-June qtr record expected in annuity sales
-Growth opportunity supported by govt review
-Enough comfort on credit risk?
 

By Eva Brocklehurst

Challenger's ((CGF)) score card on funds management and the life investing business continues to tick the right boxes for brokers. Moreover, regulatory changes are expected which will allow for deferred lifetime annuities (DLAs) and this supports a positive outlook, along with the company's investment in platforms, industry funds and Link.

Challenger is doing its job well, Credit Suisse asserts. The company expects a June quarter record in lifetime annuity sales, which the broker suspects will address some of the concerns around the difficulty of selling annuities in a low interest rate environment.

While not reflecting directly on its cash operating earnings (COE) margin, Challenger highlighted the risk premium currently available in the market across all asset classes was above long-term averages. This supports a view the company will maintain its COE margin, easing another concern in the broker's opinion.

The company's credit exposure to resources and mining industries is less than 1%, the same for agriculture, with no exposure to residential property developers. This signals to Credit Suisse why bad debts have been below the major banks recently. The broker is also not worried about valuation, calculating the stock is currently trading at around a 20% price/earnings (PE) discount to the market.

Hence, Credit Suisse considers the stock undervalued, given the compelling growth opportunity that is underpinned by industry changes in asset allocation and government support for annuities.

Ord Minnett is more circumspect, noting a $6m pre-tax profit hit to the funds management division in the second half. The Dexion business is the main culprit, a European alternative investments group bought in 2015. The broker also acknowledges the company's view that DLAs will be easier to sell than standard lifetime annuities.

Yet Ord Minnett highlights a risk to growth, in that federal Treasury explicitly stated social security means testing needs to be amended to make sure it takes into account the capital that is returned, rather than the current treatment which is only designed for full lifetime annuity products.

While Challenger provided detail on processes to deal with investment risks, the broker suspects some disclosures may cause a misunderstanding of the risks shareholders take. An example is the case of Challenger's sub-investment grade credit risk being similar to the banks, with the broker pointing out that the latter have lenders mortgage insurance to significantly reduce their risk.

Also, Ord Minnett does not believe the company provided enough comfort on the credit risk for property, equity and infrastructure, which remain very volatile classes and around 37% of the company's life assets. The broker estimates it only takes around a 3.25% fall in life asset values to reduce Challenger's target surplus to below its target range.

Ord Minnett retains a Lighten rating and believes the life business, at around 2.6 times net tangible assets, is too expensive. UBS is not overly concerned, believing that while falling rates could place some pressure on investment income in the life business, margins should be supported by the attractive risk premium for credit and property.

The flagged reduction in the funds management division flows through as a 2% earnings downgrade at the group level, UBS maintains, and subdued UK listing activity is assumed in the first half of FY17 before a pick up in the second.

Moreover, tangible evidence is now emerging to support upside from the expansion of distribution and the broker also flags the tailwinds from regulatory changes and a lack of competition. Admittedly, the strong share price performance has lifted the bar for growth amid heightened downside sensitivity but, on balance, UBS believes data points should remain positive over the medium term and retains a Buy rating.

Deutsche Bank also believes the distribution initiatives are outweighing the impact of lower rates. The improving momentum in lifetime annuity sales should start to support better retail book growth, which the broker observes has recently been hampered by more rapid fixed term annuities being run off, reflecting a shortening sales duration.

As such, while the prospect of even lower interest rates remain a risk factor, the enhanced initiatives the company has undertaken suggest to the broker this is more than offset. Nonetheless, Deutsche Bank considers the stock fully priced and sticks by a Hold rating.

The broker also notes Challenger has made good early progress in exporting its successful Fidante model to Europe, gaining $400m in net flows to date. Still, as per the broader asset management market in the UK, Deutsche Bank suggests the uncertainties over Britain's potential exit from the EU has halted alternative fund transaction activity.

Morgans found the briefing upbeat, suspecting the government's review of retirement income streams has provided an opportunity for a whole new category of product, with DLAs likely to be just the start of product innovation. The broker remains impressed by management's ability to continually deliver against guidance metrics and by the quality of the first half result, with few credit default losses.

On the subject of credit quality, Morgans notes the company has a significant risk management framework in place and an experienced investment team.The broker expects the stock to offer a mid-to-high single digit growth profile over the medium term, given its skew to strong growth industries. Morgans considers the FY17 PE multiple of 14.5 undemanding and maintains an Add call.

