The "shocking revelations" about AMP at the banking royal commission have resulted in "material reputational damage" as well as a higher likelihood that the vertically integrated group will be broken up, says Morningstar.
A report by Morningstar analysts has outlined a litany of obstacles AMP will be facing thanks to “shocking revelations” from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“AMP will be in a period of transition for the next few years and will suffer from higher compliance costs and lower growth as it employs senior management," said the report.
“We also expect more fines, higher compensations, and potential class actions,” the report said.
“Material reputational damage, a more proactive ASIC, a stronger compliance framework, and a compression in margins due to the royal commission will mean lower growth rates for funds under management and advice.”
The report also noted there could be further damage to AMP’s underlying earnings if, as a result of recommendations made by the inquiry, vertically integrated business models were required to be dismantled.
AMP’s vertically integrated model was the “backbone of its business,” Morningstar analysts pointed out.
“We believe the heightened threat of a potential break-up means AMP will be a high-risk investment in the near term.”
Although AMP had some “promising initiatives”, they had all but been “swamped by the royal commission”.
“Following the royal commission, we expect flat underlying NPAT growth in wealth management over the next five years.”
Morningstar analysts also recommended AMP divest its lower growth businesses Australian Wealth Protection, New Zealand Financial Services and Australian Mature.
Furthermore, with Craig Meller stepping down from his role as chief executive and the resignation of AMP chair Catherine Brenner, “there is also considerable uncertainty on AMP’s strategy,” the report said.
“AMP’s poor corporate governance and risk management has now materially impacted AMP’s reputation as a trusted financial advisor,” it said.
“We believe its strategy to focus investments and grow its wealth management business is now in tatters as a result of the royal commission.”