The Australian Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services has been investigating banks and financial institutions.
Earlier, AMP announced its chairwoman Catherine Brenner and chief executive Craig Meller had resigned. Morningstar now expected more fines, higher compensation payments and potential class actions, Mr Gunasekera said.
Although AMP’s share price had fallen significantly, it was unlikely to be the end. A further fall was expected if the ultimate result of the royal commission was the required dismantling of AMP’s vertically integrated model.
AMP’s vertically integrated model referred to the use of its extensive network of financial advisers, the largest in Australia and New Zealand, as the distributional arm for investing funds into its investment and banking products and services.
The royal commission appreciably increased the risk AMP would be required to face to separate its advice business from its product manufacturing and platform business, he said.
"The status quo is our base case, at this stage. Nevertheless, we believe the heightened regulatory risk now looming over AMP means it is a high-risk investment."
Following the royal commission, and even without the break-up of its vertically integrated model, almost no underlying reported profit growth was expected in wealth management during the next five years, Mr Gunasekera said.
Before the royal commission, AMP identified its wealth management, along with AMP Capital and AMP Bank, as its growth businesses in which to focus investments.
"We believe there are some promising initiatives in the wealth management business, including the new goals-based advice model and the growing of its administration business. But these initiatives will likely be offset by the negative impact of the royal commission."
The royal commission had already done material damage to AMP’s reputation and growth products. However, the key risk still hanging over it was the potential break-up of its vertically integrated model, the backbone of the business, he said.
Not having its network of financial advisers would be a major negative for AMP’s intrinsic value, impacting the company in multiple ways, including reducing the growth in funds invested into its investment products and platforms.
Lower growth in residential mortgages and deposits in AMP Bank were also likely.
Also, if all vertically integrated businesses such as the major banks, IOOF and industry super funds, were required to separate their advice arms from their product-manufacturing and/or platform businesses, the flood of advice businesses for sale in the market would likely negatively impact sale prices, Mr Gunasekera said.
AMP enjoyed a narrow competitive advantage based on the intangible asset of its large distribution reach from its extensive network of aligned financial advisers and its strong brand recognition among Australia financial advisers as well as Australians and New Zealanders generally.
Morningstar also expected both sources of competitive advantage had weakened considerably following damning admissions by AMP executives at the royal commission.
BULLS SAY
• AMP has the potential to benefit from the current mandatory 9.5% Australian superannuation guarantee contributions increasing to 10% from July 1, 2021, and it progressively increasing to 12% in 2025.
• AMP is also likely to benefit from the ageing Australian-New Zealand population. People tend to seek out financial advice and be more concerned with retirement savings the closer they get to retirement.
• Increasing complexity in superannuation and taxation rules will boost demand for financial advice. AMP has the largest adviser network in Australia-New Zealand.
BEARS SAY
• The royal commission has appreciably increased the risk AMP will be required to face to break up its vertically integrated business model.
• As a result of the royal commission, AMP will be in a period of transition as it employs a new leadership team, incurs higher compliance costs, suffers lower growth from reputation damage and combats legal proceedings, including potential class actions.
• The royal commission has identified material corporate governance and cultural problems which will need to be rectified for investors to regain confidence in the company.