FNArena's database has four Buy ratings, three Hold and one Sell (Ord Minnett). The consensus target is $9.22, suggesting 2% downside to the last share price. This compares with $8.96 ahead of the briefing. Targets range from $7.10 (Ord Minnett) to $10.23 (Macquarie).

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-Earnings growth to take time
-Dividend yield the mainstay
-X-Pay product to support growth
 

By Eva Brocklehurst

Financial services business Flexigroup ((FXL)) is tidying up. The company intends to divest or discontinue poorly performing segments and focus on its core operations. While one-off charges have led to a mild downgrade to FY16 forecasts, brokers believe more of the risks are now priced into the stock.

Still, the company has a way to go to convince Macquarie, who is downgrading the stock to Neutral from Outperform. The broker notes the guidance downgrade represents the third straight year of little organic growth. The company expects FY17 cash profit around $100m from continuing businesses while volumes are expected to accelerate in FY18.

Macquarie accepts the stock could appear good value to some, trading on a FY17 price earnings ratio of 7.7x, and the dividend yield is attractive at around 7%, but suspects actual earnings growth is likely to take time. Moreover, the broker contends the main swing factors are the affordability time frame for the solar batteries market in the case of Certegy and the commercial/small-medium enterprise (SME) turnaround in the company's Australian leasing segment.

Citi also observes the transition in the company has been going on for 12 months but suggests most risks are now priced in, upholding its Buy rating. The exit of the non-core businesses is considered a positive development as it will focus management on its key consumer and SME financing. Citi also believes the fully franked dividend yield, circa 7%, is sustainable.

Flexigroup has stated it will post a number of one-off adjustments in FY16 including write-downs and provisioning. Systems and goodwill write-offs will total $18.4m while a provision will be raised for the Enterprise segment of $15.7m.

The company will exit Enterprise, Think Office and Blink, which will contribute a combined $10-12m in earnings in FY16. There will be a 3-month contribution from the F&P Finance acquisition of $6m. All up, stripping this out and other non-core contributions from FY16 and FY17 estimates suggests to UBS that there has been an erosion of 4-6% in the base business.

The company has a 10-12% volume growth target for FY18 in NZ cards & leasing, Australian cards & leasing and the Certegy business. UBS observes, while there are a number of initiatives in place across various business segments, a significant step up is required in Certegy and Australian leasing to achieve this.

There are also risks around further impairments, higher funding costs, margin compression and competition. This weighs on the outlook and, while the valuation appears undemanding and earnings expectations have been re-based, UBS stays on Neutral.

Strong valuation support and metrics which do not require much growth to be justified are the reasons Deutsche Bank has a Buy rating. The challenge the broker envisages centres on gaining comfort with the volume targets, given few details were provided. The targets are, nonetheless, achievable and Deutsche Bank likes the opportunity in Certegy around solar storage.

Moreover, the exit of the non-performing operations is a reasonable strategy, most are profitable, and the broker estimates the run off of the Enterprise book alone should generate $20m in cash, which could be better used across higher-returning segments.

Still, Deutsche Bank acknowledges near-term catalysts appear elusive. Excluding the F&P Finance acquisition and the businesses being discontinued, FY17 is expected to generate $80m in cash profit, similar to FY16, which the broker believes is a conservative estimate.

Flexigroup will launch X-Pay, a new no-interest re-payment plan for purchases under $1,000 within online shopping carts and in-store. The company expects to be able to leverage its established partner network and credit pricing capabilities as well as low-cost warehouse funding.

Macquarie observes the new CEO considers the delivery of X-Pay as a first step to improve investor confidence in management's ability to deliver on growth targets. The broker believes the product is an interesting development and will watch progress closely, noting it is a high volume/low value offering which will take some time to build up scale.

Credit Suisse welcomes the clearing of the decks. While momentum is negative and headwinds continue, the broker believes this is still a high quality, growing business. The opportunity to fix some self-inflicted problems is being tackled and, while some new products are needed, the broker believes this is close to the bottom for the stock.

The discontinuation of the non-core businesses suggests both returns and risk profile will improve and the sale of some of the units will also deliver cash flow. Hence, Credit Suisse also suspects the FY17 forecasts are conservative. The broker understands that, in forming its FY17 outlook, the company has an unchanged view on F&P Finance and related synergies and assumes no significant change in impairment ratios.

