AMP – Page 2 – Digital Finance Analytics (DFA) Blog

Rate cuts won’t stimulate housing, says Oliver

Anyone expecting an RBA rate cut to trigger a repeat of the six-year property boom we experienced from 2011 needs to think again, according to one of Australia’s leading forecasters; via InvestorDaily.

Speaking to Investor Daily, AMP Capital chief economist Shane Oliver said he believes Sydney is now about halfway through its correction, with top-to-bottom house price falls to reach 25 per cent in the nation’s biggest city.

“Melbourne prices have come down by around 10 per cent. Like Sydney, I think they will come down by 25 per cent as well, so they’re not quite halfway through the downturn,” he said. “There is a wealth effect coming through from the price falls we have already seen and a wealth effect still to come from further falls in house prices.”

The property slowdown has also forced lenders like ING and Adelaide Bank to reduce credit or small businesses borrowing against their residential property.

ING has banned borrowers from using their homes as security for business loans amid fears of negative equity as property prices continue to fall.

A credit squeeze in the small business sector, coupled with the “wealth effect” of falling property prices, which curtails household consumption, could have serious implications for the Australian economy.

RBA assistant governor Michele Bullock gave a speech in Perth this week in which she stated that the wellbeing of households and businesses in Australia depends on growth in the Australian economy.

“And a crucial facilitator of sustained growth is credit – flows of funds from people who are saving to people who are investing.”

The Reserve Bank is banking on growth of 3 per cent by the end of 2019. But AMP Capital’s Mr Oliver believes a reduction in consumer spending and reduced construction activity related to housing suggests growth could be closer to 2 per cent.

“If SMEs struggle to get credit, then it could be worse than that,” he said.

“I’m probably in the more negative camp on the wealth effect and I think the evidence is there. RBA governor Philip Lowe gave a speech two weeks ago where he said that a 10 per cent decline in net housing wealth would reduce consumer spending by 0.75 per cent in the short term and 1.5 per cent in the longer term.

“A 10 per cent fall in net housing wealth would be equivalent to a 7 per cent fall in actual house prices, given a degree of gearing. Net housing wealth is about 75 per cent of total housing wealth, so if you’ve got a 10 per cent fall in total housing wealth, it implies a bigger impact of around 2 per cent in consumer spending.”

Unemployment is a key indicator for measuring the impact of these effects on the economy. Mr Oliver predicts the unemployment rate will increase from 4.9 per cent to 5.5 per cent by the end of the year.

Research released by the Reserve Bank of Australia shows that the central bank’s decision to begin cutting rates in November 2011, from 4.75 per cent to 1.5 per cent today, had a direct influence on booming property prices.

The price of credit has come down significantly over the last six years, given the 3.25 per cent reduction in the official cash rate over that time.

House prices peaked in mid-2017 and have declined by approximately 7 per cent nationally since then. In Sydney, prices have come down by around 12 per cent from their peak.

The next rate cut by the Reserve Bank, which some believe could come as early as May, won’t have the same impact as it did eight years ago, Mr Oliver said.

“It will provide some help to stabilise the market. But I don’t think it’s going to provide the same stimulus as it did in 2011. Household debt-to-income levels are much higher now. The banks also have much tighter lending standards than they did in 2011.

“I don’t think we’ll be off to the races again.”

‘The business model is challenged’: AMP

Troubled wealth giant AMP has admitted it faces a long hard road to recovery. With an increasingly vigilant regulator, conduct remains its greatest risk, via InvestorDaily.

In its annual report, released on Wednesday (20 March), AMP’s new chief executive officer, Francesco De Ferrari, told shareholders that 2019 will be a transitional year for the company as it completes the sale of its wealth protection business and continues work on its hefty remediation program.

AMP’s 2018 results included a provision of $430 million (post-tax) for potential advice remediation, inclusive of program costs, in relation to ASIC reports 499 and 515, which require an industrywide ‘look back’ of advice provided from 1 July 2008 and 1 January 2009, respectively.

“Our first priority is the separation of our wealth protection and mature businesses, which will help simplify and create the basis for a more agile AMP,” Mr De Ferrari said.

