AMP: Tracking Slowly to Better Profitability

We maintain our fair value estimate for no-moat AMP 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.

We expect net outflows to moderate, falling to low-single digits of FUA, starting in 2024. This contrasts with an average of mid-single-digit rates over the last five years. We anticipate relatively higher new contributions and lower redemptions, with support from recovering industry fund flows—particularly as interest rate hikes stabilize. AMP is moving beyond its vertically integrated model. Inflows from non-AMP advisors are gradually making up a greater share of overall inflows. This is critical to address the downside from increasing pension drawdown rates, and resurgent competition among institutional and specialty platforms.

Management intends to pare back loan growth for the remainder of 2023, after growing loans by 7% over the 12 months to September 2023. This a move that we support as the bank has tended to grow loans noticeably above peer averages but at the expense of profitability. Striking a better balance between loan growth and net interest margins should reduce credit risk, enhance the bank’s return on capital, and hence overall group profitability. NIMs for 2023 are expected to be lower than 1.30-1.35% as guided previously, due to intensified competition. We anticipate loan growth to moderate to mid-single digits over the next five years, down from 9% in 2022 and 7% in 2021. Our NIM forecasts an average 1.27% per year from 2023 to 2024, followed by a recovery to 1.37% from 2025 to 2027.