Company Reports

AMP is focused on simplifying its business and reducing costs, with less emphasis on growth than historically. The advantages of AMP’s vertical integration have weakened, due to proactive regulatory scrutiny, expanding approved product lists, and more transparent product/fee disclosures.

No-moat AMP’s cash flow update for the first three months of 2024 broadly supports our thesis of moderating net outflows, margin improvements, and a rebound in earnings after the lows experienced in 2022-23. We retain our fair value estimate of AUD 1.20 per share, with shares fairly valued at current prices.

After reasonably uneventful earnings updates, it is hard to pinpoint a single specific driver for the turnaround in bank sentiment. Still, we think part of it is that a likely lower cash rate eases housing fears and provides banks an opportunity to reprice loans and deposits to protect margins. Major bank share prices increased 23% since November 2023, outperforming the 16% increase in the Morningstar Australia Index over the same period. The major banks' weighted average price/fair value estimate is 1.14, up from 1.05 in the last quarter. Nonmajor banks trade at a price/fair value of 0.85.

We recently published our inaugural Industry Pulse: Australian Asset Managers 2024 Q1. It has come to our attention that some the detailed industry data we presented may not be accurate, namely around asset manager inflows and outflows. As far as our investment conclusions are concerned, we stand by our key assessments, namely the fair value estimates and moat, uncertainty, capital allocation, and star ratings for our asset manager coverage. Key data for the companies we cover is captured separately and directly from the relevant companies, and we have no reason to believe it is incorrect. However, while we investigate to confirm the accuracy and presentation of the detailed underlying data, we have retracted the report from our products. We will seek to reissue a corrected report, along with an explanatory accompanying note, as soon as practical.

We lower our fair value estimate for no-moat AMP to AUD 1.20 per share from AUD 1.30 due to lower expected corporate division earnings and a reduced year-end cash balance partly due to shareholder payouts. However, we still see some value in AMP’s shares at current prices. Earnings turned around in 2023, and we expect growth in the medium term. Underlying net profit after tax growth of 7% from 2022 is as expected, but there were divisional variances. Core business earnings exceeded forecasts, driven by lower operating expenses, reinforcing our projections for further cost reductions through 2025. Conversely, in the corporate segment, poor investment returns from external partnerships tempered our medium-term earnings outlook. Stranded costs from prior corporate activity also dampened earnings.

AMP is focused on simplifying its business and reducing costs, with less emphasis on growth than historically. The advantages of AMP’s vertical integration have weakened, due to proactive regulatory scrutiny, expanding approved product lists, and more transparent product/fee disclosures.

Australian banks face low credit growth, softer net interest margins, and an increase in loan losses in the short term. Industry returns on equity will be suppressed in fiscal 2024. However, we expect loan and deposit pricing changes in the medium term to lift margins to a level that allows wide-moat-rated major banks to generate maintainable returns above our 9% cost of equity.

We trim our fair value estimate on no-moat AMP to AUD 1.30 per share from AUD 1.35 due to a slower-than-expected recovery in AMP Bank’s net interest margins. Price competition led to a lower NIM for 2023 than we anticipated. The outlook for NIM recovery beyond 2023 is also slower, differing from our earlier forecast for a faster rebound. AMP Bank is expected to contribute around 40% of AMP’s operating earnings over the five years to 2027.

AMP is focused on simplifying its business and reducing costs, with less emphasis on growth than historically. The advantages of AMP’s vertical integration have weakened, due to proactive regulatory scrutiny, expanding approved product lists, and more transparent product/fee disclosures.

Our conviction in the thesis for listed wealth managers, asset managers, and their related service providers has strengthened after gathering insights from the recent 2023 Super & Wealth Summit, hosted by the Australian Financial Review. These firms are influenced by similar business drivers and industry trends. Most derive their revenue from funds under management and/or administration, or FUMA, which are driven by asset price movements and new fund flows from clients, and management fees or commissions on these FUMA.

We maintain our fair value estimate for no-moat AMP at AUD 1.35 per share. Platform net outflows (excluding pension) of 1.9% of funds under administration and loan growth of 4.1% for the first nine months of 2023 are tracking our full-year forecasts of 2.2% and 5.0%, respectively. Shares screen as undervalued at current prices. A rerating is contingent on moderating net outflows and a rebound in operating margins from the lows experienced in 2022-23, which we consider likely.

AMP is focused on simplifying its business and reducing costs, with less emphasis on growth than historically. The advantages of AMP’s vertical integration have weakened, due to proactive regulatory scrutiny, expanding approved product lists, and more transparent product/fee disclosures.

The short-term outlook for Australian banks is challenging with margins under pressure, loan losses expected to rise, and inflationary cost pressures unable to be offset by cost-cutting initiatives. Industry returns on equity are suppressed, hence we expect loan and deposit-pricing changes in the medium term to lift margins to a level that allows wide-moat-rated major banks to generate returns above our 9% cost of equity.

AMP is focused on simplifying its business and reducing costs, with less emphasis on growth. The advantages of AMP’s vertical integration have weakened, due to proactive regulatory scrutiny, expanding approved product lists and more transparent product/fee disclosures.

Our fair value estimate on narrow-moat AMP remains at AUD 1.60 per share following its annual general meeting. The wealth manager is steadfast on the cost-out and simplification of the retained Australian wealth management, asset management, and banking businesses. The AMP Life sale is due to complete by June 30, 2020. It could be derailed if the buyer (Resolution Life) walks, but with several key regulatory approvals granted, we think it’s likely to go ahead and our forecasts assume the sale proceeds as planned. Not selling AMP Life could be dilutive to our valuation as the business is capital intensive and also the least profitable within the group.

Factoring in volatile markets and an economic downturn, we’ve cut our near-term forecasts on fund inflows, market returns, loan growth, net interest margins, or NIM, and increased forecast impairments. Accordingly, our fair value estimate for AMP falls to AUD 1.60 per share, from AUD 1.95 previously. Our new valuation implies a midcycle P/E ratio of 15.8 times and dividend yield of 3.3%. Our narrow moat, high fair value uncertainty, and Poor stewardship ratings are reaffirmed as we transition coverage of AMP to a new analyst.

Our fair value estimate for narrow-moat-rated AMP remains at AUD 1.95 per share, with the businesses that AMP is retaining, that is, Australian Wealth Management, or AWM, AMP Capital and AMP Bank performing as expected in 2019. The disappointment was the further capitalised losses in AMP’s life businesses. The life businesses, in the process of being sold to Resolution Life, were hit by additional capitalised and experience losses of AUD 176 million in the second half of the year, leading to a total of AUD 246 million capitalised losses for 2019. However, Resolution Life is responsible for all such losses from July 1, 2018, as part of the terms of the sale, and they don’t impact our fair value estimate. Management confirmed the sale is on track to complete by June 30 this year. The other feature of the result was the steep fall in earnings from struggling AWM as well as continued strong performance of AMP capital, both of which were expected.

There are no surprises in the government's response to the Financial System Inquiry, with recommendations around superannuation and wealth management supporting ongoing initiatives rather than making drastic changes. We believe key areas of focus remain improving the efficiency and competitiveness of the superannuation industry, lowering fees, increasing the standard of financial advice, and greater adoption of income retirement products. We make no changes to our fair value or earnings estimates on listed asset managers on the back of the government response. The focus on retirement income products will likely benefit Challenger.