AMP’s half-year profit plunges but mortgages grow

The wealth firm warned investors two weeks ago that its earnings would be impacted by the royal commission, as well as its “accelerated” customer remediation plans and some one-off costs.

Speaking of the half-year results, acting CEO Mike Wilkins said: “The events around the royal commission into financial services have challenged our reputation, and while we continue to monitor the impacts, we have taken action to stabilise the business and move forward.”

The underlying profit, excluding planned remediation and other provisions, was $495 million in the first half of 2018, a decrease of 7.1 per cent from $533 million in H1 FY17.

The profit was weakened by an estimated provision of $290 million post-tax in compensation to customers who were charged fees for financial advice they had not received. This is in addition to $22 million in remediation costs incurred in H1 FY18.

AMP further estimated an annual post-tax cost of $50 million to fund the three-year remediation program, which will be run by a “dedicated” team. This cost had no impact on its first-half earnings.

An additional impairment of $13 million post-tax covered preparation for royal commission hearings, while $19 million included costs associated with its newly “re-prioritised” portfolio review.

In relation to the portfolio review, the acting CEO reiterated that the firm is in active discussions with a number of interested parties, but he remained tight-lipped on the details.

AMP also reported spending $14 million on risk and compliance projects in H1 FY18, and further committed to investing $35 million post-tax annually to upgrading its risk management and control systems over the next two years.

Furthermore, $16 million was booked on non-advice-related customer remediation, and an additional $11 million on other one-off costs.

While AMP’s overall profits decreased, the acting CEO maintained that the firm is well capitalised with surplus capital of $1.8 billion over minimum regulatory requirements as of 30 June 2018.

“Our first-half results have demonstrated AMP’s resilience through a difficult period. While there will be further challenges ahead, we have a strong foundation on which to reset the business and restore the confidence of our customers and the wider community,” Mr Wilkins said.

“We’re driving change right across the business and are dedicated to delivering the services that are critical to our customers and the Australian economy, helping to earn back trust in AMP.”

AMP did not book the potential legal costs and penalties associated with five impending shareholders class action suits that have been initiated. However, the firm maintains that it will “vigorously defend” itself in court.

Mortgages on a steady rise

Despite reporting reduced profits in its Australian wealth protection (-98.1 per cent), New Zealand financial services (-13.8 per cent) and Australian mature (-6.7 per cent) business units, the firm’s banking division, on the other hand, reported “solid” 20 per cent growth in underlying profit.

AMP Bank’s underlying profit increased from $65 million in H1 FY17 to $78 million in H1 FY18, driven by mortgage book growth and improved deposit margins.

The bank’s residential mortgage book grew to $19.7 billion in H1 FY18, up by 8.2 per cent from $18.2 a year earlier, which it said was delivered through both the broker and AMP-aligned adviser channels.

AMP noted in its investor report that residential mortgage competition, particularly in the owner-occupied principal and interest market, “remains intense”.

It also noted that its investment property and interest-only lending segments was constrained in response to regulatory requirements, such as the Australian Prudential Regulation Authority’s 10 per cent benchmark on investor loan growth, which was lifted under certain conditions.

“AMP Bank continues to target total lending growth at or above system, subject to risk appetite, regulatory growth caps, return on capital hurdles and funding availability,” the investor report stated.

The bank’s average loan-to-value ratio for mortgages remained stagnant at 67 per cent in H1 FY18, while arrears (90 days and over) dropped by 0.04 of a percentage point year-on-year to 0.44 of a percentage point during the half-year.

The wealth firm also announced that former Treasury secretary John Fraser will take up a position on AMP Limited’s board from next month and that acting CEO Mr Wilkins could remain in his role until the end of the year.

AMP revealed that Mr Wilkins will receive fixed remuneration of $1.46 million, inclusive of superannuation, to 31 December 2018.

The firm is also among the five banks that will be joined by regulatory officers from the Australian Securities and Investments Commission (ASIC) who will monitor their governance and compliance actions first-hand across extended periods of time.

[Related: PC calls for ‘integrity officer’ to monitor commission payments]