Hybrid securities are financial instruments that combine features of both debt (bonds) and equity (shares). In Australia, bank-issued hybrids — including capital notes, convertible preference shares (CPS), and Additional Tier 1 (AT1) securities — are listed on the ASX and have been popular with income-seeking retail investors due to their above-market yields. However, hybrids carry significant risks that many retail investors underestimate.
What Are Hybrid Securities?
A hybrid is a security that pays regular income (like a bond) but has features that can convert it into shares or write it off entirely under certain conditions (like equity). Australian bank hybrids are the most common type:
- Issued by the Big Four banks and other major financial institutions
- Listed on the ASX (tradeable like shares)
- Pay a floating-rate margin above the benchmark rate (typically BBSW + a spread)
- Have a scheduled redemption date but no guarantee of repayment
- May be converted to shares or written off if the issuing bank faces financial stress (at APRA’s direction)
How Hybrid Income Is Calculated
Most Australian bank hybrids pay:
Income = (BBSW + Margin) × Face Value
Where BBSW is the Bank Bill Swap Rate (a short-term interest rate benchmark).
Example: CBA Capital Note, face value $100, BBSW 4.35% + margin 2.80%:
- Annual income rate: 7.15%
- Quarterly income: ~$1.79 per security
Hybrid distributions are typically fully franked — meaning the grossed-up yield is even higher for eligible investors.
ASIC’s Warnings on Bank Hybrids
ASIC has consistently warned retail investors about the complexity and risks of bank hybrid securities. In 2024, ASIC recommended that retail investors generally avoid hybrid securities due to:
- Complexity that most retail investors do not fully understand
- Risk of conversion to equity or write-off in a bank stress event (when your income stream would stop)
- Liquidity risk — ASX hybrids can be illiquid in market stress when you most need to sell
This is not a warning to be dismissed — ASIC’s guidance exists because retail losses in hybrid stress events have been significant internationally.
Key Risks of Hybrid Securities
Conversion/write-off risk: If the issuing bank’s capital falls below a trigger level (set by APRA), the hybrid can be converted to ordinary shares or written off entirely. In a bank crisis, this happens precisely when share prices are falling — meaning the conversion results in significant value loss.
No principal guarantee: Unlike term deposits, hybrids are not guaranteed by the Australian Government Deposit Guarantee. The face value is at risk.
Complexity risk: The terms and conditions of each hybrid are lengthy and complex. Few retail investors fully understand the triggers, conversion mechanisms, and subordination in the capital structure.
Interest rate risk: Fixed-margin hybrids can lose value if market interest rates rise significantly.
Liquidity risk: Trading volumes can dry up in market stress — selling may require accepting a significant discount.
Who Hybrids May Be Appropriate For
Hybrids may be appropriate for:
- Sophisticated investors who fully understand the risks
- Investors seeking income above term deposit rates who are comfortable with equity-like downside risk in stress scenarios
- Investors in low tax brackets who benefit most from franked distributions
- Investors with a long time horizon who can weather short-term price volatility
For most retail income investors, bond ETFs and dividend ETFs provide more straightforward income with better risk management.
Related Articles
- Bonds for Income Australia
- Dividend ETFs Australia
- Income Investing Strategy Australia
- Income Investing hub
Frequently Asked Questions
Are bank hybrids safe in Australia? Bank hybrids are not as safe as bonds or term deposits — they are significantly more complex and carry equity-like downside risk in a bank stress event. ASIC has explicitly warned retail investors about the risks. For most retail income investors, safer income products (bonds, term deposits, dividend ETFs) may be more appropriate.
Are hybrid distributions franked in Australia? Most Australian bank hybrids are fully franked — which makes them more attractive to low-income investors and super pension funds that benefit from franking credit refunds. The franked yield often makes hybrids appear more attractive on an after-tax basis than equivalent fixed income products.
What is the difference between a hybrid and a bond? A bond is a straightforward loan — you receive interest and get your principal back at maturity (assuming no default). A hybrid has additional features: it can be converted to shares or written off entirely under specific stress conditions. This equity-like downside makes hybrids riskier than bonds while offering higher yields.
This article is for general informational purposes only. Hybrid securities are complex products — ASIC recommends retail investors carefully consider whether these products are appropriate for their situation. For advice tailored to your circumstances, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.