“Our second priority is the delivery of our advice remediation program to compensate impacted clients. We are focused on doing this as quickly as possible. Lastly, AMP is focused on getting our risk, governance and control settings right. This includes placing ethics and risk at the core of our culture.”

Following the sale of the wealth protection and mature businesses, AMP will have four core operating businesses – wealth management in Australia and New Zealand, AMP Bank and AMP Capital.

“Our wealth management business in Australia has foundational assets and strong market positions. However, the business model is challenged and we need to reshape it for the future,” the CEO said. What shape the new AMP wealth business takes remains to be seen.

“In New Zealand, our wealth management business continues to deliver resilient earnings for the group. Our opportunity is to become an advice-led wealth management business,” Mr De Ferrari said.

AMP Capital has a strong growth trajectory, particularly internationally. AMP Bank has performed well and can be further leveraged as part of our wealth management offer.

In its director’s report, AMP provided extensive commentary on the key risks to the company, which has faced significant challenges throughout 2018.

“Given the nature of our business environment, we continue to face challenges that could have an adverse impact on the delivery of our strategy,” the company said, adding that the most significant business challenges include business, employee and business partner conduct.

“The conduct of financial institutions is an area of significant focus. There is a risk that business practices and management, staff or business partner behaviours may not deliver the outcomes desired by AMP or meet the expectations of regulators and customers” the company said.

“An actual or perceived shortcoming in conduct by AMP or its business partners may undermine our reputation and draw increased attention from regulators. Our code of conduct outlines AMP’s expectations in relation to minimum standards of behaviour and decision-making, including how we treat our employees, customers, business partners and shareholders.”

AMP Bank To Lift Some Mortgage Rates

Weeks after posting a 97% drop in profits, AMP has announced changes to its home loan offerings, via Australian Broker.

In the next few days, AMP Bank plans to decrease a range of fixed rate loan options as well as increase variable rates.

“We have held off passing this cost on to existing customers for as long as we can. We are managing our loan portfolio in a very active market and decisions on rates are never taken lightly,” said AMP chief executive Sally Bruce.

When the bank shared its financial results in mid-February, it attributed its 2018 earnings being less than the year before to several factors, including higher cash outflows and the ongoing impact of the royal commission.

Now, variable lending rates for new and existing owner occupiers and investors will increase by 0.15% p.a.

“The change in variable rates is driven by an increase in costs,” said Bruce.

The bank also announced two new fixed lending offers: the three-year package investment P&I at 3.99% per year, and the five-year package owner occupied P&I at 4.05%.

AMP clarified that the two-year fixed rate of 3.75% for owner occupied principal and interest customers will continue to be offered.

The rate changes go into effect on 8 March for new business and 11 March for existing business.

Could Hayne destroy AMP’s wealth model?

In a research note published on Thursday, Morningstar analyst Chanaka Gunasekera said the most immediate near-term risk for AMP will be the royal commission’s final report, which the government will release after the market closes on Monday, 4 February; via InvestorDaily.

“We expect the report to be highly critical of AMP’s governance and conduct,” the analyst said.

“However, the key risk remains the potential for the royal commission to recommend the dismantling of the company’s vertically integrated wealth management business mode.

“While we think the most likely outcome is that a wholesale separation of its advice, platform, product manufacturing and other businesses will not be recommended, we nevertheless expect the recommendations will lead to a reduction in the competitive advantage of operating this vertically integrated model.”

In his interim report to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Hayne questioned vertical integration as it relates to financial advice.

“The one-stop shop has an incentive to promote the owner’s products above others, even where they may not be ideal for the consumer,” Mr Hayne said.

Morningstar also flagged the uncertainty around the strategy of AMP’s new chief executive Francesco De Ferrari, who has just taken up the reins and has been tasked with being a change agent for the group.

While the new CEO’s strategy will largely depend on Hayne’s final report, there are other risks at play.

“The political risks are heightened by the fact that a pseudo federal election campaign has commended, with the poll expected by the middle of May 2019,” Mr Gunasekera said.

