AMP's weaker core

It's no secret that AMP is under pressure, as we highlighted in a two-part series before Christmas, but Friday's warning of a weak result and a savage dividend cut underlined the difficulties it faces.

The dividend was always going to fall - as we highlighted in May last year - but the severity of the cut is nonetheless shocking, with the final dividend reduced to 4 cents, from 14.5 cents a year earlier, halving the full-year payout from 29 cents to 14 cents.

AMP expects to report an underlying profit of $680 million for the year to December 2018, excluding customer remediation and restructuring initiatives, and only $30m on a statutory basis.

Those figures are certainly disappointing but are also somewhat irrelevant, as much has changed in the past few months.

Core strength

AMP's future depends on how its core businesses - that is wealth management, AMP Bank and AMP Capital - perform amid regulatory uncertainty, bad publicity, and industry change.

The update couldn't provide much insight on these matters, but management expects the combined earnings for these businesses to be around $325m for the second half of the year compared to nearly $400m in the first half.

Part of the fall will be down to weaker investment markets, so we'll have to wait for the actual result to understand how much of it is specific to AMP.

Management did, however, add $200m to its provision for compensating customers to include the $186m cost of running the program and $14m in lost customer earnings. This takes the total remediation provision from $415m before tax to $615m.

Gone but still accounted for

Earnings were also impacted by another poor performance from the life insurance business that has already been sold. AMP is still recording the results of this business in its accounts until the ownership passes over to Resolution Life, although most of the earnings impacts since 1 July 2018 will ultimately be borne by the new owner.

So the $230m in losses from the division recognised by AMP in the second half will largely be recouped - as will the increased amount of capital AMP has set aside to support the division.

The combination of increased remediation and life insurance reserves has reduced the level of capital above minimum requirements from $1.8bn to $1.6bn. That's still well above our recent 'Bull-case' estimate of $1.3bn but the buffer has declined.

Capital strength

In that light, the dividend cut seems prudent. Capital can be preserved until Francesco De Ferrari can develop and convey the strategy for AMP.

Investors expecting income can take some comfort from AMP reiterating its commitment to returning most of the net cash proceeds from the disposal of wealth protection - but we have little idea when that will be.

2018 was a tough year for AMP, and the company expects 2019 to remain difficult. We should have more details once AMP reports its full-year results on February 14. Before then, though, we'll hear more from Ken Hayne, with the Royal Commission's final report expected to be released on Monday 4 February. HOLD.