Bank capital notes are being phased out: what holders should know

Bank capital notes, often called hybrids, are being phased out. The Australian Prudential Regulation Authority (APRA), which supervises the banks, has finalised rules that take effect on 1 January 2027 and expects all bank capital notes to be gone by 2032. The major banks are already repaying notes on their call dates, the dates when a bank may choose to repay them, so many holders will soon have cash to reinvest.

APRA is removing capital notes from bank capital by 2032

In APRA's rules, capital notes are called Additional Tier 1 (AT1) capital. They have no maturity date, pay distributions at the bank's discretion, and can be converted into shares or written off if a bank runs into serious trouble.

APRA proposed the change on 10 September 2024, confirmed it on 9 December 2024 and finalised the rules on 4 December 2025. It said overseas experience showed the notes were hard to use in a crisis. Its Chair said the risks were greater here because of the "unusually high proportion of AT1 held by retail investors".

The largest banks can replace capital notes worth 1.5 per cent of their risk-weighted assets with 1.25 per cent in Tier 2 capital and 0.25 per cent in Common Equity Tier 1. Risk-weighted assets are a bank's loans and other exposures, adjusted for risk. Tier 2 is long-term debt that ranks behind depositors and other creditors. Common Equity Tier 1 is mainly ordinary shares and retained profits. Smaller banks can switch entirely to Tier 2.

Existing notes keep their legal terms. APRA expects them to be replaced as their call dates arrive, and every existing note reaches its first call date by 2032 at the latest.

The major banks have been repaying notes since early 2025

ANZ redeemed its Capital Notes 5 on 20 March 2025. Westpac repaid $1.69 billion of Capital Notes 5 on 22 September 2025, and NAB repaid $1.87 billion of Capital Notes 3 on 17 June 2026. Commonwealth Bank gave notice on 15 September 2026 that it will redeem its PERLS XIII notes on 20 October 2026. They last traded on the ASX on 8 October 2026.

In each case holders receive $100 a note in cash plus a final distribution, and none of the announcements offered a new capital note to roll into. APRA expects banks with more of these notes than they need not to issue new ones before 1 January 2027.

A call repays $100 a note in cash

Under APRA's rules, a bank needs APRA's approval before it calls a note. It must also either replace the note with capital of the same or better quality or meet APRA's conditions for reducing its capital.

Notice comes weeks ahead: NAB gave notice on 20 March 2026 of its 17 June 2026 redemption. Trading on the ASX stops about two weeks before payment. Holders on the register at the record date, the cut-off for payment, then receive $100 a note plus a final distribution. NAB told holders they did not need to do anything, though it advised them to check the share registry had their bank account details. Its final distribution was $1.4438 a note, fully franked.

If a bank does not call a note, it stays on issue under its original terms.

Holders have several choices for the money that comes back

Capital notes were never covered by the Government's deposit guarantee, and they rank behind a bank's depositors and senior creditors. The main alternatives sit at different points on that scale:

• Term deposits. A fixed rate for a set term, usually one month to five years. The Government's deposit guarantee, the Financial Claims Scheme, covers deposits up to $250,000 per account holder at each Australian bank. Breaking a term early can mean notice and less interest.
• Senior bank bonds. Bank debt not backed by specific assets, with a set maturity date. They rank behind deposits but ahead of all of a bank's capital, including Tier 2 notes, capital notes and shares, and the deposit guarantee does not cover them.
• Tier 2 subordinated notes. Bank debt with a maturity of at least five years and mandatory interest. They rank behind senior debt and ahead of capital notes and shares. If APRA decides a bank would otherwise fail, they can be converted into shares or written off, with capital notes taking losses first.
• Government bonds. Loans to the Australian Government paying fixed or inflation-linked interest, with exchange-traded Treasury bonds bought and sold on the ASX. Their price moves with interest rates, so a bond sold before maturity may fetch more or less than its face value, the amount repaid at maturity.
• Corporate bonds. Loans to companies, with risk depending on the company and where the bond ranks. Most trade off-exchange, often in large parcels, and if a company fails, holders may not get all their money back. We offer optional capital protection on specified bonds.

Bonds can also be held through managed funds and exchange traded funds, which pool investors' money across many borrowers. Many capital notes paid franked distributions, so comparing the tax treatment of each option is worthwhile.

If you hold capital notes, your adviser can check when each may be called and how the cash will reach you. They can also talk through which options suit your income needs and comfort with risk. It helps to have that conversation before a call date.

This article is general information only. It does not take into account your objectives, financial situation or needs, and it is not a recommendation to buy, sell or hold any investment. Figures are as published on the dates given. Past performance is not a reliable indicator of future performance. Read the full risk warning