February 14, 2019 / 4:00 AM / 8 days ago

Australia's AMP sees more pain ahead for scandal-hit wealth unit

SYDNEY (Reuters) - Australia’s AMP Ltd on Thursday said client withdrawals from its flagship wealth management unit showed no sign of abating and warned that legal and compliance costs would hit 2019 earnings, as it tries to recover from a year of scandal.

FILE PHOTO - The logo of AMP Ltd adorns their head office building in Sydney, Australia February 9, 2017. REUTERS/David Gray/File Photo

Australia’s biggest wealth manager is hemorrhaging funds after a public inquiry into the financial sector inquiry heard it had engaged in conduct such as charging fees for no service and attempting to deceive regulators.

The 170-year-old company said that its flagship Australian wealth management unit had cash outflows of A$3.97 billion ($2.8 billion) in 2018, equivalent to about 3 percent of asses under management. That compared to inflows of A$931 million in 2017.

At the same time, regulatory and compliance costs were mounting and would affect earnings this year, AMP said, as it confirmed a pre-announced 35 percent fall in 2018 underlying net profit to A$680 million.

“We are continuing to work incredibly hard to turn the flows from negative to positive, but our outlook for those in the immediate term is probably to have flows in quarter one no different from what we’ve experienced in quarter three and four,” Chief Executive Francesco De Ferrari told reporters.

The quasi-judicial inquiry that shocked Australia last year with revelations of wrongdoing by some of the country’s most respected financial firms had “served as a catalyst for change at AMP,” he said.

Ferrari joined the company on Dec. 1 following the resignations of the previous CEO, chairwoman and several board members in the fallout from the inquiry.

He has pledged to rebuild the once-venerable AMP brand but Thursday’s results suggest that could take longer than expected, analysts said.

The higher insurance, regulatory and compliance costs alone would hurt 2019 earnings by up to 20 percent, Credit Suisse analysts estimate.

“A lot of the extra costs with regard to risk management and compliance etc will go to rebuild trust in that brand,” said Sean Sequeira, chief investment officer at Alleron Investment Management.

“But there continue to be concerns about how well they can execute their strategy and whether the strategies they have are enough to actually stem the outflows.”

SHARES FALL

AMP shares fell 10 percent following the announcement, while the broader market was unchanged. AMP has lost over half its market capitalization in the past 12 months as a result of the inquiry.

The government has said it will take action on all the inquiry’s recommendations, which could lead to stricter enforcement of a long-standing requirement for trustees to act solely in the best interest of clients rather than shareholders.

“We will adapt to whatever regulation comes out to ensure we are best in class in the independence of trustees,” De Ferrari said.

AMP Capital, its funds management business, reported stable assets under management of A$187 billion, as flows from its joint ventures helped offset A$1.6 billion in net cash outflows from internal and external clients.

AMP confirmed statutory profit fell 97 percent to A$28 million, as high costs of remediating customers for misconduct and losses from divestitures wiped off its earnings, which the company had flagged on Jan. 25.

Statutory revenue more than halved, driven by an 85 percent fall in net investment gains.

Reporting by Paulina Duran in Sydney; Additional reporting by Ambar Warrick and Rushil Dutta in Bengaluru; Editing by Stephen Coates

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