Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 245

Impact on hybrids of Labor’s franking policy

A Labor Party win at the next Federal election may change the dividend imputation system with potentially significant impacts on self-funded retirees. Fears that the abolition of excess franking credit refunds will cause a substantial disruption to the hybrid market are unlikely. However, as with any change there is always potential for winners and losers, and with that comes opportunity.

A long way to go in its current form

There are a number of events required prior to this policy becoming legislated, including:

  • The Labor Party would have to win government at the next Federal election
  • The policy would have to withstand changes to water down its impact
  • The legislation would need to pass in both the House of Representatives and the Senate.

There are doubts about all three to varying degrees and the probability of all three occurring appears relatively low. The second and third points are somewhat related. The proposal as currently structured is unlikely to receive support in the Senate. Changes may be required to ensure low-income earners are protected, such as introducing a cap on claims. If the policy is watered down, the proposal may continue to struggle unless the Labor Party has a majority in the Senate.

Likely to lead to a buying opportunity

Even if legislation is enacted as initially communicated, it is unlikely to be a death knell for the hybrid market. While SMSFs and self-funded retirees account for a substantial part of the hybrid market, they aren’t the only investors who can utilise the franking credits. In the retail space, for example, SMSFs in accumulation phase and self-funded retirees with other taxable income will continue to gain the full benefits of fully franked hybrids. The market also includes institutional buyers.

That’s not to say there won’t be some dislocation. There is likely to be a sell-off of hybrids as investors who can’t utilise the franking credits transfer them to those who can. Also, given the pool of potential fully franked hybrid investors will diminish, there may be an increase in margins attached to new hybrids. For those who can use the franking credits, that is good news. The increase in margins, however, is likely to be moderate creating a relatively minor impediment for hybrid issuers rather than a permanent roadblock.

The proposed changes have already impacted the hybrid market, with bank and insurance securities experiencing a sell-off and adding to the widening trend that commenced in February. The following chart from Bell Potter shows that trading margins on the most common major bank hybrids (the black line) have increased from around +275bps to +350bps since early February 2018, a material move. We believe there may be some further weakness in the near term but ultimately this will be seen as a buying opportunity.

Click to enlarge. Source: Bell Potter Fixed Interest Weekly 16 March 2018

Notwithstanding that the impact on the more recent Basel III hybrids is likely to be less than the market is anticipating, our preferred hybrids remain the pre-GFC/legacy perpetual income style securities such as those listed on the ASX under codes NABHA (National Australia Bank) and MBLHB (Macquarie Bank). We believe that there is a high probability that there will be a buy-back and/or redemption of these securities in the next few years with either option resulting is substantial capital gains from current levels.

More detail on NABHA

The National Income Securities (ASX:NABHA) are a legacy Tier 1 hybrid that was issued in 1999. We believe NAB will look to replace the NABHAs with a Basel III compliant hybrid (i.e. Additional Tier 1 security such as the NABPDs) when the NABHA’s become inefficient capital between 2020 and 2022 and that investors will be able to exit at $100.

Based on a current price of $78.55 (at the time of writing), this equates to the following yields to call depending on the timing of the potential exit:

Our base case is that this will likely happen on the first coupon payment date in 2021 (i.e. 15 February 2021 – highlighted in blue) which would equate to yield to call of 12.5% (or a trading margin of +10.3% over swap). Further, NABHAs are set to benefit from any recycling out of traditional hybrids that may be impacted by the ALP’s proposed franking changes given that NABHAs do not have any franking credits attached but rather pay the entire coupon in cash.

We believe that although the documented maturity is ‘perpetual’, NAB will retire the NABHAs before 2022 for three key reasons:

  • Capital/regulatory treatment – these legacy securities will no longer count towards capital ratios from 1 January 2022
  • Replacement cost – NAB can replace the NABHAs with cheaper and/or more capital effective securities
  • Precedent - the recent buybacks of the NAB USD Libor+15bps (i.e. very cheap) legacy Upper Tier 2 capital security.

Of course, much can happen between now and 2022 and investors must make their own enquiries and judgement, and the Labor Party policy has added an element of uncertainty to the outlook for hybrids.


Brad Newcombe is a High Yield Analyst, Fixed Income at Mint Partners Australia. Individuals should make investment decisions based on a comprehensive understanding of their own financial position and in consultation with their own financial advisors.



What might the Tax White Paper say on imputation and CGT?

NAB hybrid: one says buy, one says sell, you decide

Is it time to sell bank hybrids?


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.