Morningstar will review the outlook for Aussie wealth managers following the publication of the royal commission final report.

“From the perspective of banks, vertical integration always promised the benefit of cross-selling opportunities (the opportunities for cross-selling financial products to existing and new customers).

Evidence about platform fees and the provision of financial advice at the royal commission posed significant questions about the aspects of ‘one-stop shop’ models in advice industry.

In particular, it invited attention to how the vertical integration of the industry may harm clients by protecting platform entities associated with advice licensees from competitive pressures.

The commissioner claimed that clients end up paying more for platform services than other providers would charge for the same service.

In their response to the interim report, Australia’s largest financial institutions acknowledged that conflicts of interest exist but stressed that they can be managed effectively.

AMP’s submission argued that “there are many advantages of vertically integrated structures and that no recommendation should be made by the commission which would limit an entity’s commercial flexibility to adopt a vertically integrated model, as and when it considers it appropriate to do so.”

In an earlier submission to the royal commission, AMP outlined the following benefits to consumers of a vertically integrated model:

– economies of scale which benefit consumers;

– potentially lowering the cost of advice;

– convenience of a relationship with a single financial institution;

– perceived safety in dealing with a large institution;

– having access to different forms of advice (e.g. phone, on-line, face to face);

– having trust in the institution; and

– that large institutions stand behind the advice that authorised representatives provide to customers and have the capacity to do so

AMP Shareholders Brace For $0.04 Dividend Payment

Ahead of its full year 2018 financial results – due to be published on 14 February – AMP expects to report an underlying profit of “around $680m” and profit attributable to shareholders of “approximately $30m”; via Australian Broker.

Regarding shareholders, in a statement, AMP said, “Recognising the 2H 18 performance of the business, the related capital impacts and the uncertainties in the operating environment, the board anticipates declaring a final dividend of 4 cents per share.”

AMP’s 2018 interim dividend stood at $0.10 per share (50% franked), compared to a final dividend of 14.5 cents in 2017 (90% franked) and 14 cents in 2016 (90% franked). In 2007, the final value reached 24 cents (84% franked).

Payment of the 2018 full year dividend is due on 28 March.

The news is the latest in a series of blows to AMP shareholders. Last year, they staged the largest known “first strike” ever recorded by a top 50 Australian company when, during AMP’s annual meeting, 61.5% of investors voted against the firm’s executive pay structure.

In 2018, AMP was hit with five shareholder class actions, brought by Slater & Gordon, Quinn Emanuel Urquhart & Sullivan, Phi Finney McDonald, and Shine Lawyers.

In a statement AMP said its total business unit operating earnings for the second half of 2018 are expected to be approximately $220m, comprising around $325m from the retained businesses, Australian wealth management, AMP Capital, AMP Bank and New Zealand wealth management and advice.

A net operating loss of around $105m from the businesses is subject to a sale agreement with Resolution Life.

The firm’s 2019 AGM is scheduled for Thursday 2 May.

AMP’s Shane Oliver Tips 25% Home Price Falls

AMP Capital chief economist Shane Oliver believes house price falls could be greater than he anticipated following weak auction clearance figures, via InvestorDaily.

CoreLogic data shows that capital city dwelling prices are down 7 per cent from their September 2017 high.

Sydney prices are down 11 per cent from their July 2017 high, while Melbourne is down 7 per cent from its November peak.

For Sydney and Melbourne, AMP’s base case has been that prices would have a top to bottom fall of around 20 per cent out to 2020. However, looking at the data, AMP Capital’s top forecaster has reconsidered his outlook.

“The further plunge in auction clearance rates and acceleration in price falls late last year suggest a deeper fall – possibly of around 25 per cent (although it’s impossible to be precise),” Mr Oliver said.

This suggests around another 15 per cent fall in Sydney and more in Melbourne, he said, adding that a 25 per cent top to bottom drop would take prices back to where they were in late 2014/early 2015.

While a 25 per cent drop in property prices may seem like a ‘crash’ to some, it comes after a significant period of growth; over the five years to 2017, Sydney prices rise soared 72 per cent and Melbourne prices increased 56 per cent.

