MySuper Churns For AMP, But Bank Strong

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The trend of disappointing flows continued with AMP's March quarter update, as the flagship wealth management business was affected by high outflows from default superannuation transitions.

-Brokers suspect flows are unlikely to impress for some time
-Stock may re-rate as volatility subsides after recent regulatory changes
-Upside risk skewed to the second half after more clarity on margins and life re-pricing
 

By Eva Brocklehurst

The March quarter update from AMP Ltd ((AMP)) continued a recent trend of disappointing flows. The flagship business was affected by unexpectedly high outflows from default superannuation transitions ahead of the July 1 MySuper deadline.

UBS suspects the revenue environment is becoming harder and holds back from adopting a more positive view on the stock, especially as a lack of positive growth momentum was evident in the March quarter. March quarter cash outflows were -$199m, with around -$5bn in default super notifications occurring in the quarter. Customer consolidation activity resulted in some outflows, which brokers suspect went to industry funds as bank trends were weak, rather than internal transfers to the company's own MySuper products.

While the company may get close to a forecast $1.7bn June quarter flow estimate, as activity in contributions picks up before the super rule changes, UBS is less convinced now and has reduced its estimate to $1.5bn. Assets under management in wealth management and AMP Capital were -1% below the broker's estimates. Wealth protection is performing in line with re-based assumptions and has reported positive experience, although UBS notes in-force premiums declined -1%.

The only business reporting a surge in the top-line business was the AMP Bank, with sequential loan growth of 4.6%. UBS understands this favours owner occupiers, as investor lending reduced as a percentage of overall loans. While some top-line growth is encouraging, the broker is questioning whether this is the right time of the credit cycle to be materially ramping up growth.

Goldman Sachs suspects investors may be concerned by the ongoing weakness in wealth management. However, the broker points out that the actual earnings impact of March quarter flows is negligible, although the flow trend has been weak for several quarters. This means the current debate is really about how much of the trend should be extrapolated.

While asset inflation is still the dominant earnings driver in wealth, the broker acknowledges soft flows may deter some investors. While not wanting to overplay situation, Goldman Sachs suspects the bears will point out that the drain on gross outflows is an ongoing trend.

MySuper

MySuper accounts offer lower fees and simple features. An employer has had to pay an employee's superannuation into a super fund that offers MySuper since January 1, 2014. Existing default funds have until July 1, 2017 to transfer their balances into MySuper.

Morgan Stanley suggests the company is losing the battle on flows. As AMP moves default customers under MySuper ahead of the July 1 deadline it is struggling to retain business and the broker suspects the industry funds are the likely beneficiaries. The broker also notes the company cites a growing preference for residential property investment which has causing outflows from self managed super funds (SMSF).

On the positive side, the broker points out, with the MySuper transition completed in April, net flows are still positive for the year to date but, then again, with the $450m WA Water super mandate deal, they should be.

Ord Minnett agrees there may be some improvement going forward after the MySuper transition but believes a rise in outflows to industry funds needs to be monitored. The offset is that the AMP Bank was robust and most growth in wealth comes from markets, which were strong.

Credit Suisse suspects flows are unlikely to move the dial for the company in the near term. The extent of money coming out of higher margin products and into lower margin products is what will drive earnings. The company has guided to a -5% margin headwind in FY17 and the broker finds no reason why this should not be the case, based on first-quarter flows. Any additional pressure post the MySuper transition remains a risk. The broker suspects the earnings risk on the upside is likely to be skewed to the second half, when investors will obtain a better take on margins post the MySuper transition and the impact of current life re-pricing.

Morgans agrees the stock is far from a clean story, as customers are transitioning to MySuper and there are higher SMSF outflows as investors favour residential property investment. Still, the broker believes the stock could easily re-rate as the market becomes more comfortable that contemporary wealth protection earnings have been fully re-based and the core franchise of wealth management benefits from volatility subsiding after recent regulatory changes.

The broker considers the stock offers some value in an otherwise expensive share market, trading on a price/earnings ratio of around 15 times FY17 forecasts. The main downside risks to the broker's Add call are unexpected equity market volatility, a downturn in the life insurance market and unfavourable regulatory changes regarding superannuation or life insurance.

Wealth Protection

Goldman Sachs is not that concerned about corporate super flows and external platforms, noting the former can be lumpy while the latter is generally a low margin. Australian wealth protection performed solidly,  and the broker observes the company is working on a second re-insurance tranche.

The broker suspects investors would have been a little disappointed if they were expecting any additional capital management from the new reinsurance deal but most are probably less worried about this division than previously, when trends were worsening and before the company purchased some additional reinsurance.

Concerns remain regarding the un-reinsured part of the business but the company has stated the second tranche is progressing well. Goldman Sachs, not one of the eight stockbrokers monitored daily on the FNArena database, has a $5.15 target and Neutral rating.

There are three Buy ratings on the database and four Hold. The consensus target is $5.62, suggesting 6.7% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 5.6% and 5.8% respectively.
 

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