FNArena's database has four Buy ratings and two Hold. The consensus target is $2.47, suggesting 20% upside to the last share price. This compares with $2.87 ahead of the briefing. Targets range from $2.17 to $2.78. The dividend yield on FY16 estimates is 7.2% and on FY17 it is 7.4%.
 

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- Overall soft results from Australian banks
- Positives among the negatives
- Capital yet to be addressed
- Risks ongoing
 

By Greg Peel

Ahead of this month’s bank reporting season, which featured first half results from Westpac ((WBC)), ANZ Bank ((ANZ)) and National Bank ((NAB)), the greatest concern bank analysts had was uncertainty surrounding financial distress suffered by some high-profile corporate names in the period, including the likes of Dick Smith, Slater & Gordon, Arrium and Peabody. It was not an unfounded fear.

As FNArena’s Australian Bank Reporting Season Preview highlighted, there was also some concern bad and doubtful debt (BDD) issues would also surface more generally in Australia’s mining states, and within New Zealand’s struggling dairy industry.

Analysts also suggested that any benefits arising from mortgage repricing in the period would be eroded by funding costs and competition, and that dividends may well be under threat from weaker earnings, increased debt provisions and the upcoming (albeit as yet unquantified) need to increase tier one capital.

Bank analysts proved spot on with their concerns, but not spot on the mark in terms of quantum. BDD provisions were actually larger than expected, except for NAB, and provided the source of initial bank price weakness in the week when Westpac was first to fess up. Most analysts did not expect dividend cuts this time around, but were not too surprised by ANZ’s move. Citi correctly predicted ANZ’s cut but also had NAB pencilled in for a cut, which was not forthcoming.

All up, the season provided some negatives, but positives as well.

Average earnings among the three fell 2% in the half, UBS notes, once adjusting for ANZ’s one-off items and NAB’s Clydesdale spin-off. This compares to a 1.6% fall in the previous half, and was a greater decline than consensus forecasts suggested. The “miss” was down to those greater than expected single-name impairments, but also down to much lower than forecast non-interest income, meaning fees, trading income and so forth.

If you want to get technical, Goldman Sachs notes pre-provision operating profit (PPOP) across the sector was down 0.2% on last year’s first half. That sounds underwhelming, except that it’s the worst PPOP return on risk-weighted capital since the first half 2009. And we all remember what was going on back then.

While the increase in BDD provisions for single-name exposures were worse than feared across the banks, the good news is credit quality elsewhere was quite good. Loan issues in the mining states and NZ dairy were no worse than expected, while general small and medium enterprise loans, commercial real estate loans and loans in NZ outside of dairy provided no scares.

As expected, earnings headwinds provided by mortgage repricing in the period (lifting variable mortgage rates despite no change to the RBA cash rate in the half) were more than offset by the tailwinds – BDDs, weak non-interest income and also a rise in short term funding costs -- as analysts had anticipated. The good news is that costs did not rise as much as was feared, although a lot of that was due to staff reductions. And loan growth was actually solid.

Then there’s the issue of capital. At some point, the banks are going to have to increase their tier one capital ratios to comply with yet to be finalised Basel 4 international “too big to fail” requirements, and APRA’s own “unquestionably strong” additional requirement, which at this stage remains little more than a throw-away qualitative line lacking any quantitative certainty.

One way to increase capital is not to give as much of it away as dividends. The banks know all too well that their shareholder appeal lies solely with yield in this low interest rate world, so dividend cuts are a big risk. If the banks keep their quantum of dividend (cents per share) steady as earnings fall, dividend payout ratios rise. All the banks have target payout ratio ranges, but in some cases ratios have crept out to the upside. Assuming earnings don’t suddenly improve, which would also require BDDs to suddenly swing back the other way, at some point the banks are going to have to address their dividend policies.

ANZ, of course, has.

The share price response was immediate. Westpac had been first cab off the rank, reporting on the Monday, so it had the task of informing the market single-name BDDs were actually worse than you all thought. All bank shares were sold down on the day. ANZ then reported before the bell on the Tuesday, announcing its dividend cut, and ANZ shares copped another hiding. But at 2.30pm on that day, a big, shiny white mare jumped over the hedge, ridden by Glenn Stevens. ANZ shares closed higher on the day.

The surprise RBA rate cut shifted the bank playing field tectonically. By the time NAB reported on the Thursday, economists were rushing to pencil in another RBA rate cut in August. By the time Commonwealth Bank ((CBA)) provided its quarterly update the following Monday, banks were back in favour with investors.

