Wealth giants’ profits to remain challenged

A research note from Morgan Stanley equity analysts Andrei Stadnik and Richard Wiles and research associates Jenny Hau and Sona Fernandes has pointed to the recent move by Challenger to expand its retirement offering by acquiring the MyLife MyFinance bank from Catholic Super.

The group signalled it would be buying the customer savings and loans bank for $35 million in December and that it would also gain an authorised deposit-taking institution (ADI) licence.

Challenger will initially offer retail term deposits to customers, gradually replacing term annuities.

The Morgan Stanley analysts have projected the move will result in lower earnings volatility and boosted distribution efficiencies, with advisers not needed to produce a statement of advice, and the product being readily understood by retail clients and government-backed.

Further, they anticipate a potential for new products that combine capital-light managed funds with term deposits and transaction accounts, and potentially lifetime annuities.

Challenger has not projected a large funding cost-benefit initially, with term deposit pricing likely to be similar to term annuities, but as the major banks cut rates, it is expected to be a viable option for the future.

Morgan Stanley has projected for the 2021 financial year, Challenger will produce a statutory net profit after tax (NPAT) of $372 million, a rise on its $416 million loss in FY20.

Meanwhile, for wealth management rivals IOOF and AMP, ongoing issues are forecast for the near future, despite some relief soon to come from the end of the early superannuation release scheme and the economic recovery from the COVID crisis.

AMP is expected to face lower flows in its wealth and asset management divisions, while negative mortgage growth in the bank is forecast to offset stronger markets.

“AMP has lost several ESG mandates in AMPCI [AMP Capital] and we think real estate and infrastructure flows are also at risk,” the Morgan Stanley report noted.

For the 2020 year, Morgan Stanley has estimated AMP will record $265 million in operating earnings, a 47 per cent plummet from 2019. Underlying profit is expected to reach $319 million, a 32 per cent drop.

But AMP’s NPAT expected to recover to $303 million, after 2019’s $2.4 billion loss.

For IOOF, challenges also remain around outflows, after the group saw $2.2 billion in outflows from its investment management business and $1.3 billion from its advice segment during the December quarter.

Morgan Stanley has predicted the group’s flows will more than offset stronger markets, as its recently severed agreement with BT is projected to cause a $25 million reduction in platform fees.

The termination of the BT contract resulted in $8.1 billion moving out of IOOF’s managed funds total during the three months to December.

“With outflows lower than expected in the December quarter and deteriorating [year on year], it becomes even more important for IOOF to re-platform (HUB relationship will help), cut costs, integrate ANZ and build scale,” the analysis stated.

But in contrast to AMP, IOOF is expected to see its underlying NPAT swell to $135 million for FY21, an increase of 4 per cent on the previous period’s result of $128.8 million.