Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 316

Is it time to sell bank hybrids?

Over the past five years, we have used a simple rule of thumb to assess the value of the new style/Basel III compliant Australian major bank hybrids:

  • Excellent value at a five-year credit margin approaching +500bps
  • Expensive when the five-year margin is +300bps or lower

This simple rule is based on the tightest and widest issues we have seen from the major banks since Basel III Additional Tier 1 (AT1) hybrids were first issued in January 2013. The two ‘book-ends’ were both issued by CBA and only 18 months apart, which shows how quickly the market can move:

  • CBA Perls VII (CBAPD) – issued in October 2014 at a credit margin of +280bps to call in 8.2 years
  • CBA Perls VIII (CBAPE) – issued in March 2016 at a credit margin of +520bps to call in 5.5 years

Significant tightening of margins

Australian bank and insurance AT1 hybrid spreads have been tightening for some time but that trend has picked up since the May 2019 election win by the Coalition which removed the risk that Labor’s franking policy posed, as the black line in the chart below demonstrates.

Source: Bell Potter

With demand increasing following the election, supply has been constrained with a dearth of new issues and little replacement funding expected in the near term. Issues approaching call/maturity dates in the next 12 months include just one major bank:

  • IANG (IAG) 16 December 2019 ($550 million)
  • NABPC (NAB) 23 March 2020 ($1,343 million)
  • MBLPA (Macquarie Bank) 24 March 2020 ($430 million)
  • CGFPA (Challenger) 25 May 2020 ($345 million)
  • SUNPE (Suncorp) 24 June 202 ($400 million)

Against this backdrop and the market’s search for value, AT1 hybrid spreads are now the tightest we have seen since the new breed of Basel III compliant hybrids first hit the market in early 2013. The widest margin of any of the major bank hybrids (as at 22 July 23019) was the NABPF June 2026 call AT1 with a trading margin of just +288bps.

Inadequate reward for hybrid risks

Margins for the AT1s with a first call in five years are closer to +270bps. This is in contrast to last week’s ANZ 10-year subordinated bond issue with a margin of +200bps. We argue that a differential of just 70bps is too low for the additional risks that AT1 hybrids present, including extension/non-call risk, no maturity date, automatic conversion to equity if Core Equity Tier 1 ratio falls below 5.125% and potential for coupons to be cancelled.

We believe it is time to take profits on bank and insurance company AT1 hybrids. We still see value in the legacy hybrids such as NABHA and MBLHB which are still trading at a discount to par, but those too have rallied strongly in recent times.

Whilst there is no immediate threat or trigger point to cause hybrid spreads to widen, history tells us that spreads are tight.

An opportunity to re-enter the market might be seen in the coming 12 months if the banks use the retail ASX-listed market to help raise the additional $50 billion Tier 2 capital required over the next four years, following APRA’s clarification of capital requirements earlier this month. We suspect we will see a number of large, well-priced listed Tier 2 issues with margins in the low-200bps. There is also the potential for some out of cycle/non-rollover AT1 issues which could present good new issue margins.

One further impact of the tight major bank credit spreads was the recent BNP AT1 in AUD. It was initially launched with a margin of 412bps but priced 75bps tighter at a margin of 337bps. Despite the tightening in issue spread, the size of the order book (demand) and the relatively small issue size (supply) provided a pathway for the strong secondary performance which we have seen to date.


** Justin will be hosting the ASA webinar 'Bonds, hybrids and inverse yield curve effect on equity markets' on 8 August 2019, outlining how in a low-interest environment you can maximise yield through the use of bonds and hybrids. **


Justin McCarthy is Head of Research at BGC Fixed Income Solutions, a division of BGC Brokers, and a sponsor of Cuffelinks. The views expressed herein are the personal views of the author and not the views of the BGC Group. This article does not consider the circumstances of any individual investor.

For more articles from Mint Partners and BGC, click here.


Why bank hybrids are far too expensive

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

Understanding the extra return from hybrids


Most viewed in recent weeks

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.

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'.

Latest Updates


Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.


Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.


Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.


10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.



© 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.