Hybrids could be in for a volatile year throughout 2018 as banks face regulatory risk from the banking royal commission, increased pressure on their share prices and stress within property markets.
Hybrids are likely to remain in short supply throughout 2018, according to Morningstar analyst John Likos, which will go some way to supporting their prices.
The supply of listed hybrids securities is expected to fall between $1.25 billion and $2.5 billion in 2018, Mr Likos said, which in normal circumstances would help to hold up prices.
But 2018 will see the banks facing a number of headwinds that will largely offset the supply-driven gains in the hybrid market, he said.
First, hybrid prices are likely to be adversely affected by non-performing loans on the bank loan books due to "increased stress within residential and commercial real estate", Mr Likos said.
Second, investors could shy away from bank exposure due to "uncertainty arising from regulatory risk, particularly from the recently announced banking royal commission", he said.
Finally, pressure on underlying bank share prices could increase the attractiveness of equity dividend yields relative to hybrids, Mr Likos said.
On the supply front, Morningstar is expecting a $1.25 billion hybrid issue from NAB in the coming year.
"We would not be surprised to see NAB leveraging off current long-term lows in hybrid issuance yields and coming to market with a new issue," Mr Likos said.
The last time NAB issued a domestic Additional Tier 1 hybrid market was in mid-2016, he said.
"We put a line through ANZ Bank returning to the listed hybrid market in 2018 given the lack of a rollover trade, a peer-leading capital position and being the most recent major bank issuer," Mr Likos said.