By Jonathon Tainsh

Over the past 12 months, we have seen an increasing number of clients seeking advice around income-producing investments and, in particular, portfolios with significant exposure to bank hybrids.

For many of these investors, hybrids have played an important role for years. They have provided attractive income, exposure to familiar issuers such as Australia’s major banks, and in many cases tax-effective income through franking credits. As a result, some portfolios have accumulated substantial allocations to hybrids over time.

At the same time, we are often asked a broader question:

“If I can earn a reasonable interest rate in a bank account or term deposit, why would I invest in anything else?”

It is a fair question.

Interest rates are significantly higher than they were just a few years ago. Cash and term deposits once again provide meaningful levels of income and, for many investors, offer comfort through simplicity and certainty.

However, income investing is about more than simply finding the highest interest rate available today.

It is about building a portfolio that can continue supporting your lifestyle, preserving capital and maintaining purchasing power over many years.

One reason this discussion has become increasingly important is that Australia’s bank hybrid market is gradually being phased out, creating a natural opportunity for investors to reassess how they generate income and manage risk within their portfolios.

What Are Bank Hybrids?

Many readers may never have owned a bank hybrid. Others may hold them without necessarily understanding how they work. Put simply, hybrids are investments issued by banks that sit somewhere between traditional bonds and shares. Historically, they appealed to income-focused investors because they often offered:

• Higher income than cash and many term deposits
• Distributions that generally increased when interest rates rose
• Franking credits that improved after-tax returns for many investors
• Exposure to well-known Australian banks and financial institutions

These characteristics made hybrids particularly popular amongst retirees and self-managed superannuation funds looking to generate income.

Why Are They Being Phased Out?

Australia’s banking regulator, APRA, has announced that bank hybrids will be progressively removed from the banking system and replaced with other forms of regulatory capital. Existing hybrid securities will continue to mature or be redeemed over time, but the market is expected to gradually reduce in size.

Importantly, this is not a criticism of investors who have owned hybrids.

Rather, it reflects changes to the way regulators want banks to structure their capital following reviews of global banking events and periods of financial stress. For investors who hold hybrids today, the practical challenge is straightforward:

What should happen as these investments mature and the capital is returned?

As of 14th May 2026. Source: ASX

Why Are More Investors Reviewing Their Hybrid Exposure?

The interest in hybrids is not coming from regulators alone. Many investors are now reviewing their portfolios because substantial portions of the Australian hybrid market are scheduled to mature or be redeemed over coming years. For investors with meaningful hybrid exposure, this creates an important planning consideration. The discussion often starts with hybrids but quickly becomes something broader.

Questions such as:

• How much income do I actually need?
• How much should remain in cash?
• What role should fixed income play?
• How can I reduce reliance on a single source of income?
• How do I protect purchasing power over the long term?

are often more important than identifying a direct replacement for any one investment.

So What Exactly Is Fixed Income?

“Fixed income” is one of those industry terms that sounds more complicated than it really is. In simple terms, fixed income investments involve lending money to a government, bank, company or other organisation in exchange for regular interest payments.

Examples include:

• Cash and term deposits
• Government bonds
• Corporate bonds
• Floating-rate investments
• Various income-focused credit investments

Just like shares, not all fixed income investments are the same. Some prioritise stability and capital preservation. Others seek to generate higher levels of income but involve accepting additional risks.

The important point is that hybrids are only one small part of a much broader fixed income universe.

Source: JP Morgan

Why Not Just Stay In Cash?

This is probably the most common question we receive at the moment. Cash offers a number of genuine benefits.

It provides:

• Capital stability
• Liquidity
• Simplicity
• Certainty

Those are valuable characteristics. However, cash also has limitations.

Inflation Risk

Over time, the cost of living tends to rise. If investment returns fail to keep pace with inflation, purchasing power gradually declines. A dollar preserved in nominal terms may still buy less in the future.

Reinvestment Risk

Today’s attractive cash rates may not last forever. If interest rates fall, investors relying exclusively on cash may find their income declines significantly.

Longevity Risk

For retirees, the challenge often extends well beyond the next few years. Many portfolios may need to support spending for twenty or thirty years or longer. That means portfolios often need some capacity to grow as well as generate income.

Different Investments Play Different Roles

One of the most important investing lessons is that no single investment needs to do everything. Different assets are designed to perform different jobs.

This is why many successful long-term portfolios combine multiple asset classes rather than relying heavily on a single source of return or income.

The goal is not necessarily to maximise returns. The goal is to create a portfolio that can meet income requirements while remaining resilient through changing market conditions.

The Bigger Lesson

While much of the current discussion centres on hybrids, the broader lesson is really about portfolio construction. The phase-out of hybrids provides an opportunity to revisit some important questions:

• What am I trying to achieve?
• How much income do I need?
• How much risk am I comfortable taking?
• How should different investments work together?
• Am I relying too heavily on one source of income?

In our experience, the strongest portfolios are rarely built around a single product or investment theme. Instead, they are built around a clear strategy where different assets each play a defined role.

The Real Question Worth Asking

The gradual decline of the bank hybrid market is certainly an important development for investors who hold them. However, we believe the bigger opportunity lies in using this transition as a catalyst to review how portfolios generate income, manage risk and preserve purchasing power over time.

Rather than asking:

“What replaces hybrids?”

A more valuable question may be:

“What combination of investments gives me the best chance of achieving my long-term objectives?”

The answer will be different for every investor. But it is almost always built on the same foundation: diversification, discipline and a clear understanding of the role each investment plays within the portfolio.