$ 43.2 bn
$ 5.3 bn
25 %
With APRA phasing out Australian bank hybrids by 2032, the income strategies many investors have relied upon for decades are coming to an end. As we move into this new era, investors may need to rethink how they generate income and reposition their portfolios for what comes next.
Whether you are a financial adviser having conversations with your clients or an investor holding bank hybrids and wondering what to do next – download our guide to understand our potential alternative.
Bank hybrids – as the name suggests – have characteristics of both bonds and equities. They were typically issued with a par value of $100 and pay quarterly coupons. Hybrids are listed on the ASX and also pay franking credits.
Investors have used hybrid securities for decades as a way to access regular floating rate income payments and franking credits.
In 2024, APRA confirmed it will phase out the use of Additional Tier 1 (AT1) or hybrid securities issued by Australian banks. These will mostly be replaced by Tier 2 (T2) or subordinated debt in their capital structure in a move aimed at strengthening and simplifying the banking and financial system, particularly during periods of crisis.
Accordingly, we don’t expect there will be any new issuance or rolling replacement of any major bank hybrid securities - so if you currently invest in hybrid securities, you may be looking to find alternative income solutions.
As bank hybrids mature, investors may need to identify where to reinvest capital to maintain income levels.
- Investors relying on hybrid distributions may face a gap in regular income
- This may prompt a reassessment of how income is generated within portfolios, including exposure across different parts of a bank’s capital structure
- With maturities already underway, decisions may need to be made sooner rather than later
This has led many investors to explore alternative sources of income beyond bank hybrids, such as subordinated debt.
As bank hybrids mature, investors are increasingly exploring other income-generating parts of a bank’s capital structure – including senior bonds, subordinated debt and equities.
Among these, subordinated debt has emerged as an area of interest for investors seeking regular income, given its position within a bank’s capital structure and its role in generating yield.
Subordinated debt is being seen by many as an alternative to hybrids as this is what Australian banks will be utilising to replace hybrids on their balance sheet.
From an investor standpoint, bank subordinated debt, can offer compelling yields and more frequent income than the quarterly distributions hybrids provided. However, is not like-for-like as it does not carry franking credits (now only available via Australian equities) and is not available to be traded on the ASX like hybrids.
The claims of subordinated debt holders rank below that of senior bondholders or depositors. That means if the issuer were to default, subordinated bondholders will only be paid after all obligations to higher ranking creditors are paid. As a result, subordinated bonds generally pay higher interest than senior bonds.
Despite ranking lower on the capital structure hierarchy, subordinated debt has many of the same higher-quality features as senior bonds. They both offer non-discretionary coupons, so interest payments must be made, and have a clearly defined maturity date at which principal must be repaid.
What differentiates subordinated bonds is their ‘loss absorbing’ feature. Subordinated bonds form part of the regulatory capital that banks are required to hold to protect depositors and policyholders from unexpected losses. This means in the event of severe crisis, which the regulator deems a bank to no longer be viable, interest and capital payments owing to subordinated bondholders can be delayed, converted to equity potentially at a significantly lower value than the principal amount or in the worst case written off. To compensate for this risk, subordinated debt can offer a higher yield than senior debt and deposits.
Subordinated debt typically offers attractive yield and regular income, with lower capital risk compared to hybrids or equities, whilst providing exposure to high quality issuers such as the major banks.
Some of the benefits of investing in actively managed subordinated debt are
- Wider investment universe: More opportunities to invest than passive ETFs, which are restricted to the benchmark universe. Passive ETFs often track only around 20% of the securities in the subordinated debt market
- Traditional fixed income benchmarks are flawed: Passive fixed income ETFs track indices that tend to be weighted towards the most indebted issuers – and these issuers are not necessarily the most credit worthy. Active managers can exploit these benchmark inefficiencies
- Actively managed: Can dynamically adapt to fast-changing market conditions, adjusting exposure towards higher-quality issuers with the aim of achieving the best market outcomes and protecting against downturns
Introducing the Macquarie Subordinated Debt Active ETF (ASX: MQSD)
Designed as a liquid and diversified way to access subordinated debt, MQSD provides an alternative for investors seeking to replace bank hybrid income.
4 September 2025
Watch the webinar replay to explore how investors can approach alternatives to bank hybrids and generate potential income. The team outlines differences in yield potential across various options available.
22 August 2025
Blair Hannon, Head of ETFs, sits down with Livewire Markets to unpack bank hybrids; why they mattered, and where investors might turn next as APRA phase out hybrids by 2032.
1 April 2025
Brett Lewthwaite, CIO and Global Head of Fixed Income, shares his views on how investors can target attractive yields with lower risk through fixed income investing.
Subordinated debt is the closest hybrid replacement."
Brett Lewthwaite
CIO and Global Head of Fixed Income, Macquarie Asset Management
Risks
All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short term).
The risks of investing in the Macquarie Subordinated Debt Active ETF include:
Investment risk: The Fund seeks to generate higher income returns than traditional cash investments. The risk of an investment in the Fund is higher than an investment in a typical bank account or term deposit. Amounts distributed to unitholders may fluctuate, as may the Fund’s NAV unit price, by material amounts over short periods.
Manager risk: There is no guarantee that the Fund will achieve its performance objectives, produce returns that are positive, or compare favourably against its peers, or that the strategies or models used by the Investment Manager will produce favourable outcomes.
Income securities risk: The Fund may have exposure to a range of income securities. The value of these securities may fall, for example due to market volatility, interest rate movements, perceptions of credit quality, supply and demand pressures, a change to the reference rate used to set the value of interest payments, market sentiment, or issuer default.
More information on the risks of investing in the Fund is contained in the Product Disclosure Statement, which should be considered before deciding to invest in the Fund.
Important information
The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
1. Source: Australian Financial Review, “APRA winds down $43b bank hybrid market, angering investors”, December 9, 2024