AMP (ASX: AMP) delivered a poor FY22 underlying result that missed consensus estimates. FY22 underlying Net Profit After Tax (NPAT) for the twelve months to 31 December 2022 dropped 34% to $184 million, primarily due to:
- continued net outflows and the impact of volatile investment markets and price reductions in Australian Wealth Management (AWM);
- net interest margin (NIM) compression in AMP Bank;
- partly offset by the benefit of cost reduction initiatives.
The half on half performance was no better as 2H22 underlying NPAT fell 43% to $67 million. No specific FY23 earnings guidance was provided but commentary points to another challenging year. AMP remains at a crossroads as it seeks to reinvent itself post divestments for a sustainable future in banking and wealth management. The cost improvements across the Group from the transformational program have clearly been a positive, but the operational performance improvements in Australian Wealth continues to deteriorate. We expect wealth businesses to continue to face a challenging earnings outlook over the short to medium term.
AMP Bank is performing relatively better, but we expect growth to slow and impairment expenses to rise, though the extent of any increase will depend on how well employment rates are maintained.. With increasing competition for loans and deposits in a rising rate environment, risks to NIM are also to the downside.
During the year, AMP Bank has helped over 188,000 customers with their banking needs and enabled over 9,290 Australians to purchase their own home. The bank’s residential mortgage book grew at 1.8x system, while maintaining strong credit quality. This was underpinned by ongoing service improvements to drive organic growth, as well as the acquisition of Nano’s residential mortgage book. The residential mortgage book grew by 9% to $23.8 billion. NIM of 1.38% in FY 22, compared to 1.62% in FY 21, was primarily driven by mortgage margin compression and asset mix changes, and partially offset by favourable deposit margins. The second half of FY 22 saw NIM improve to 1.44% as funding demand and competition in the market normalised. AMP Bank’s NPAT (underlying) of $103 million reflects the competitive environment from a funding and lending perspective, as well as the benefit of the one-off loan impairment release in FY 21 not repeated in FY 22.
Source: AMP Investor Presentation
AMP Bank is predominantly a lender for residential properties – both owner occupied and for investment. In every case the Bank completes a credit assessment, which includes cost of living allowance and requires valuation of the proposed security property.
AMP Bank’s CRC and Board Risk Committee (BRC) oversee trends in lending exposures and compliance with the Risk Appetite Statement. AMP Bank secures its housing loans with mortgages over relevant properties and as a result, manages credit risk on its loans with conservative lending policies and particular focus on the LVR. The LVR is calculated by dividing the total loan amount outstanding by the lower of AMP Bank’s approved valuation amount or the purchase price. Loans with LVR greater than 80% are fully mortgage insured. Mortgage insurance is provided by Genworth Mortgage Insurance Australia Ltd and QBE Lenders Mortgage Insurance Ltd who are both regulated by APRA. AMP Bank has strong relationships with both insurers and experienced minimal levels of historic claim rejections and reductions.
The average LVR at origination of AMP Bank’s loan portfolio for existing and new business is set out below:
Source: AMP Investor Presentation
AMP Bank continued to take a disciplined approach to growing its loan book, supported by improving service and turnaround times, and competitive pricing. AMP Bank also continued its strategic investment in technology, enhancing its offering to further digitise and automate the lending experience for brokers, advisers and customers. Continued investment in home loan processing technology improved customer cycle times to unconditional approval by 33%. Partnerships with innovative fintechs positions AMP Bank to reach a broader direct-to-consumer base. AMP Bank partnered with Bricklet, a shared equity home platform, to enable more Australians to get into the property market earlier in life. A partnership with fintech platform Nano enables AMP Bank to offer fully digital mortgages, with unconditional approval in as little as 10 minutes.
Loan growth vs system
- AMP Bank’s residential mortgage book grew at 2.7x system in 2H 22 and 1.5x system (1.8x including Nano acquisition) for FY 22 in a highly competitive lending environment.
- Strong growth supported by consistent service and strengthened digital capability.
- Median customer cycle time to unconditional approval improved by 33% to 8.3 days (FY 21: 12.3 days).
Mortgage book
- AMP Bank continues to focus on maintaining book quality with 67% of mortgages being owner-occupied.
- Interest only lending as a percentage of the total book remained steady at 15% in FY 22.
- Average book loan to value ratio (LVR) of 66% and dynamic LVR weighted average for existing mortgage business increased 5% to 63% in December 2022.
Credit quality
- Strong credit quality maintained; 90+ days arrears decreased to 0.30% in FY 22, comparing favourably to peers.
- 30+ days arrears increased 0.02 percentage points from FY 21 to 0.80% in FY 22, still at historically low levels.
- 41% of AMP Bank mortgage repayments were ahead of schedule by more than three months at FY 22, consistent with FY 21.
Source: AMP Investor Presentation
