Bank Hybrids Are Being Called. What Comes Next for Client Income?

Are your clients’ bank hybrids expiring?

Bank hybrids did a specific job in client portfolios for close to twenty years. As call dates arrive, the question is which parts of that job each client still needs done – and what can do that job now.

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

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. Investing for retirement ain’t what it used to be, and with clients moving into drawdown, advisers need a view on what can carry the income role hybrids performed.

The role hybrids played in client portfolios

With approximately $32 billion¹ 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:

1. Regular income – a floating rate above the bank bill rate.
2. Franking credits – lifting the after-tax return.
3. Familiar names – major bank credit quality.
4. Rollover certainty – a fresh issue always waiting.

Their retirement may leave a gap in an investor’s portfolio just as client demand for income is evolving.

Why bank hybrid investments are being phased out

In December 2024, APRA confirmed it would phase out Additional Tier 1 (AT1) as eligible bank capital, finalising the changes a year later. AT1 was built to absorb losses and stabilise a bank under stress, converting to equity or being written off before it failed. The 2023 Credit Suisse resolution tested that 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. APRA has pointed to Tier 2 subordinated debt as a simpler alternative.

The timeline is gradual; the client conversations are not. The phase-out runs from 2027 to 2032, but most hybrids will be called well before then – more than a third within about two years, close to 85 per cent within five². Around $2 billion is scheduled to be called across September and October alone. These decisions land in this year’s review cycle.

Waiting is itself a decision, and it carries a cost. Hybrids trading above face value typically converge towards face value as the call nears, so investors may not ultimately realise the premium currently reflected in market valuations if the securities are redeemed at face value.

Liquidity thins as the market shrinks, and proceeds landing in cash without a plan sit at cash rates. Planning ahead can help clients consider their available options before proceeds are returned.

The gap this leaves

The rollover pipeline is closing. Banks will replace hybrids largely with Tier 2 subordinated debt, issued in wholesale parcels and not generally available to retail clients. 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. 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. 

Filling the gap

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:

• Notice accounts – Classic, 90 Day and 6 Month – for monthly income with shorter notice.
• The 12 Month Investment Account, the flagship option outlined below, holding approximately $11.3 billion and named “Best Credit Fund – Mortgages” by Money magazine for 17 consecutive years.
• The 2 Year and 4 Year Investment Accounts, for capital committed longer.
• Select Investment Account – one of Australia’s largest peer-to-peer lending portfolios.

A bank hybrid is an unsecured, subordinated exposure to a single bank that can absorb losses in a crisis. Now consider the 12 Month Investment Account. It has a different structure – a diversified portfolio of loans, each secured by a first-ranking mortgage over Australian property.

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 tax profile differs. The Fund does not provide franking credits, so for clients who valued the grossed-up return, any comparison should consider the after-tax return, not the headline yield alone.

For clients who prefer a listed structure

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. 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, with distributions unfranked. It invests across the 12 Month Investment Account and the La Trobe US Private Credit Fund, the latter of which is managed with Morgan Stanley.

For clients approaching a call date, a review is an opportunity to revisit how their income needs are met from here. The 12 Month Investment Account and the listed LF1 are two alternatives available to clients seeking monthly income at a meaningful yield, security over first mortgages, diversification, and a choice of terms. 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 our Investment Centre on 1800 818 818.