AMP is a name that has been in focus in recent years. The company has gone through some reconfiguration and shed some of it less profitable departments leading to something of a turnaround through calendar 2023.
Better performance
On an underlying basis, earnings per share was 3.8 cents, an increase of 11.8% on 1H22 driven by the buyback of shares as part of the capital management strategy.
Underlying return on equity was 5.6% in 1H23 (1H22: 5.4%) and Total AUM across Platforms, Master Trust and New Zealand Wealth Management sections of the business was $134.5b in 1H23, an increase of $5.1b (3.9%) from 1H22 due to higher closing investment markets.
Group cost-to-income ratio was managed lower and improved to 66.2% from 68.6% in 1H22. A restrained dividend payout policy that has been enacted would be seen as a positive for debtholders.
This period of consolidation and re-focus has been reflected in a much more stable share price performance, see fig 1.
Banks and insurance companies issue debt to provide what is termed regulatory capital. Much of this issuance is concentrated in so-called tier 2 instruments. AMP is one of many Australian banks to issue this type of paper, including the “Big 4”.
Worse ratings for AMP
AMP’s sub-debt is rated below that of the “Big 4” by two to three notches. The relative margin advantages are shown below in graphical form. The very significant yield pick-up is reflective of the increased risk associated in holding these bonds.
For those who see the positives in the recent profitability turnaround for AMP and in the recent streamlining of their business in shedding AMP capital and their focus on the more profitable areas such as AMP Bank may feel the additional yield is a good compensation for the risk. All investors in AMP’s various sub-debt have had their capital returned on the first call date.
Bank debt trading tighter this year
The past year has seen much higher rates due to aggressive central bank tightenings. Against this trend, margins over swap have been generally contracting, leaving much of the tier 2 debt trading above par. AMP’s BBSW+4.65% 2027 maturity has also tightened with this trend, and this has been aided by greater stability at a company level.
Floating-rate structure
Theese bonds are floating rate notes. With rates having risen and possibility of further action from the RBA, “floaters” may hold additional appeal for some investors. For this type of bond, each coupon will adjust with changes in the 90-day bank bill rate which is very closely tied to the cash rate set by the RBA. Generally these types of bonds have less price variation than those that have a fixed coupon.
Why would I consider these bonds?
The notes described above are available at a premium to par. Along with other floaters they have tightened in margin and are available at an indicative price of 103.70 – an 8.10% forecast yield. With current coupon above 8.6% as a running yield, this premium is acceptable.
Investors who have the soon to be called AMP November 2023 callable notes may find these notes a suitable extension idea along with investors who are comfortable with a sub-investment grade bond investment with floating coupons.
