AMP downgrades profits as it continues damage control

AMP Limited provided an update to its earnings expectations on Friday (27 July), two weeks before it was due to report its half-year financial results for FY18, and announced a series of actions being taken to “reset the company, prioritise customers and strengthen its risk management systems and controls”.

Acting CEO Mike Wilkins told investors and journalists in a phone briefing that AMP is expecting to report an underlying profit of between $490 million and $500 million for H1 FY18, compared to the $533 million recorded in H1 FY17.

The profit was weakened by an estimated provision of $290 million post-tax for advice remediation and a further $55 million post-tax, which covers one-off costs related to the royal commission, its portfolio review and accelerated efforts to compensate customers who were charged fees without being provided financial advice.

As such, the wealth firm has warned investors that the interim dividend they receive could be lower than anticipated.

AMP refused to clarify whether the updated earnings guidance takes into account the potential legal costs and penalties associated with five impending shareholders class action suits that have been initiated. However, the acting CEO reiterated that the wealth firm will “vigorously defend” itself in court.

“Accelerating” customer remediation

Mr Wilkins said that AMP’s customer remediation efforts will be run by a “dedicated program team” over a period of three years, with an estimated annual post-tax cost of $50 million. This is in addition to the estimated remediation provision of $290 million.

“Our remediation provision responds to industry-wide issues raised by ASIC in its [wealth management] reports 499 and 515 and reflects a conscious business response to increased community expectations,” the acting CEO said.

“The goal is to ensure any impacted advice customers are appropriately compensated as quickly as practicable. That’s not only the right outcome for customers, but it’s also the right course for AMP.”

He claimed that AMP’s remediation program is one of the first from the banks that addresses both employed and aligned investors.

Mr Wilkins also said that the firm expects to recover “a reasonable portion of the [remediation] costs over time” through “several avenues”, which will be disclosed at a later date.

Upgrading risk management and control systems

AMP has committed to investing $35 million post-tax annually to upgrading its risk management and control systems over the next two years.

Mr Wilkins noted that there is currently a “heightened level of regulatory and community expectations on financial services companies in Australia”, adding that the wealth firm is aware that it needs to improve its risk control and governance frameworks.

“In terms of where we’ll invest, we’re looking to increase our capabilities in risk management as well as developing a more comprehensive enterprise-wide governance risk and compliance reporting system,” the acting CEO said.

“Prioritising” portfolio review

Additionally, AMP will be “prioritising” its portfolio review moving forward.

“We provided an update at our first quarter announcement that this review was ongoing, but at that stage it wasn’t our primary focus. The update today is that we’ve now reprioritised the portfolio review, looking at a range of options with the aim of releasing further value from those businesses,” Mr Wilkins explained.

The acting CEO vaguely added that the firm is in “active discussions with a number of interested parties on all options”, the details of which will also be disclosed at a later date.

Mr Wilkins claimed that AMP’s core Australian businesses experienced “solid growth” in H1 FY18 and “demonstrated resilience”, despite an “unsettling first half for the company”.

He admitted, however, that the growth was offset by “weakness” in its Australian wealth protection business.

Slashing superannuation fees

In a bid to boost its competitiveness in the retail superannuation industry, AMP also announced fee reductions for MySuper’s 700,000-strong customer base as well future customers.

The new fees, which will be about 0.45 of a percentage point lower that the current price, will be introduced in Q3 FY18 and won’t affect AMP’s H1 FY18 earnings, according to Mr Wilkins.

“Fundamentally, we believe AMP is well positioned to take advantage of the growth in superannuation in Australia and we’re ready to compete for it,” the acting CEO said, though he did not disclose what the new MySuper fees will be.

He added that the firm will continue working on “rationalising and simplifying” its product set.

“Strongly capitalised”

AMP maintained that it is “strongly capitalised”, with Mr Wilkins saying that the firm expects to report a capital surplus of $1.8 billion (as of 30 June) in its half-year financial results, which takes into account the customer remediation costs, capitalised losses and changes to best estimates.

“The board is committed to maintaining a strong capital position. With that in mind, we’re guiding today that we’re targeting a total full-year 2018 dividend payout at the lower end of our stated range of 70 to 90 per cent of underlying profits,” the acting CEO said.

“Our interim dividend will be outside that range, providing us with some capital and strategic flexibility over the coming months.”

AMP will be reporting its H1 FY18 results on 8 August.

[Related: AMP files defence against shareholder class action]