It should be noted that banks earn less in a low interest rate environment than they do in a high interest rate environment, because their net interest margins (the difference between what they borrow at and what they lend at) gets smaller and smaller on lower numbers. So why are RBA rate cuts positive for Australian banks?

Well firstly, the lower the prevailing interest rate (and this is benchmarked by the rate on term deposits as an alternative investment), the more appealing are high-yield bank shares. Secondly, RBA rate cuts always provide banks with a backdoor opportunity to reprice their mortgage rates by not passing on all of the 25 point cut. And thirdly, lower mortgage rates encourage more punters into the market, allowing for loan growth.

When NAB did finally report on the Thursday, it did not announce a dividend cut, which didn’t shock analysts, but it did announce only a slight uptick in BDD provisions, which left analysts perplexed. NAB is just as exposed to the Dicks and Slaters of the world as its peers.

“NAB stood out with a very low BDD charge,” noted UBS, “which looks low given its well-known corporate exposures. We expect this to increase in 2H16”.

“We were surprised that NAB’s newly impaired single names weren’t higher,” said Deutsche Bank. “Its low group bad debt to loans ratio implied unsustainably low impairment expenses in its core business banking portfolio”.

Reading between the jargon, analysts are suggesting NAB may yet be found out to have been a bit blasé about its BDD exposures.

It also means NAB’s dividend payout ratio is now above management’s target. While management is of the belief the ratio can come back down again on earnings growth, analysts are not so confident. Macquarie, for one, believes the Big Banks should all be able to sustain their dividends at their full year results, except NAB.

Macquarie’s belief is predicated on an assumption bad debts don’t get any worse than the broker expects. Not the well-known single names, as they’ve been provided for (ex NAB), but BDDs in general. Prior to this reporting period, BDDs have been on a long trajectory downwards since the GFC, and indeed never reached the scary heights banks were fearing back in 2009 when they materially topped up their BDD provisions.

The return of these provisions to the bottom line has allowed the banks to push up their dividend payouts to historically high levels these past few years in order to feed the hungry mob. Analysts assume BDDs, in general, have now reached the end of this cycle and will now start cycling back the other way, or “revert to mean”.

Mind you, bank analysts have been assuming such for quite some time now, and have yet to be proven right. Take out the single-name issues in this reporting season, and yet again, general BDD growth was below expectation. But like a stopped clock, they must eventually be right.

Which brings us back to capital again. While analysts are just as in the dark as the banks themselves as to what “too big to fail” and “unquestionably strong” will translate into in actual numbers, there is no doubt banks will need to increase their tier one capital. The question remains as to whether they can do this organically – unlikely when earnings growth is minimal – or satisfy requirements through dividend reinvestment plans.

Mind you, when the banks all raised fresh capital one after the other last year, many analysts believed then that DRPs would suffice.

One who did not believe so was Morgan Stanley. And again the broker has been left scratching its head:

“We were surprised that the banks didn’t make more effort to improve CET1 [common equity tier one] ratios at the 1H16 results given that they generally expect capital requirements to move higher”.

Bank investors have already had a rough year on share price falls. A 6% yield is cold comfort against a 10% capital loss. But still they keep coming back, and doubling down, given lower share prices plus sustained dividends equal even better yields. Over the next two to three years, Goldman Sachs expects dividend per share growth to be lower than earnings per share growth as dividend payout ratios are reduced. They will have to be reduced, Goldman believes, because return on equity will fall as a result of higher capital requirements.

Moreover, if the banks do try to avoid or minimise actual dividend cuts by boosting capital through DRPs, dividends per share fall anyway, given DRPs increase the bank’s share count.

All sounds a bit grim really. So should you buy the banks?

The sector looks inexpensive relative to the industrials sector, Deutsche Bank suggests, “but positive catalysts are lacking and downside risks outnumber upside risks in our view”.

Goldman Sachs believes the sector outlook will remain “difficult” in the second half.

“We retain a negative stance on the major banks,” says Morgan Stanley.

“We believe there are limited prospects for growth or higher returns over the short to medium term,” says UBS.

Ahead of the bank reporting season, Macquarie believed there was little downside risk given bank shares prices had already been sold down. Sure enough those share prices have since bounced, with a little help for the RBA. “Following recent re-rating the sector’s absolute valuations appear more closely aligned to our fundamental valuations,” Macquarie now offers.

