We lower our fair value estimate for no-moat AMP to $1.20 per share from $1.30 due to lower expected corporate division earnings and a reduced year-end cash balance partly due to shareholder payouts.

However, we still see some value in AMP’s shares at current prices. Earnings turned around in 2023, and we expect growth in the medium term. Underlying net profit after tax growth of 7% from 2022 is as expected, but there were divisional variances. Core business earnings exceeded forecasts, driven by lower operating expenses, reinforcing our projections for further cost reductions through 2025. Conversely, in the corporate segment, poor investment returns from external partnerships tempered our medium-term earnings outlook. Stranded costs from prior corporate activity also dampened earnings.

We continue to project low-teens growth in underlying net profit after taxes (“NPAT”) for the five years to 2028. We expect noncore cost reductions, ongoing product rationalizations, flow recovery following market turbulence in 2022-23, and incremental revenue from improving advisor productivity to drive this growth.

Although guidance for lower bank net interest margins into fiscal 2024 was disappointing, we expect this margin pressure to abate in the medium term as AMP diversifies its funding mix and focuses on protecting margins over aggressive growth. AMP Bank’s margins have kept compressing due to its less diversified funding mix (leading to higher funding costs than the major banks) and aggressive growth strategy, where it offered very competitive loan rates.

Evidencing our thesis, losses in the advice business are diminishing, while productivity (measured by revenue or assets under management per practice) continues to improve.

Declining vertical integration seen by (1) growth in Jigsaw advisors (non-AMP advisors supported by AMP’s infrastructure) and (2) a growing portion of fund flows sourced from non-AMP advisors and third-party distributors is a key positive.

Business strategy and outlook

AMP is focused on simplifying its business and reducing costs, with less emphasis on growth than historically. The advantages of AMP’s vertical integration have weakened, due to proactive regulatory scrutiny, expanding approved product lists, and more transparent product/fee disclosures.

AMP is simplifying its wealth management offerings. Compared with before 2018, its practices are now larger and more profitable. Tighter compliance and operating standards have also been enforced. These help minimize compliance costs and regulatory breaches.

The firm aims to retain its share of advisors through offering superior advisor support services and aims to increase distribution via external advisors. Its extensive product suite is being reduced and made more cost-competitive to help attract future fund flows.

Meanwhile, AMP Bank has consistently expanded its mortgage book above system growth via mortgage brokers, while adoption of its digital offerings are also gaining traction.
Ongoing negative connotations to the AMP brand and higher operating standards may prompt more advisors to leave AWM or deter prospective joiners into the AMP network—thus narrowing its distribution reach. With the competitive landscape now more even, we also see little prospects of large new inflows. Margin pressures will persist, limiting the fees that AMP can charge.

Earnings growth prospects are positive overall. Notwithstanding compression in product fee margins, noncore cost reductions, ongoing product rationalizations and enhancements, recovery in flows following market turbulence in 2022-23, and incremental revenue from improving advisor productivity, are expected to drive earnings growth.

We expect AMP Bank's margin pressure can be alleviated over the medium term as it diversifies its funding mix—notably to source more lower-cost deposits—and focuses on protecting margins over aggressive growth.

Moat rating

Read more about how identifying a company with a moat impacts investment results.

AMP Limited lacks an economic moat. In our view, traces of competitive advantages from brand and switching costs have weakened, notably in its wealth management business, and no longer support a moat for the business overall.

Erosion of the brand and switching costs follows serious misconduct by some of its advisors revealed in the 2018 Hayne Royal Commission. AMP’s banking arm is also at a cost disadvantage and lacks client stickiness relative to the big four Australian banks.

Looking ahead, we don’t foresee strong customer loyalty toward the AMP brand, or a high degree of stickiness between a client and an AMP advisor. AMP Wealth Management’s, or AWM’s, success depends on its ability to foster trust with its clients, and the Royal Commission revelations of misconduct and poor corporate governance have tarnished AMP’s image as a trusted financial advisor. AMP’s heritage brand wasn’t sufficient in preventing consecutive outflows since 2018; either from clients pulling out of AMP platforms, advisors leaving the AMP network, or even clients switching advisors.

