Bank Hybrids Phase-Out Leaves Investors Seeking New Income Options
Retirees and self-managed super funds (SMSFs) are facing the end of a familiar income option as bank hybrids reach their call dates. With approximately $32 billion of major bank hybrids outstanding, this shift affects a significant portion of retail investors.
For nearly two decades, bank hybrids provided a unique solution in client portfolios. They offered a floating rate above the cash rate, predictable distributions, and the perceived safety of major bank credit quality. However, this era is coming to a close.
The End of an Era for Bank Hybrids
The Australian Prudential Regulation Authority (APRA) confirmed in December 2024 that it would phase out Additional Tier 1 (AT1) capital, finalizing the changes by 2025. This decision was influenced by the 2023 Credit Suisse resolution, which highlighted the mismatch between the design of AT1 securities and the retail investors who held them.
The phase-out will occur gradually, but the impact on investors is immediate. More than a third of hybrids will be called within about two years, and close to 85% within five years. This leaves investors with a critical decision: what to do with the proceeds.
The Income Gap and Reinvestment Options
As hybrids are called, investors are left with a gap in their portfolios, particularly in terms of floating-rate income, franked income streams, and familiar investment options. La Trobe Financial highlights the need for a thoughtful approach to reinvestment, considering factors such as income needs, notice periods, and tax implications.
One option is the La Trobe Australian Credit Fund, which offers regular income, a trusted name, and transparency. With approximately $14.7 billion under management as of June 30, 2026, the fund provides various investment accounts tailored to different needs and time horizons.
For those seeking a listed structure, the La Trobe Private Credit Fund (ASX: LF1) may be a suitable alternative. Listed in June 2025, it pays monthly distributions with a current target cash distribution yield of the RBA Official Cash Rate plus 3.25% per annum*, net of fees, costs, and taxes incurred by the Fund, with distributions unfranked.
As investors handle this transition, it’s essential to consider the unique features and risks of each option. The phase-out of bank hybrids marks a significant shift in the income environment, and careful planning is key to ensure retirees and SMSFs continue to meet their income needs.
With $2 billion in hybrids set to be called in September and October alone, the time to act is now. Investors must weigh their options carefully, keeping in mind the changing trends of income investing in Australia.
The Impact of Budget Reforms on Investment Strategies
The 2026–27 Budget reforms to negative gearing and capital gains tax, effective July 1, 2027, have shifted the focus in Australian portfolios toward real income. This change makes deferred capital growth a less attractive strategy, especially for retirees moving into the drawdown phase.
Alternatives to Bank Hybrids
The 12 Month Investment Account, holding around $11.3 billion, has been named “Best Credit Fund – Mortgages” by Money magazine for 17 consecutive years.
For clients preferring a listed structure, the La Trobe Private Credit Fund (ASX: LF1) may fit better. 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. Each has its own structure, risk profile.
