Variable cost savings, improvements in advice business productivity, and a rise in underlying net profit after taxes are among the pleasant surprises to emerge in AMP’s latest results, supporting claims of a potential turnaround at the financial services giant, according to Morningstar.
In an ASX announcement on Thursday, AMP reported a 5.4 per cent increase in underlying net profit after tax (NPAT) of $118 million for the half-year ending 30 June, up from $112 million in 1H23.
Its platforms business recorded a 22.7 per cent increase in underlying NPAT to $54 million, which was said to have been predominantly driven by stronger market conditions and disciplined cost control.
Meanwhile, the underlying NPAT loss of AMP’s advice business narrowed from $25 million in 1H23 to $15 million in 1H24, which AMP similarly said reflected its continued disciplined cost management.
With the announcement, AMP chief executive Alexis George said the firm has made “good progress” on its key strategic commitments.
Morningstar has raised its fair value estimate to $1.25 per share, up from $1.20 per share, following the results, “particularly reflecting” the stronger-than-expected platform and master trust flows.
In a recent market note, analyst Shaun Ler noted AMP’s shares have risen lately and are currently fairly valued.
The share price stands at $1.29 as at Friday, 9 August, up almost 11 per cent in the last five days.
“Signs of earnings recovery are now clearer, and we think AMP can reach a maintainable earnings base of around $287 million per year from 2024 to 2028 compared with its five-year average of $294 million,” Ler said.
He described the strong recovery in product flows and increased inflows from non-AMP advisers as “impressive”, alongside “effective” restructuring and product enhancements in the wealth businesses.
“Other improvements, like increased revenue per adviser/practice and reduced vertical integration, suggest much of the reputational damage is now behind AMP, positioning it to compete more effectively with peers,” Ler said.
However, he also identified several risks that could still hinder earnings growth, such as AMP Bank trailing larger banks in competitive positioning due to a lack of funding cost advantage and product offerings.
In the half-year ending 30 June 2024, AMP Bank delivered an underlying NPAT of $35 million, down 38.6 per cent on 1H23.
Net interest income decreased by 18.5 per cent while net interest margin remained steady at 1.14 per cent.
“[AMP Bank] is likely to grow loans at below-industry, low-single-digit rates in the next five years, behind the five-year average of 10 per cent. A decline in both net interest margins and loan volumes during the half was disappointing, with future growth largely tied to the overall market rather than share gains,” Ler said.
“AMP is relying on the launch of its small digital bank to diversify revenue and funding mix beyond retail customers, though we don’t see this enhancing competitive positioning or generating significant revenue synergies.”
He forecasts slower growth starting in 2025, highlighting that recent improvements in flows may have reflected “pent-up demand for risk assets after depressed capital markets in 2022–23”.
Forward outlook
More broadly, the Morningstar analyst predicts group operating margins at AMP to average 35 per cent for the next three years, subsequently falling to around 32 per cent by 2028.
In his note, Ler observed this figure is above the five-year average of 29 per cent, though it falls short of a pre-royal commission average of 45 per cent.
“While we expect improved flows and cost-control initiatives to benefit near-term margins, product fee margin compression, lower net interest margins, increased pension payments, and likely higher growth reinvestment as the business stabilises could dampen long-term profitability,” Ler said.
He also described AMP’s recent decision to sell advice licensees and self-licensed offer Jigsaw to Entireti, while retaining a minority stake, alongside the sale of minority stakes in 16 advice practices to AZ NGA, as “broadly positive”.
With this, the firm will be able to “extract value” from advice businesses, he said, which might not have been possible if owned.
Ler predicts that, with businesses simplified and past uncertainties clearing, AMP will resume payment of ordinary dividend payments from 2025, barring any unforeseen downside risks.
The $295 million third and final tranche of its $1.1 billion capital return program is due by the end of 2024, he noted.
“Around $158 million of share buybacks were completed in the first half of 2024, and $52 million will be paid in the interim dividend. This leaves AUD 85 million in share buybacks remaining for the rest of the year,” Ler said.
The firm has almost $680 million in surplus capital, he continued, while provisions booked on the balance sheet, covering compliance, remediation, litigations, and other items, currently amount to $324 million. This is down from $508 million in December 2023.