Yet despite the doom and gloom implicit from these broker views, among eight brokers on the FNArena database and four Big Banks, the database shows 13 Buy ratings, 16 Hold ratings and only 2 Sell ratings. Seems incongruous.

It gets more incongruous when we look at the following updated table.
 

All of CBA, ANZ and NAB are afforded three Buys and almost the same balance of Holds and Sells, yet CBA is (as of yesterday’s close) only 1% away from consensus target, ANZ is 9% away and NAB is 2% above. Only Westpac, with five Buys and no Sells, seems justified on 8% to target.

We must take into account that a preponderance of Hold ratings and few Sells reflects the fact analysts know that however subdued the outlook, the banks will continue to be supported by yield. With regard the number of Buys despite dour views on the sector as a whole, we must acknowledge that broker ratings among the banks tend to be more relative than absolute. And do not fall into the trap of believing the table above suggests all brokers prefer Westpac first and NAB last. Broker preferences among the Big Four cover just about all the available permutations.

Happy investing.
 

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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-Emerging markets contributing more
-Attractive capital management potential
-Efficiency gains needed to insulate margins
 

By Eva Brocklehurst

QBE Insurance ((QBE)) has outlined its growth and cost reduction plans to 2018. The company has provided a gross written premium (GWP) target growth rate of 3% with an 11% insurance margin and expense target of $300m.

The insurer is considerably more organised and efficient now, UBS contends. The company intends returning CTP (green slips) to profit and defending its exposure to lenders mortgage insurance. Europe has been re-established as the most consistent performer, with the business selectively growing.

Emerging markets, improved retention and five specific growth areas are expected to add 1% per annum to achieve the GWP targets. Achieving the targets should allow the insurer to reach 10% per annum net profit growth into 2018.

A $50-100m underwriting improvement and claims savings of $200m are incremental to UBS estimates. Otherwise, the broker found the further details on how the targets are to be delivered are aligning with its forecasts.

On capital, the company indicates it does not need as much surplus, with its base now highly resilient to realistic one-in-20 year disasters. Management was not specific about its plans but UBS believe capital management could emerge as an important part of the investment thesis if targets are delivered.

QBE assumes no increase in market pricing or no change to interest rates in its forecasts and Macquarie notes GWP growth assumptions are to be achieved via emerging markets contributions, which have provided 100 basis points in the year to date. The company is also targeting a cumulative cash remittance of $2.5bn over 2016-18, with a dividend pay-out ratio of up to 65%.

The guidance, combined with the emergence of the capital management potential, suggests upside to an already attractive outlook in Deutsche Bank's view. The FY18 outlook implies an 11% margin, which is in line with the broker's estimates, while factors such as higher risk-free rates or reserve releases could boost margins to 12%, equating to 10% profit upside.

Furthermore, with the balance sheet already strongly capitalised and GWP growth of 3% expected, the broker highlights the capital management potential from FY17, even allowing for the lift in the dividend pay-out ratio. Buy-backs are estimated to boost earnings by 6% by FY20, returns on equity by 90 basis points and long-term discounted cash flow by 11%.

Morgans observes management would not be drawn on the potential for special dividends, rather alluding to significant capital flexibility. Management's confidence in the improvement in the North American business has increased while emerging markets are seen as key growth areas.

Morgans also finds the earnings profile attractive and considers the leverage to an improving insurance pricing cycle, or a rise in bond yields, has increased significantly, continuing to believe the stock is inexpensive.

The targets are aspirations. They are not locked in, Credit Suisse warns. There are many moving parts that need to work over the next three years. The broker lauds the company for providing such a level of detail around assumptions but retains a more cautious view on premium rates and investment income. QBE is depending on improvement in both to achieve its growth ambitions.

The broker does not believe the targets are easily achieved and, indeed, the presentation highlighted that around US$500m in costs are needed to come out of the business just to stand still over the next three years. The broker supports QBE's actions but wants to witness more favourable signs in the premium and investment markets in order to have a more positive view.

The new targets for growth are impressive, but Morgan Stanley notes they come with increased earnings volatility. The broker also believes it is too early to return capital and the soft operating environment will make it essential QBE delivers its efficiency gains to insulate margins from pricing pressure. Where it could be mistaken, Morgan Stanley acknowledges, is if the company fast tracks a capital release by selling or reinsuring legacy run-off books.

Ord Minnett is a little sceptical too, retaining a Lighten rating. After de-risking its book via capital raising and increasing reinsurance, the company is now intent on hiking investment risk to boost margins.

