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Alarming cash outflows prompt AMP action

Glenn Freeman  |  30 Oct 2018Text size  Decrease  Increase  |  
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AMP's banking division will scrap or reduce 20 fees and charges to further simplify its product offering, after last week revealing huge cash outflows for the third-quarter 2018.

Nine special service fees will be removed and 11 will be reduced across AMP's banking operation. The fee cuts will be from its one-off transaction fees, and further simplifications will be applied across its product set, including mortgages, from next year, the bank said on its website today.

The statement also indicated customers in legacy transaction accounts will be moved to up-to-date products.

This follows on from last week's revelation AMP will sell its life insurance division at a discount, which became apparent during its third-quarter earnings briefing.

At the same time, management also revealed further outflows from its funds during the quarter, as clients responded to the damning evidence uncovered by the banking royal commission.

Morningstar equity analyst Chanaka Gunasekera last week reduced his fair value estimate for AMP on the back of what he describes as "alarming levels of cash outflows" – coupled with the "bargain" sale of its Australian and New Zealand wealth protection and life insurance business.

He revised his fair value estimate to $2.85 a share, from $3.40 previously.

AMP

The proposed sale price amounts to just 80 per cent of the life division's embedded value

Life division sale has pros and cons

Gunasekera believes the proposed sale price amounts to just 80 per cent of the embedded value of the sold businesses.

"On a positive note, the sale will significantly simplify AMP’s business model and materially reduce its regulatory capital requirements.

"It will also give incoming CEO Francesco De Ferrari more balance sheet capacity to turn the group around," he says.

Morningstar's revised fair value estimate assumes around $1 billion of proceeds from the sale will be used to buy back AMP shares, "on the expectation that its surplus capital needs will be reduced following the sale, but AMP did not provide firm guidance on what it proposed to do with the proceeds," Gunasekera says.

"The ultimate use of these proceeds will likely depend on the Royal Commission’s final report, potential future client remediation and damages claims, and the incoming CEO’s strategy," he says – a lack of clarity that adds to a continued high uncertainty rating for the stock.

Commenting on the high outflows during third-quarter, Gunasekera says these were higher than anticipated, providing "tangible evidence of the damage inflicted by the Royal Commission".

Withdrawals from AMP funds soared to about $1.5 billion in the third quarter, from $243 million in the previous quarter.

The division had total assets under management of $132.6 billion at the end of the quarter.
Shares fell 25 per cent in response to the news last Thursday, to a record low.

AMP's share price has halved since the inquiry into the Australian finance sector began in February.

 

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Glenn Freeman is senior editor, Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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