Why is everyone talking about bank hybrids?
AT1 bank hybrids are popular with retail investors for their attractive returns, franking credits, and perceived safety, supporting low funding costs for Australian banks. In fact, retail investors hold an estimated 30% of the available bank hybrid securities in Australia. These products were designed after the Global Financial Crisis to manage liquidity risks, but APRA believes that they are overly complex products for retail investors, and don't serve their intended purpose during times of financial stress. Therefore, APRA is phasing out bank hybrids by 2032, with most being called within the next five years. Approximately $43 billion dollars is invested in AT1 bank hybrids and will need to be reallocated.
Below we delve further into how the phase-out will unfold, and why now is the time for retail investors to think about reallocating their bank hybrid exposure to Australian high yielding credit.
Bank hybrids outstanding
As of today, there are approximately $43bn in major bank retail bank hybrids outstanding. These charts show that over a quarter (27%) of the outstanding securities will be called in less than 2 years and over three quarters (76%) will be called in under 5 years. The chart on the right shows the cadence of the phase-out.
Why might Australian corporate credit make an ideal replacement for bank hybrids?
Australia’s corporate credit index offers high quality for investors, which makes it an attractive option for those looking to reduce bank hybrid exposure but still wanting higher yields without the volatility of equities. Benefits include strong diversification, robust regulation, inflation protection and stable policy settings.
Global macroeconomic conditions are challenging, and volatility persists. Since February, Australian credit spreads have widened but not as much as US investment grade and high yield markets, which remain vulnerable to further spread widening with higher-for-longer US rates. In contrast, Australia’s rates are beginning to ease, making Australian credit an appealing opportunity to benefit from capital gains and relative spread stability.
Why should investors consider replacing their bank hybrids now, rather than later?
There are a few reasons why investors should be considering their current position in hybrids now, rather than deferring until the call dates.
Potential for capital losses
If investors own AT1 bank hybrids that were bought above their face value, they may face a loss, if the call price is less than they paid. Because APRA has decided these securities will be called, investors also won’t receive expected coupons beyond the call date. This makes them riskier than non-callable bonds as the call date approaches.
Diminishing liquidity
As a bond gets close to maturity, its price becomes less affected by interest rates, so bond traders may lose interest. Similarly, retail and institutional investors may no longer be interested, as the soon-to-mature bond may not fit their portfolio objectives. With fewer coupon payments left, trading slows and it becomes more expensive and harder to buy or sell the bond.
Compelling opportunities outside of bank hybrids
Investors who are concerned about replicating returns they have received on bank hybrids may be hesitant to review their position, however there are other compelling income opportunities outside of pure bank hybrids, which can offer similar returns, greater diversification and lower volatility - such as Australian high yield credit.
INTRODUCING THE
Schroder Australian High Yielding Credit Fund
Combining attractive yield with better risk-adjusted returns than equities.^
For investors seeking:
• superior risk-adjusted return with minimal interest rate risk;
• an alternative to cash-based products;
• exposure to the best Australian companies with more protection than equities.
The Fund has returned 5.64% p.a. (net of fees) since inception. This is 2.38% p.a. over the RBA cash rate.^^
Hear more about the Fund
In this video, Portfolio Manager Helen Mason explains how the Schroder Australian High Yielding Credit Fund addresses the need for a higher-yielding income option beyond diversified, traditional equity and cash-based products.
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The role of the Schroder Australian High Yielding Credit Fund in portfolios
The Schroder Australian High Yielding Credit Fund offers investors the opportunity to generate competitive monthly income, preserve capital, diversify their portfolios, and potentially achieve consistent returns with lower risk and volatility compared to equities. Duration and currency exposures are also hedged, which can help to mitigate potential risks.
This product is likely to be appropriate for a consumer seeking income and capital preservation. This product focuses on a single asset class therefore should only be considered for up to 50% of a portfolio allocation where the consumer has a medium to high risk and return profile. This product has a bias towards defensive assets and therefore it is unlikely to be suitable for a consumer seeking high levels of capital growth or for those consumers that have a high return objective, or those consumers with a short investment horizon.
^ As of January 31, 2025. Underlying strategy rolling three-year returns compared to the S&P/ASX200.
^^Figure as at September 2025. The Schroder Australian High Yielding Credit Fund - Active ETF was incepted on 4 Dec 2024. The management fees and costs of HIGH are estimated to be 0.50% p.a. of the net asset value (NAV) of the Fund which comprises of the following components: – A management fee: 0.50% p.a. of the NAV of the Fund – Indirect costs: estimated to be 0% p.a. of the NAV of the Fund – Expense recoveries: estimated to be 0% p.a. of the NAV of the Fund.