The jury is still out at Morningstar on whether new management can deliver a wide range of remedial actions in the wake of AMP’s royal commission revelations.
Morningstar has downgraded its fair value estimate in the company from $2.40 a share to $2.05 a share in the face of accelerating structural headwinds.
Morningstar said its justification was due to damaging royal commission revelations that were an unprecedented disaster that trashed the heritage brand and made its long-term strategy uncertain.
“A wide range of remedial actions have been announced and have been or will be implemented as soon as practicable. Execution is always key, and so far we think the jury is out on whether new management can deliver,” said Morningstar’s analysis.
Morningstar gave AMP a high uncertainty rating and a poor stewardship rating but recognised that new leadership could right the ship.
For its part, AMP said it had a clear focus under new leadership and that it was undergoing a transformation that would rebuild the brand.
"AMP is focused on providing great outcomes for customers and is confident in delivering sustainable, long-term value for our shareholders.
"The company is changing under the leadership of David Murray and Francesco De Ferrari and has already taken significant action to improve culture, governance, accountability and processes across the group for the benefit of customers.
"We have a clear set of 2019 priorities including the long-term transformation of Australian wealth management to compete more effectively, customer remediation and the separation of Australian and New Zealand wealth protection and mature," an AMP spokesperson said.
Morningstar did concede that AMP had a strong balance sheet driven by its asset-management business expanding throughout Asia and the bank was recording strong earnings growth.
AMP recorded a 5.6 per cent increase in earnings for AMP Bank at the end of the 2018 financial year and said it had maintained a strong capital position.
Strong headwinds and court actions against AMP could challenge the strong capital position and Morningstar expected the bank’s impressive earnings growth would stall in 2019.
Part of Morningstar’s downgrade came from a broader view of wealth management with the analysis pointing at uncertainty on the future state of the Australian industry.
“We think what’s increasingly becoming clearer is the broad framework will include the interests of wealth manager shareholders taking much more of a backseat than in the past to the interests of superannuation members and financial advisor clients. This will affect all levels of AMP’s vertically integrated business models,” said Morningstar.
The royal commission would continue to impact AMP, with reputational damage impacting the outflows of its AWM business, which were at historic high levels in the first quarter of 2019, according to Morningstar.
ASIC and APRA also showed more of a commitment to proactively enforce best interest duties since the royal commission, but already the board and management of AMP seemed to be on the front foot and had prioritised remediation and improving governance and risk management over new business.
Further changes were likely at AMP, said Morningstar, with exiting life business the first of many shifts to occur.
“Each level of the company’s vertically integrated business model will need to be considered against the structural shifts occurring in Australia’s wealth management. We think the regulatory risks have increased for all parts of AMP’s vertically integrated business model,” said Morningstar.
The aligned dealer groups and financial advisers are the most unprofitable part of AMP’s model, said Morningstar, and acted as a distribution arm for its profitable platforms.
“A more proactive regulation of the best interests obligation by regulators and stronger adherence to it by trustee boards is likely to mean AMP’s financial advisers will play less of a role in the future than they have in the past as a distribution arm for AMP’s platform and products,” said Morningstar.
Ultimately, it is expected AMP will make changes to its dealer groups and advisers to make them more profitable as stand-alone businesses.
“We believe 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 new senior management following shocking revelations made at the royal commission.”
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