Profits at the Australian annuities giant have fallen victim to low interest rates and poor sales at embattled major bank-owned wealth businesses in the process of being divested.
Challenger warned investors last week that it expects lower interest rates and significant disruption in the financial advice market – the group’s primary sales channel – to hit profits.
Challenger has forecast NPAT of $398 million for the year to 30 June 2019, down slightly from the $406 million delivered in FY18. But things get worse from there.
“The damage occurs from fiscal 2020, with underlying NPAT forecast at $369 million from the previous $402 million,” Morningstar analyst Chanaka Gunasekera said.
“We expect the lower interest rate environment and disruption to its financial adviser distribution channel will continue to be headwinds to earnings growth over the next five years.”
Chief executive Richard Howes, who took over from Brian Benari this year, told investors last week that interest rates have now become a structural rather than a cyclical factor for the company.
IFAs buck the trend
The listed annuities giant is focusing on the non-aligned advice sector as distracted bank-owned advisers fail to deliver new sales and instead focus on demergers and remediation.
In a trading update on Thursday (13 June), Challenger noted that “significant financial advice market disruption” had impacted the sale of annuities, which have contracted 12 per cent domestically between Q218 and Q219.
However, IFAs bucked the trend and accounted for 38 per cent of sales in Q219, up from 25 per cent the previous year.
Major hubs – which include AMP, IOOF and the major bank-owned advice groups – was a 25 per cent contraction, while IFA sales were up 26 per cent on combined second and third quarter comparative sales.
As a result, Challenger is working to mitigate adviser disruption by building relationships with IFAs and leveraging platforms such as Netwealth and HUB24.
“As expected, the disruption to Australia’s financial advice industry, which is Challenger’s major distribution channel when selling annuities sin Australia, is continuing,” Morningstar’s Mr Gunasekera said.
“However disappointingly, management indicates that market disruptions intensified in the fourth quarter of fiscal 2019.”
Over the coming years, Morningstar expects large advice groups owned by the major banks will be less focused on writing news business, including Challenger annuities, and more focused on exiting their wealth management businesses and remediating customers.
“Regulatory changes, including stronger educational requirements for advisers and the removal of grandfathered commissions is also likely to see more advisers leave the industry and higher levels of adviser churn in major advice hubs,” Morningstar noted.
Challenger’s share price has fallen by approximately 30 per cent since the start of 2019, from around $9.3 in early January to $6.50 at midday on Monday (17 June).