To Buy Or Not To Buy AMP

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AMP has lost a third of its value over the course of the Royal Commission. Is it now a bargain, or is the worst yet to come?

-Brand damage inevitable
-Confusion over BOLR liability
-Divergent broker views

By Greg Peel

Back in 2013, ASIC banned “conflicted remuneration” for financial advisors, which refers to practice of advising clients to invest in the product of a particular wealth manager not because the advisor necessarily believes it is a suitable investment, but because the advisor would receive a tidy commission from the wealth manager for doing so.

As the rule was new, it applied only to new investments. Those advisors who had already put a client into a product, and assuming the client stuck with it, were allowed to “grandfather” those commissions, meaning they could still be paid.

This resulted in advisors not suggesting client’s move out of that product, even though it might have been in the client’s best interest to do so.

Back in May, ASIC recommended grandfathered commissions cease once and for all, noting wealth managers were still paying billions of dollars in commissions to advisors who remained “conflicted” between remuneration and valuable advice. Given the rolling revelations of the Royal Commission, and the assumption strict regulatory changes would stem from the findings, Westpac ((WBC)) last week jumped the gun and announced the end of grandfathered commissions.

Stockbroker Shaw and Partners suggests the move is as much of a competitive play by Westpac as it is getting in ahead of the inevitable. This week Macquarie Group ((MQG)) made the same announcement.

Assessing the Damage

Throughout the course of the Royal Commission, AMP ((AMP)) shares have lost a third of their value. This raises the inevitable question among stock analysts: Could it get any worse from here, or has AMP by now been oversold?

On this point, analysts are split. All concede two realities: that AMP will suffer “brand damage”, implying investors will stay away or move investments from the wealth manager regardless; and that there will be an exodus of financial advisors/planners from AMP’s books.

As to the impact, views diverge.

Back in mid-June, Morgan Stanley declared itself in the “oversold” camp by suggesting AMP’s earnings and franchise resilience will surprise the market. The broker believes fear and uncertainty has provided an opportunity, and has retained an Overweight rating.

Morgan Stanley pointed out that tighter regulations in the wealth management industry will hit everyone, not just the major players, and capital requirements for financial licensees who choose to go it alone will be potentially onerous post Royal Commission.

Morgan Stanley assumed the end of grandfathered commissions in its valuation. A week later UBS made the same move, factoring in both the end of grandfathered commissions and the loss of minimal balance, inactive super accounts to government control into earnings forecasts.

This earnings uncertainty, combined with the broker’s perception of management and operating instability, led UBS to retain a Sell rating.

Credit Suisse was the next to pipe up, this week suggesting uncertainty around regulatory risk is causing confusion. AMP may be licensee to the largest financial planner base in the country, but very few of those planners are actually salaried, the broker pointed out, especially compared to planners with the major banks.

On that basis, AMP – the listed company – generates minimal earnings from financial advice. The largest earnings contribution comes from operating a platform, Credit Suisse noted. AMP will no doubt suffer brand damage, the broker concedes, but will not be hit by a substantial buyer-of-the-last-resort (BOLR) liability. Credit Suisse retains Outperform.

Assessing the Risk

BOLR is one reason Shaw and Partners yesterday released a note suggesting AMP is facing a “bleak future”, believing the worst is yet to come. In retaining a Sell rating, Shaw cites three major issues: the end of grandfathering; BOLR; and the potential for restructuring costs, class actions and fines stemming from the Royal Commission.

As at the end of last year, AMP had 1454 planners on its books, Shaw notes. BOLR is an arrangement provided for a financial planning practice whereby the licensee makes a payment, in AMP’s case of four times revenue, in event of a planner retiring. It is another way wealth managers have lured planners into their webs.

The end of grandfathering, and more onerous regulatory, capital and licensing requirements that will stem from the Royal Commission for planners, will no doubt spark a rush of retirements. With BOLR another incentive.

Shaw notes that if the average BOLR payment per planner is $1m, AMP is potentially up for $1.5bn. Little excess capital on the balance sheet implies the company will have to reduce dividends and/or raise capital if a planner exodus, as is assumed, eventuates.

It would appear Credit Suisse’ assessment with regard BOLR contradicts that of Shaw. At the very least it underscores Credit Suisse’ suggestion of confusion, and UBS’ emphasis on uncertainty.

Back in May, when AMP went under the pump at the Royal Commission, Ord Minnett and Macquarie both downgraded prior Buy (or equivalent) ratings to Hold, given uncertainty. Citi and Deutsche Bank already had Hold ratings, while Morgans has held onto an Add rating.

We’ve not heard from those five brokers since.

Beyond four Hold ratings on the FNArena database (of which Shaw is not a member), UBS is the only straight Sell. Morgan Stanley and Credit Suisse are waving contrarian flags with their Buy ratings.

Understandably, UBS has set the lowest target price among the eight database brokers, at $3.30. It is the only sub-4$ target (last traded price $3.65). Credit Suisse leads the pack with a $4.80 target, reiterated this week, with Morgans (as at May) on $4.56 and Morgan Stanley (June) on $4.50.

Shaw has cut its target to $3.00.

If Shaw is right, AMP will fall another ~20%. If Credit Suisse is right, it will rally back ~30%.

Perhaps the missing qualification to broker ratings in this case, if we consider “consensus” as a whole, is “High Risk”.

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