The broker is cautious about the expense and claims savings which are planned to offset the cycle, as the returns so far on initiatives in this area have not been witnessed by shareholders and much of it is suspected to be reinvested or competed away. While considering it difficult for insurers to make underwriting gains in a soft cycle, the broker does factor into the forecasts the company’s risking up of its investments.

FNArena's database shows five Buy ratings, two Hold and one Sell (Ord Minnett) for QBE. The consensus target is $12.51, suggesting 5.6% upside to the last share price. This compares with $12.35 ahead of the update. Targets range from $11.45 (Credit Suisse) to $13.70 (Deutsche Bank).
 

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-Clear path to develop DLA products
-Multiple premium payments allowed
-Minimal impact from super limits
 

By Eva Brocklehurst

Several initiatives in the 2016 federal budget will impact on insurers and providers of superannuation products. Of significance are the reforms which extend earnings tax exemptions to longevity risk products, which supports deferred lifetime annuities (DLAs) and other pooled risk products. Additional rules specifically for lifetime products will allow a tax exemption, provided the value of any potential capital withdrawal declines over time.

The changes were widely canvassed but brokers consider the budget confirmation is particularly positive for Challenger ((CGF)) as it provides a clear path for the development of the company's DLAs. The next step will be government consultation on how these will be treated vis-a-vis the age pension means test, ahead of the reforms being introduced in July 2017.

The reform proposals clear the way for new long-duration products at a time when fixed term annuities are becoming less attractive in a low interest rate environment, but Deutsche Bank notes it may also enable increased competition to Challenger's DLAs.

An unexpected positive, the broker observes, is that multiple premium payments will be allowed for a retirement income stream. This would prevent clients from being locked in at prevailing interest rates with a single lump sum premium.

The changes to the tax status of deferred annuities is a win for Challenger, Morgans agrees, as it opens up a new product for sale. The company has signalled that the proposal for a very flexible deferred annuity market should help its DLA product reach a material size.

The regulation changes need will mean these products cannot be launched until FY18 and Deutsche Bank also flags the uncertainty that exists in terms of demand and profitability. Still the broker de-risks the DLA upside in its valuation and raises the target for Challenger to $8.25 from $7.85.

Bell Potter also finds it difficult to quantify the short term earnings impact, given more detail is needed to be sure how the new products will work. Still, the broker believes DLAs over time could be as meaningful to Challenger as the company's existing term annuity book. The broker also notes from the budget announcement that it appears the DLAs will be able to sit inside superannuation, or be purchased outside of super with similar benefits.

A feature of existing annuities that allows for the draw-down of both income and capital will also be extended to DLAs. DLAs may also be purchased at any stage, either before or after retirement. Bell Potter, not one of the eight brokers monitored daily on the FNArena database, raises its target for Challenger to $11.00 from $10.40, with an unchanged Buy rating.

While the government introduces new limits on superannuation contributions and higher taxes, the impact on the likes of AMP ((AMP)) is expected to be minimal in terms of flows and funds growth. The threshold at which the tax rate on super contributions increases to 30% was lowered to $250,000 from $300,000. The annual cap on concessional contributions has also been reduced to $25,000, with a new lifetime non-concessional cap of $500,000.

Deutsche Bank envisages the changes will affect high net worth self managed super funds more than AMP's mass market client base. The new non-concessional cap and the introduction of a $1.6m cap on transfers to retirement products were less widely expected, UBS maintains, yet these measures appear to tie into the government's stated objective for super being a substitute for, or supplement to, the age pension.

Morgans considers the changes to superannuation as a net negative, given this reduces concessional contributions. Yet, the broker concedes it is only higher net worth indiviuals that are affected, with 96% of individuals in superannuation unaffected.

Moreover, the broker observes AMP is historically more a middle market player in super so concurs the budgetary impacts should be more muted. For Perpetual ((PPT)), while its higher net worth clients may be more affected, it remains hard to quantify the exact effect on flows, the broker maintains. Morgans makes no changes to forecasts in the wake of the budget, retaining Add ratings for AMP and Challenger and a Hold call on Perpetual.

Challenger has four Buy ratings and five Hold on FNArena's database with a consensus target of $8.96 that suggests 3.3% downside to the last share price. AMP has seven Buy ratings and one Hold with a consensus target of $6.25, suggesting 6.6% upside to the last share price. Perpetual has eight Hold ratings. The consensus target is $43.68, signalling 5.8% upside to the last share price.
 

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