.
- Tier 2 notes, corporate bonds or bond funds: different ranking, mostly unfranked, and many are less accessible to retail investors.
- Other listed income products: check carefully what you actually own, including liquidity, fees and ranking.
Be wary of anything marketed as a "hybrid replacement" with similar income and less risk. Higher income usually comes with risk somewhere, even if it's harder to see.
What to check for your holdings
- The first call date of each hybrid you own.
- The share of your income that comes from hybrids.
- What role that money plays: defensive buffer, or income?
What to do with this
List your hybrids by call date. For the next one due, write down what job that money does in your portfolio before the redemption cash arrives, so the decision isn't made by whatever product is being promoted that month.