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What you need to know about AMP Limited’s (ASX:AMP) results before buying the shares

Embattled shareholders in AMP Limited (ASX: AMP) caught a break today with the stock enjoying a relief rally following the release of the wealth manager’s half-year results.

The stock rallied 2.7% to $3.44 in morning trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index edged up 0.3% after management unveiled a slightly better-than-expected result and reported growth in its key divisions.

It may not sound like a big deal that underlying interim net profit came in around 2% ahead of consensus forecasts as it dipped 7% to $495 million, but the fact that no other skeletons are falling out of its closet is enough to embolden bargain hunters who have been eyeing the stock’s 34% plunge since the start of calendar 2018.

No one was willing to catch a falling knife until this result and the fact that AMP can produce growth in its wealth management business – the part of the group that has copped the worst of the Royal Commission into potentially illegal practices – will go a long way to reassure investors that the wheels haven’t totally fallen off.

The wealth business delivered operating earnings growth of 5.7% in the six months ended June 30, 2018, thanks to costs cutting and growth in other revenue from advice and SMSF businesses.

AMP Bank also impressed as it delivered growth of 20% over the period due to an 8% increase in its residential lending book and improved deposit margins.

Further, AMP has strengthened its board with the appointment of the former secretary to the Australian Treasury, John Fraser, as a non-executive director.

AMP had lost three directors, its chairperson and chief executive in the wake of the damning revelations at the Royal Commission, which has also badly impacted on the big banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

But I don’t think the stock will enjoy a re-rating even as it bounces from recent lows. AMP needs a re-rating if it is to properly recover from its brutal sell-off. A re-rating is when the market lowers the risk profile of a company, which in turn lifts its valuation.

Firstly, there are still issues with the wealth management business and it isn’t obvious to me that the growth can be sustained in the second half of the year and into 2019.

I also don’t think the 20% growth in AMP Bank can be sustained given rising funding costs. AMP had lifted mortgage rates in response, but the big banks are standing pat or cutting theirs to win market share.

The fact that AMP has yet to find a permanent chief executive will also be a near-term drag on the company, as will the five class actions lawsuits that AMP is fighting to defend.

Dividends are also expected to fall further after management cut its interim dividend by nearly a third to 10 cents a share.

AMP may have found its feet for now, but it’ll be a while before it can learn to run again.

In the meantime, there’s no rush to buy the stock – not when there are better alternatives from the experts at the Motley Fool.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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.

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