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What of Australia's other big bank?

Glenn Freeman  |  31 May 2017Text size  Decrease  Increase  |  

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The travails of Australia's "big four" banks in the face of the new Budget's levy have dominated recent financial news, but this other major financial institution is delivering earnings growth to drive shareholder returns.


Diversified financial conglomerate, AMP Limited (ASX: AMP), has three clearly-defined divisions: Australian Wealth Management, AMP Bank, and AMP Capital. David Ellis, senior banking analyst, Morningstar, attended its investor day last week.

While Ellis notes AMP's increased investment in the three core units is expected to deliver earnings growth, he says: "We think the jury is out on whether current management can deliver on the vision."

"We are positive long term, but the recent track record is not inspiring and we are sceptical whether the investment in goals-based investing in the Wealth Management business will work," he says.

AMP's planned expansion in China is of particular interest, especially given major Australian banks Australian and New Zealand Banking Group (ASX: ANZ) and National Australia Bank (ASX: NAB) have been divesting their Asian operations more recently.

"The China initiatives are interesting and could develop into material earnings contributors, but short term there remains a lot of work to do in the Australian operations," Ellis says.

Broadly speaking, he believes AMP is well-placed to benefit from Australia's fast-growing wealth industry and the global phenomenon of ageing demographics.

"AMP Bank is well placed to leverage close relationships with the Australian wealth management business' 3,000-plus financial advisers, plus increased access to the mortgage broker channel," he says.

Its current low base of loan and deposit products--with mortgage market share of less than 1 per cent--also represents a considerable opportunity for AMP.

"To double profit contribution the bank needs to grow at rates well above system. We can see the bank achieving these strong growth rates due to access to AMP's large financial adviser distribution network," Ellis says.

He is less upbeat in his assessment of the AMP Wealth Protection, AMP Mature, and AMP New Zealand businesses, describing them as "low-growth businesses" which are "collectively ... being run lean to maximise returns, and where possible, reduce capital intensity".

He notes Wealth Protection has typically accounted for around 9 per cent of group business unit earnings, but the division reported a $415-million loss in 2016.

AMP Mature and AMP New Zealand generate around 13 per cent and 12 per cent of group earnings, respectively. In these business units, Ellis says, "margin management and cost efficiency have overriding importance with minimal new investment featuring".

Regarding AMP's China expansion, Ellis acknowledges the market's increasing demand for retirement products is an "exciting opportunity" but is ultimately a "long game". AMP has been operating in China since 1997 and has recently partnered with China Life, which Ellis describes as "an attractive opportunity" in light of structural changes in China's pension market and the nation's ageing demographic.

He sees the turnaround of AMP's Wealth Management business as the group's most difficult objective, but most important for overall performance.

"But industry tailwinds are supported by an ageing population, mandated superannuation, and pension needs and rules becoming more complex."

AMP's platform for self-managed super fund trustees and accountants, SuperConcepts, is leveraging these trends as the overall business shifts from a "product and distribution business to a customer-led organisation focused on customers' goals".

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Glenn Freeman is a senior editor at Morningstar.

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