Major institution's wealth earnings tipped to plunge

The coronavirus pandemic has been labelled yet another headwind for the already embattled wealth group.

A report from Morningstar has stated “gone are the glory days” of AMP Wealth, from it previously contributing 45 per cent to the group’s operating earnings. 

Net profit after tax (NPAT) for the segment has been projected to fall at about 3.5 per cent per year to fiscal 2024, due to slower growth in average assets under management, of about 4 per cent per year versus 5 per cent in the last five years. 

AMP’s Australian wealth business recorded $6.3 billion of cash outflows in 2019 full year, slugging the division’s profit which had fallen by 49.9 per cent year-on-year. 

Last year, 440 financial advisers exited the group, but the mass cash withdrawals from the wealth segment were put down to lingering reputational damage from the royal commission.

Morningstar anticipates AMP Wealth will continue to experience net cash flows until fiscal 2022, as the Hayne commission continues to haunt its reputation and deter prospective clients from engaging from the group’s remaining advisers over the short term. 

The adviser exodus is also anticipated to continue, as the phasing out of grandfathered commissions and higher education standards squeeze the workforce. 

But the analysis has pointed to light at the end of the tunnel, with greater transparency, higher compliance and education standards being expected to reinvigorate client confidence and cash flows over the long term. 

“In the near term, we expect the virus-induced downturn to be only temporary and forecast profit growth from fiscal 2022,” the Morningstar report stated. 

“Such conditions are not conducive for AMP, which is likely to see reduced earnings from lower investment markets, client risk aversion, less residential housing turnover, and further mortgage arrears. AMP recently withdrew its fiscal 2020 earnings guidance due to the heightened short-term uncertainties. 

“However, we expect the virus-induced downturn to be only temporary and forecast profit growth from fiscal 2022. We expect investment returns, client flows and bank margins to revert higher over the medium term; corresponding with an expected recovery in financial markets and economic growth after the pandemic.”

As the wealth segment’s revenue falls, investment management division AMP Capital is expected to rise. 

AMP Capital was the strongest performer out of all the segments in 2019, managing a 18.6 per cent profit increase to $198 million, while its AUM rose by 8 per cent to $203.1 million. 

Morningstar has said the division is set to become the group’s core earnings generator after it sells off the life insurance business, with the investment manager projected to make up around 45 per cent of operating earnings by fiscal 2024, from 36 per cent in fiscal 2019. 

AMP Capital’s NPAT has been predicted to grow by around 6.5 per cent per year to fiscal 2024, while growth in average external funds under management is projected to grow by 9.6 per cent per year, with a similar rate of net inflows as the last five years due to its expanding distribution reach.

“Volatility is likely to weigh on near-term market returns and FUM inflows, but AMP Capital’s product and geographical diversification should help limit the severity of losses,” Morningstar said. 

“It is executing well on its international expansion, choosing to partner with established local organisations like Mitsubishi UFJ Trust Bank and China Life to facilitate distribution. Apart from equities exposure, AMP Capital also manages both listed and unlisted infrastructure and property assets – helping broaden its investor base and stabilise its FUM pool.”

Further, AMP Bank is expected to also grow its NPAT by around 2.5 per cent per year to fiscal 2024; although loan growth and its net interest margin will be subdued in the near term. 

AMP has affirmed its sale of AMP Life is on track to be completed by the end of June, with a further update for the divestment of the New Zealand wealth business to be given by August.  

The group has also indicated that 80 per cent of its further $673 million in remediation is scheduled to be completed by the end of the year, with it to be fully wrapped up in 2021. 

Morningstar analysts commented if the sale of AMP Life proceeds, the group’s balance sheet will be further bolstered. They expect its capital to be in excess of its targeted surplus to about $1.6 billion, allowing it sufficient funds to cover costs to turn around the business and revive earnings growth.