Today's release of AMP and ASX results allows us to draw some conclusions on the direction the financial services industry is headed. Though progress has been made, it has a long road in front of it.
Post-GFC, the financial services sector has had to cope with fundamental changes that have dealt a blow to the industry. And as global economic uncertainty continues investors have lost their appetite for risk.
Rising to the challenge, AMP and ASX have found growth opportunities in the current environment that they can build on in the medium- to long-term.
The effect of weakened activity during the year is clear from ASX’s number. Both retail and institutional investors shunned risk as the eurozone crisis escalated and the global economy struggled to recover.
In the first half, ASX boasted a 2.8 per cent growth in revenue that translated into a 2.9 per cent rise in earnings. In contrast, reduced activity in the second half led to a fall in revenue of 5.1 per cent and a subsequent 8.6 per cent slide in earnings.
But declines in its equity-related businesses – listings, cash markets and information services – were largely offset by its derivatives, technical services and Austraclear divisions.
Alongside continuing market inactivity, the financial services sector has been changed irreparably in the past five years. Areas of ASX’s business that were previously reliable sources of profits have been hit hard. ASX has taken the smart way forward, working to ensure adequate diversification to help offset any negative performance.
Earlier this year, ASX expanded its technical services business, opening a new Sydney data centre and building on the trading infrastructure offered to clients. It’s looking to be a solid investment. Revenue from the technical services division was greater than revenue from its cash market trading business in 2012.
As it awaits a pick-up in activity, ASX has expanded its listings division to include more products on the exchange, including Exchange Traded Funds, which are becoming more popular with the rise of self-managed superannuation funds.
In a similar fashion, AMP has also taken the reduced market activity as an opportunity to build on existing business and invest in new opportunities as a buffer against volatile activity.
Its merger with AXA last year has allowed it to lift its market share and will allow for more growth opportunities in the future. AMP advised that it expects to save an additional $10 million from the merger due to it retaining more advisers than expected.
Alongside this, AMP has continued to focus on its superannuation business. In June the group announced the acquisition of fund administrator Cavendish Group as a means of building on its SMSF. Cavendish is the largest SMSF administrator in the country, boasting over 5000 funds and 110 employees.
A new unit – AMP SMSF – will be made up of Cavendish and the fund manager’s existing SMSF businesses; Ascend, Multiport and Super IQ, the last of which is 49 per cent owned by AMP.
Investing in its SMSF business should reap great rewards for AMP. It’s the largest growing superannuation sector in Australia, with market share doubling from 15 per cent of all Australian superannuation in 2011 to more than 30 per cent today.
The benefit of SMSF is the control that it allows. As superannuation funds struggle to post half-decent returns, more and more Australians think they can do a better job themselves. And AMP is looking to capitalise on this.
AMP and ASX may have posted diverging results today, but their methods of dealing with the structural changes occurring in the financial services industry are sound. This is not a case of a quick fix. The industry has taken a battering in the last five years. Building it back up, and making it stronger, takes time.
ASX and AMP spread their wings
As the financial services sector feels the effect of global jitters, AMP and ASX have built upon their traditional businesses while also investing in complementary opportunities – to good effect.
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