The reputational damage suffered is likely to make it more challenging for AWM to attract clients and new assets under management, or AUM, in the next few years. Operating conditions are now tougher and financial advisors now have to adapt to more stringent industry standards, such as the move toward a fee for service model and stricter requirements on advice quality and compliance.

While higher industry standards should revive cash inflows into AWM over the long term, we still don’t see the business attracting much more inflows than competitors on this basis. This is because the distinction between a large, established wealth manager versus a newer player—in terms of the quality of advice provided—is now less evident. We believe it’s likely that every wealth manager will focus on improving their advice and compliance standards following the Royal Commission, and the perceived benefit from engaging an AMP advisor over other financial planners is less clear.

We’re not convinced that clients will remain permanently with an AMP product either. There is an abundance of alternative options from other dealer groups or platform providers.

Requirements for more transparent disclosure have made it easier to compare product features. The abolishing of grandfathered commissions and platform rebates and expanding approved product lists have incentivized advisors to choose from a broader mix of products and services, and not solely recommend those produced by AMP.

Accordingly, we don’t think AWM can leverage its brand to charge more than competitors. Investment-related revenue margins have compressed over time. Price competition will persist, with wealth managers expected to compete fiercely for new clients in an environment where fee disclosures are more transparent than before.

The barriers to prevent an existing/prospective AMP advisor from leaving/joining another network are low. A smaller advisor network narrows the broad distribution reach it historically possessed, potentially restricting flows into not just products within AWM, but also products of AMP Bank—weakening the benefits of vertical integration.

We’re likely to see further reduction in AMP’s advisor numbers over the next few years. With the move toward a fee for service model, the preference is to retain larger and more profitable practices (while trimming those on the other end); so the firm can operate its financial advice business economically, keep compliance costs in check and minimize the potential of regulatory breaches. The phasing out of grandfathered commissions, higher operating standards and emergence of new independent advisor groups may also prompt more advisors to leave AWM and deter prospective joiners into the AMP network.

Moreover, phasing out its buyer-of-last-resort arrangement by January 2022 and allow advisors to take their clients with them (if they were to leave the AMP network) also weakens its ability to retain advisors (and AUM) to the same degree as it had previously. While AMP intends to retain its share of advisors via offering a wider variety of advisor support services than other dealer groups, this is not enough to attract advisors who perceive that they cannot run a secure, profitable business through AMP.

The lack of moatworthy characteristics in AWM also applies to its New Zealand wealth management business. Returns on equity have been the highest among all AMP divisions, reflecting high-margin operations in a smaller market. This may not be maintainable. There is limited customer or advisor loyalty that support an intangible asset or switching costs, with declining market shares and contracting advisor numbers. This limits the distribution capabilities of its aligned advisors in the region.

We also believe AMP Bank does not have an economic moat. In our view, it lacks maintainable cost advantages and switching costs required under Morningstar’s global bank moat framework. AMP Bank is a relatively small lender in Australia with less than 1% market share of total loans, trailing considerably behind the four majors who collectively have around 75% share. It is also smaller in size than other regional banks like Bendigo and Adelaide Bank, Bank of Queensland, Suncorp, and Macquarie Bank.

AMP Bank is at a cost disadvantage to the Australian major banks. Funding costs are higher due to an inability to access wholesale credit markets at the same rates as the majors, resulting in comparably lower net interest margins. Furthermore, it also lacks a switching cost advantage, given its loan book consists predominantly of residential mortgages. In contrast, the major banks’ multiple product offerings (such as personal loans, credit cards and business loans) and ability to provide an aggregated view of all financial information adds to customer stickiness.

With competitive advantages nonevident in AWM (which is undergoing a restructure), and AMP Bank remaining subscale compared with other Australian banks, we don’t foresee significant excess returns that are maintainable.