“A 25 per cent plunge in Sydney and Melbourne may seem like a crash but given the extent of the prior gains, it’s arguably not. But a 25 per cent national average fall would probably be interpreted as a crash,” he said.

“Our assessment is that this is unlikely unless we see much higher interest rates or unemployment (neither of which are expected) driving a sharp rise in defaults and forced property sales or a collapse in immigration (which would collapse demand).

“Strong population growth is still driving strong underlying demand for housing. While mortgage stress is a risk, it tends to be overstated, and is unlikely to be a generalised issue unless interest rates or unemployment shoot higher. And, while Sydney and Melbourne are at risk, other cities have not seen the same boom and so are unlikely to crash.”

The latest Domain Q4 House Price Report, released on Wednesday (23 January), revealed that Sydney house prices fell 3.2 per cent over the quarter and 9.9 per cent over the year to $1,062,619. Unit prices fell 3.3 per cent over the quarter and 5.8 per cent over the year to $702,012.

“The depth of Sydney’s current house price downturn is the sharpest in more than two decades, although the duration is yet to surpass the 2004-06 slump,” Domain Senior Research Analyst Dr Nicola Powell said.

“House prices have fallen 11.4 per cent from the mid-2017 peak, pushing them back to mid-2016 levels. For the second time since Domain records began in 1993 house prices have fallen for four consecutive quarters, the only other period this occurred was in 2008.

“Despite the consistent quarterly moderations, the depth of the falls have not gained significant momentum. The pullback in price was anticipated given the stellar run of growth that lasted almost six years. Home owners reaped an unprecedented gain of 89 per cent over this period.”

New research released this week from NAB revealed how consumers are weighing up the new opportunities or threats that the current housing downturn presents. It found that half of Aussies think it is not a good time to sell their home or investment property.

This view was broadly consistent across states, although a much higher number in Western Australia said it wasn’t a good time to sell their home.

“We suspect this is influenced by the fact that some home owners in WA may also be sitting on capital losses,” NAB chief economist Alan Oster said.

Over the next 12 months Australians are still most positive about renovating their home and buying a property to live in. But it’s also clear consumers are far more uncertain about the future – around 4 in 10 said they simply didn’t know if it would be a good time to buy, sell, renovate or take out a mortgage.

On average, consumers expect price falls of -2.1 per cent over the next 12 months (against -2.4 per cent forecast by property professionals in NAB’s latest Residential Property Survey).

NSW (-3.1 per cent) and Victoria (-2.9 per cent) are expected to lead the way down, but consumers again are a little less pessimistic than property professionals.

AMP betting on 20% fall in property prices

Top forecaster Shayne Oliver believes there is still plenty of room for property prices to head south as homes weaken to GFC levels; via InvestorDaily.

Australian capital city dwelling prices fell another 0.9 per cent in November marking 14 months of consecutive price declines since prices peaked in September last year. This has left prices down 5.3 per cent from a year ago, their weakest since the GFC.

The decline is continuing to be led by Sydney and Melbourne.

Sydney dwelling prices fell another 1.4 per cent and have now fallen 9.5 per cent from their July 2017 peak. Meanwhile, Melbourne prices fell another 1.0 per cent and are down 5.8 per cent from their November 2017 high.

Perth also saw prices fall by 0.7 of a percentage point, but Hobart and Darwin saw prices rise by 0.7 of a percentage point. Prices in Canberra rose 0.6 of a percentage point and Brisbane and Adelaide prices rose 0.1 of a percentage point.

“The decline in property prices is being driven by a perfect storm of tighter credit conditions, poor affordability, rising unit supply, reduced foreign demand, the switch from interest only to principle and interest mortgages for a significant number of borrowers, fears that negative gearing and capital gains tax concessions will be made less favourable if there is a change of government, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors,” AMP Capital chief economist Shayne Oliver said.

“These drags are most evident in Sydney and Melbourne because they saw the strongest gains into last year and had become more speculative with a greater involvement by investors.

