AMP break-up would be a ‘major negative’

A scathing report by Morningstar analysts has listed the headwinds facing AMP's vertically integrated model after "shocking" revelations at the royal commission in the past two weeks.

"These include lower growth, more compliance costs, potentially higher fines, more compensation payments and potential damages payments associated with reported potential class action against AMP," said the report.

“While we believe the royal commission has already done material damage to AMP’s reputation and growth prospects, the key risk still hanging over it is the potential break up of its vertically integrated model, which is the backbone of its business.”

Such a break-up could see AMP's battered share price fall even further, said Morningstar.

This “heightened regulatory risk now looming over AMP” has led Morningstar analysts to deem it a “high-risk investment”.

“Not having its network of financial advisers would be a major negative for AMP’s intrinsic value, impacting the company in multiple ways, including reducing the growth in funds invested into its investment products and platforms, as well as into AMP Capital, and lower growth in residential mortgages and deposits in AMP Bank.

“Furthermore, if all vertically integrated business such as the major banks, IOOF, and industry superfunds were required to separate their advice arms from their product manufacturing and/or platform businesses, the flood of advice business for sale in the market would likely negatively impact sale prices.”

But even without the dismantling of the vertical integration model, Morningstar expected of AMP “almost no underlying NPAT growth in wealth management over the next five years.”

Nonetheless, the royal commission has “materially increased” the likelihood that the model would be broken up.

Indeed, if its dismantling were recommended by the royal commission, Morningstar analysts expected “it would be politically challenging for an Australian government not to implement such a recommendation”.