AMP: Interim result 2017

Just looking at AMP's first-half result, and its comparison with the same period last year, you might be forgiven for thinking everything was travelling along pretty smoothly. Operating earnings from its various business units rose 5% to $542m; and, after deducting central costs, investment income and interest on corporate debt, the underlying net profit rose 4% to $533m.

But this would be to ignore the carnage wrought in the second half of 2016, when the company recognised $485m of losses and wrote off goodwill of $668m in its wealth protection business. Against those numbers, the 11% rise in profit in that business, to $52m, looks somewhat underwhelming. As we noted in our review of the full year result in February, the new assumptions which forced these losses will make profits easier to come by, so it's hard to know what to make of the ‘improved' performance.

The performance of AMP Bank is less ambiguous, with a 10% increase in profits to $65m, thanks to an 18% increase in its residential mortgage book to $18.8bn. The net interest margin was 1.67%, down by 0.04% from the first half of 2016, but up 0.04% from the second half. The lending growth was backed by a 16% increase in deposits to $12.4bn. Management expects further growth in the second half, albeit at a lower level due to the regulatory clamp-down on interest-only investor lending.

Wealth struggles

By far the biggest division, however, is Australian wealth management, which saw a 1% fall in profits to $193m. The fall reflects margin compression from transitions to MySuper products, with investment-related revenue falling 0.05% to 1.04% of assets under management (AUM) and operating earnings falling by 0.02% to 0.32% of AUM. This was partly offset by a $1.0bn net fund inflow (also driven by MySuper transitions), which took AUM to $125bn.

Adviser numbers continued to fall, dropping by 127 to 2,960. That was an improvement on the 280 that left the group in the December half. Management said this was mostly due to retirements and expects a flat number in the second half (at least for core licensees), but it stands in stark contrast to the advisers joining IOOF Holdings.

Surplus capital fell from $2.3bn to $1.9bn due largely to business growth (notably in AMP Bank and from buying advice businesses from departing planners) and the $200m share buyback in the period. As a result, management has paused the $500m buyback before it is half-complete, although that might change when a further $500m of capital is released due to new reinsurance agreements commencing in November.

The interim dividend was increased by 4% to 14.5 cents, 90% franked. Assuming the same for the final dividend (as last year), the stock offers a dividend yield of  5.7% alongside its forward price-earnings ratio of about 15 (based on 2017 estimates of around 34 cents). That doesn't look expensive, but given AMP's underlying problems (particularly the dwindling adviser numbers) and complexity, we would need a much cheaper price to be interested. HOLD.