“Ongoing weakness in these two cities is evident in very weak auction clearance rates and auction sales volumes. Recent auction clearance rates averaging just below 40 per cent in Sydney and Melbourne are consistent with ongoing price declines of around 7 to 10 per cent per annum.”

The economist believes the decline in Sydney and Melbourne property prices has much further to go as Comprehensive Credit Reporting kicks in, making it even harder to get multiple mortgages.

Many homebuyers will be watching out for changes to negative gearing and capital gains tax, which could become the new reality after a change of government at the coming federal election.

“In these cities we expect to see a top to bottom fall in prices of around 20 per cent spread out to 2020,” Mr Oliver said.

“However, the plunge in clearance rates and the uncertainty around credit tightening and tax concessions indicate that the risks are on the downside. So there is more to go yet.”

AMP Bank Tweaks Broker Commissions

AMP Bank has revealed that, effective for loans settled from January 2019, it will be calculate broker commissions for its home loans on the net balance, instead of the total approved facility amount, via The Adviser.

The bank becomes the third large lender to change the upfront commission structure to the new model in the past few weeks, after NAB and Westpac announced similar changes.

The bank outlined that it had made the changes “in line with Sedgwick recommendations” from his Retail Banking Remuneration Review (which helped form the basis of the Combined Industry Forum’s reform package).

Mr Stephen Sedgwick AO recommended in his report last year that remuneration should not “directly link payments to loan size”, suggesting that alternative payment arrangements could include: commission based payments that take the loan to value ratio (LVR) or the loan type, or “the quality of the advice given to the customer into account; and, preferably arrangements between lenders, mortgage brokers and aggregators that are not product based such as lender-funded fees for service”.

Speaking of the changes, an AMP Bank spokesperson said that the change “centres on ensuring customers obtain loans that are appropriate for their needs and objectives”.

The spokesperson continued: “Brokers and advisers play a vital role in our community, providing more than 50 per cent of all home loan applications and the portion of the market they service continue to grow, reflecting the important service they provide.

“Like brokers and advisers, AMP Bank is committed to ensuring we continue to deliver good customer outcomes so we’re making some changes to the way commissions are calculated for home loans.

“These are changes that have been committed to by the industry and we have announced the detail early as we think it’s important to give brokers and advisers early visibility of the changes.”

Lenders expected to make changes by the end of the year

NAB became the first major lender to implement the recommendations from the ASIC and Sedgwick reviews, which were backed by the Combined Industry Forum package of reforms.

Its white label brand, Advantedge (and Advantedge-funded brands, such as Homeloans) announced the same changes in tandem, and Westpac announced earlier this week that the bank and its subsidiaries (St. George, Bank of Melbourne and BankSA) will link upfront commission payments for standard home loans to net debt utilisation and inclusive of loan offset arrangements, rather than the approved loan limit, effective 1 January 2019.

The CIF recently hosted an event which further outlined its work on mortgage broking reforms and reiterated that lenders are expected to make the remuneration changes by December 2018

AMP agrees to sell wealth protection and mature businesses

AMP Limited has announced the successful completion of its portfolio review including an agreement to divest its Australian and New Zealand wealth protection and mature businesses (AMP Life) and reinsure New Zealand retail wealth protection for total proceeds of A$3.45 billion.

The stock dropped (in a down day) to a new low.

AMP will exit its Australian and New Zealand wealth protection and mature businesses via a sale to Resolution Life¹ for total cash and non-cash consideration of A$3.3 billion; transaction expected to complete in 2H 2019; subject to regulatory approvals.
Binding agreement with Swiss Re² to reinsure New Zealand retail wealth protection, releasing additional capital of up to A$150 million to AMP prior to completion of sale; subject to regulatory approvals.
Intention to seek divestment of New Zealand wealth management and advice businesses via initial public offering (IPO) in 2019 subject to market conditions and regulatory approvals, unlocking further value.
Significant capital release will strengthen AMP’s balance sheet and provide strategic flexibility; all options for use of proceeds to be evaluated and update to be provided following transaction completion.

