AMP Bank

AMP Bank are in the market for a 10NC5 Tier 2 – both fixed and floating, subject to feedback.

These will be available to wholesale investors.

In conclusion, using ADSWAP5 and a margin of +450bps brings the equivalent yield to around 9%.

The two closest comps are the AMPAU Float 27s (callable Dec 22) and 28s (callable Nov 23). Both these Tier 2 securities are issued by AMP Limited and rated BB (S&P) or one-notch below the new AMP Bank (BB+). Using the AMPAU Float 28s (callable Nov 23) as a base and adding 50bps pa for each year would bring the extrapolated spread to +500bps. However, AMP Bank is rated Baa2/BBB with the Tier 2 securities expected to be rated BB+ (by S&P). Thus, we would expect at least 50bps to be shaved off to account for the slight improvement in credit risk by one-notch (BB to BB+ respectively). This would bring the margin to +450bps.

The new CGFAU 7.186 09/16/37s (callable Sept 27) are another good comp. These Tier 2 securities are rated BBB (by S&P) so two-notches above the new issue. Assuing 50bps per notch, this would imply the new AMP Bank Tier 2 should price around the +450bps mark.

We agree a spread pickup of 50bps pa is appropriate especially when moving out the maturity spectrum in the high-yield space where credit quality can deteriorate exponentially. In investment-grade space, this spread pickup per additional years of maturity would be only 20-30bps pa respectively.

See below for more details.

AMP Bank is rated Baa2/BBB with the Tier 2 securities expected to be rated BB+ (by S&P). The securities will be callable in 2027 and convertible upon a non-viability trigger into AMP Limited shares.

Source: AMP

AMP Bank is a core subsidiary of the AMP Group. It predominantly offers residential mortgages, basic savings, and transactional deposit accounts to Australian retail customers. As of 30 June 2022, AMP Bank had 177,600 clients and had provided 4,900 new home loans. AMP Bank sources most of its residential mortgage business through brokers. AMP Bank’s main funding sources are retail deposits, wholesale funding and RMBS (via its Progress Program).

AMP Group is one of AU/NZ’s leading wealth management companies, with a growing Australian retail banking business. The AMP Group has helped people and organisations build financial security since 1849 by providing financial advice, products and services.

Source: AMP

Source: AMP

1H22 key movements:
– NPAT (underlying) of A$117m was down A$38m (25%) on 1H 21 largely reflecting lower business unit earnings:
o AMP Bank decrease predominantly due to reduction in Net Interest Income and a release of one-off credit loss provision of A$12m in 1H 21.
o Half-on-half Master Trust and North earnings impacted by previously announced repricing initiatives, with average AUM broadly in line over the period.
o Strong momentum on Advice transformation and cost-out saw losses improve by A$55m.
o New Zealand Wealth Management NPAT decreased to A$17m, primarily due to the impact of lower markets.
o AMP Capital continuing operations benefitted from higher contributions from joint venture investments.
– Items reported below NPAT improved on 1H 21 predominantly from the gain on sale of Infrastructure Debt platform

Source: AMP

1H22 business highlights:
– NPAT of A$46m, decreased 45% from 1H 21, largely due to a reduction in net interest income and release of loan impairment expense in 1H 21 (A$12m) that was not repeated this period.
– Competitive mortgage pricing and increased growth of fixed rate loans reduced Net Interest Margin (NIM).
– Higher cost to income ratio reflects lower margins driven by competitive pressures and continued investment in growth, including digitisation.
– Total deposits at 1H 22 increased A$2.2b (12%) from FY 21 with majority from customer deposits.
– Deposit-to-loan ratio at 1H 22 was 88% (FY 21: 81%) with household deposits growing at 4.24x system in 1H 22.

Source: AMP

Loan growth vs system – AMP Bank’s residential mortgage book grew at 1.15x system in a highly competitive lending environment. Deliberate decision to slow applications in Q1 22 to manage NIM and maintain book quality, due to competitive pricing and rising rates. Applications have since increased in Q2 22. The Auto Credit Decisioning (ACD) rate remained stable at ~60% in 1H 22 resulting in consistent approvals.

Mortgage book – The Bank continues to focus on maintaining book quality with 68% of mortgages being owner-occupied. Active management in current market environment has resulted in a decrease in interest only lending from 17% (1H 21) to 14% (1H 22) of the total book. Average book loan to value ratio (LVR) of 66% and dynamic LVR weighted average for existing mortgage business increased 1% to 59% in June 2022.

Credit quality – Strong credit quality maintained; 30+ days arrears decreased to 0.70% in 1H 22. 90+ days arrears decreased 0.11 percentage points to 0.39% in 1H 22, comparing favourably to peers. The Bank’s total credit provisioning remained steady from FY 21 at A$29m in 1H 22. 64.2% of AMP Bank mortgage repayments were ahead of schedule by at least one month at 1H 22 (1H 21: 63.2%).

As an ADI, the Issuer is subject to regulation by APRA under the authority of the Banking Act. APRA has set minimum regulatory capital requirements and capital buffers for ADIs that are consistent with the Basel III framework. AMP Bank targets a 9% CET1 ratio (7% APRA minimum and 2% targeted buffer).

As of 30 June 2022, AMP Bank’s levels of regulatory capital relative to APRA’s requirements was as follows:

Source: AMP

AMP Bank has not recently directly issued subordinated notes to wholesale investors. AMP Limited has issued two subordinated notes in recent years
1. A$250m in August 2017 – Used to fund Tier 2 capital within AMP Bank.
2. A$250m in November 2018 – used to fund Tier 2 capital in AMP Life (prior to its sale) and AMP Group (post AMP Life sale).

The notes will have similar economic terms to other recent subordinated issuances from Australian non-major banks.

The two closest comps are the AMPAU Float 27s (callable Dec 22) and 28s (callable Nov 23). Both these Tier 2 securities are issued by AMP Limited and rated BB (S&P) or one-notch below the new AMP Bank (BB+).

Using the AMPAU Float 28s (callable Nov 23) as a base and adding 50bps pa for each year would bring the extrapolated spread to +500bps. However, AMP Bank is rated Baa2/BBB with the Tier 2 securities expected to be rated BB+ (by S&P). Thus, we would expect at least 50bps to be shaved off to account for the slight improvement in credit risk by one-notch (BB to BB+ respectively). This would bring the margin to +450bps.

Source: Bloomberg

We agree a spread pickup of 50bps pa is appropriate especially when moving out the maturity spectrum in the high-yield space where credit quality can deteriorate exponentially. In investment-grade space, this spread pickup per additional years of maturity would be only 20-30bps pa respectively.

The new CGFAU 7.186 09/16/37s (callable Sept 27) are another good comp. These Tier 2 securities are rated BBB (by S&P) so two-notches above the new issue. Assuing 50bps per notch, this would imply the new AMP Bank Tier 2 should price around the +450bps mark.

Source: Bloomberg

In conclusion, using ADSWAP5 and a margin of +450bps brings the equivalent yield to around 9%.