Shares in AMP Limited (ASX: AMP) fell 5% to a multi-year low of $3.31 on Friday. The wealth manager, recently targeted by the Royal Banking Commission and ASIC, will see its earnings decline in the first half of FY18.
AMP will report interim results on August 8. Underlying profit should be in the range of $490 million to $500 million, down from the $533 million reported last year.
The company explained that while core businesses such as wealth management, AMP Capital and AMP Bank have performed well, the result was weighed down by the wealth protection segment, which will not contribute significantly to earnings.
For the first half of FY18, AMP will also book $55 million post-tax one-off costs relating to the investigations of the Royal Commission and to an internal portfolio review, which has been reprioritised after the recent turmoil.
AMP announced a dividend pay-out for the year at the lower end of its 70% to 90% guidance range. The company declared that, to retain capital and strategic flexibility, the interim dividend might be outside this range.
Resetting the business
In today’s release, the company outlined a plan of action to “reset the business, prioritise customers and strengthen risk management systems and controls”.
In addition to the reduction of underlying profit, AMP will bear the cost of compensation in favour of its clients, particularly for potential lost earnings.
Statutory profit will be impacted by a $290 million post-tax provision for potential remediation costs stemming from two ASIC reports that require an industry-wide review of the last ten years of service arrangements and advice to clients. The remediation program itself has an estimated cost of around $50 million over the next three years.
Other actions include fee reductions for around 700,000 superannuation customers, expected to cause a $50 million drop in wealth management revenue from FY19, and a $70 million investment over two years to reinforce risk management.
With the stock trading so low, some investors in search of a bargain might be tempted by AMP. Personally, I think we are yet to witness the full impact of regulatory scrutiny and Royal Commission roasting.
AMP may have to do something drastic to retain clients and streamline its business. For the time being, I wouldn’t risk buying AMP shares.
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Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.