Wealth protection and mature – Resolution Life transaction summary

Under the terms of today’s agreement, AMP will sell its Australian and New Zealand wealth protection and mature businesses (AMP Life) to Resolution Life for a total consideration of A$3.3 billion, which comprises:

A$1.9 billion in cash.
A$300 million in AT1 preference shares in AMP Life (issued on transaction completion).
A$1.1 billion in non-cash consideration:

o Economic interest in future earnings from the mature business, equivalent to A$600 million; expected to provide steady ongoing earnings to AMP of approximately A$50 million after tax per annum, assuming an annual run-off at 5 per cent.

o A$515 million interest in Resolution Life, focused on the acquisition and management of in-force life insurance books globally.

AMP expects to monetise all non-cash consideration over time.

Together with the New Zealand reinsurance agreement, the total value equates to approximately 0.82x pro forma embedded value of the sold businesses at 30 June 2018, excluding franking credits.

Resolution Life assumes risk and profits of the wealth protection and mature businesses from 1 July 2018³, subject to Australian wealth protection risk-sharing arrangements.

A new relationship Agreement has been established with Resolution Life and AMP Capital will continue to manage wealth protection and mature assets under management. AMP Capital will also join Resolution Life’s global panel of preferred asset managers.

The transaction is subject to regulatory approvals and other conditions precedent and is expected to complete in 2H 2019.

Partnering to ensure smooth transition for customers

Resolution Life is an international insurance and reinsurance group whose management has a 15-year track record in providing quality service to in-force insurance customers.

The transaction has been designed to ensure all existing terms and conditions will be retained. The teams supporting existing AMP customers will largely transfer on completion to maintain continuity of service.

AMP and Resolution Life will work closely together to ensure a smooth transition for customers.

New Zealand wealth protection reinsurance

AMP has entered into a binding reinsurance agreement with Swiss Re for the New Zealand retail wealth protection portfolio which is expected to release up to A$150 million of capital to AMP, subject to regulatory approval. The agreement is expected to be effective from 31 December 2018, and will cover approximately 65 per cent of the New Zealand retail wealth protection portfolio for new claims incurred from that date.

The reinsurance agreement is expected to reduce New Zealand profit margins by A$20 million on a full-year basis. The reinsurance outcomes are factored into the Resolution Life transaction.

New Zealand wealth management and advice businesses

AMP is today also announcing its intention to seek divestment of its New Zealand wealth management and advice businesses via an IPO in 2019. The decision to proceed with an IPO and its timing remain subject to market conditions and regulatory approvals.

These businesses have FY18 pro forma operating earnings of approximately A$40 million on a standalone basis. The IPO would release capital to AMP and create a standalone New Zealand wealth management and advice business.⁴

Portfolio review outcomes will release capital, simplify portfolio and create strategic flexibility

The completion of the portfolio review will strengthen AMP’s balance sheet and provide strategic flexibility. All options for use of proceeds will be considered including growth investments and/or capital management activity.

The exit from Australian and New Zealand wealth protection and mature will also significantly simplify AMP and its earnings profile, enabling it to focus on its higher growth businesses of Australian wealth management, AMP Capital and AMP Bank.

The simplification and separation costs related to the Resolution Life sale transaction are expected to be in the order of A$320 million post-tax.

Additional capital from the transaction with Resolution Life will facilitate a reduction in AMP’s corporate debt of up to A$800 million.

The financial impacts of the transaction on AMP post-separation are outlined in the investor presentation.

AMP will exclude the 2H 18 earnings from the discontinued businesses in determining the FY 18 dividend. AMP continues to target a total FY 18 dividend payout within, but towards the lower end of its dividend guidance range of between 70 – 90 per cent of underlying profit.

Further guidance on use of proceeds will be provided following the completion of the transaction in 2H 2019.

How Would Negative Equity Fall With A 20% Home Price Fall?

We have taken AMP’s latest home price projections and run them across our Core Market Model. If his forecast were to eventuate, we think around 17% of borrowing households would fall into negative equity – meaning their outstanding mortgage would be greater than their property value.