How have ASX financial shares performed during the August 2021 earnings season?

Mergers and acquisitions have set the tone for a "transformational" year in the finance sector.

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The ASX financial sector includes insurers, banks, wealth management companies, and fintechs. August 2021 delivered a unique reporting season for ASX financial shares after an extraordinary trading year.

For wealth management group IOOF Holdings Limited (ASX: IFL), it has been a "transformational" year that culminated in the $1.4 billion acquisition of MLC.

Fellow wealth manager AMP Ltd (ASX: AMP) is also going through a transformative period, planning a demerger of part of its business. Insurance Australia Group Ltd (ASX: IAG) says its FY21 business performance was sound, reflecting the strength of its core insurance business. 

How have ASX financial shares performed against the market?

ASX financial shares have had a mixed performance over 2021. The IAG share price is up 13%, and the IOOF share price has gained 33%. In comparison, the All Ordinaries Index (ASX: XAO) has gained 11% over the year.

The AMP share price, on the other hand, is down 29% over the same period.

Investors had mixed reactions to the release of results last month, sending IOOF shares tumbling 10% in a day but pushing the AMP share price up slightly before backing away the following week. IAG shares also dipped slightly on the release of its results before recovering. 

Who are the winners this earnings season? 

IAG announced a 35.9% increase in insurance profit, which grew to $1.007 billion from $741 million in FY20. This was due to lower natural perils costs, favourable credit spreads, and a first-half COVID-19 benefit mainly from lower motor vehicle claims. It translates to an improved reported insurance margin of 13.5% compared to 10.1% in FY20.

Gross written premium increased 3.8%, mainly rate-driven, but IAG also reported promising new business growth and stronger customer retention. 

Despite the positive news, the insurer recorded a net loss of $427 million, compared to a $435 million profit in FY20. This resulted from significant one-off corporate expenses relating to business interruption, customer refunds, and payroll remediation.

IAG's cash earnings, which exclude one-off items, increased to $747 million compared to $279 million in FY20. The company announced a dividend of 13 cents a share, giving IAG a payout ratio of 66% based on full-year cash earnings. 

IOOF reported an underlying profit of $147.8 million but a statutory loss of $143.5 million. The company attributed the loss to non-recurring costs such as goodwill write-downs and the costs of the MLC acquisition. IOOF completed the acquisition of MLC from National Australia Bank Ltd. (ASX: NAB) on 31 May 2021.

The acquisition effectively doubled the size of IOOF's business to $494 billion in funds and management administration and advice. Plans for integration remain on track, with IOOF CEO Renato Mota expressing excitement about the future potential of the combined group. 

IOOF reported revenues of $770 million for FY21 (up 31%), including one month's contribution from MLC. IOOF's earnings before interest, tax, depreciation and amortisation (EBITDA) were $221.5 million (excluding MLC), an increase of 19% on FY20. The company declared a final franked dividend of 11.5 cents per share. This comprised 9.5 cents per share in ordinary interim dividends and 2.5 cents per share special dividends. It brings total FY21 dividends to 23 cents per share.

And the losers? 

AMP shareholders were pleased by the advised increase in the wealth manager's earnings this reporting season but less happy about the lack of dividends on offer.

AMP's earnings increased 57% thanks to the recovery in economic and market conditions. AMP Bank benefited from the release of credit loss provisions, and investment income was higher, up $48 million on 1H 20 to $57 million. Net profit after tax increased to $118 million, compared to $115 million in the prior corresponding period.

A conservative approach to capital management is, however, being maintained. While AMP is in a strong capital position with $452 million in surplus capital, no interim dividend was declared. 

AMP is in the process of finalising requirements for the demerger of AMP Capital's private markets investment management business. The demerger is intended to unlock further value in the private markets business by simplifying its structure and providing operational independence.

AMP says the demerger is on track, with an ASX listing to occur in 1H 22. The board intends to review its capital management strategy and the payment of dividends following the demerger completion. 

Looking ahead

IAG reinstated guidance for FY22 in August, reflecting its confidence in the business and economic outlook. Low single digit growth in gross written premiums is predicted, with a 13.5% – 15% reported insurance margin. This aligns with the insurer's goal to achieve a 15% – 17% insurance margin over the medium term.

IAG seeks to deliver an insurance profit of at least $250 million per year and is creating value by scaling up the use of artificial intelligence and automation. The company expects modest growth in customer numbers in FY22. This, combined with rate increases, will contribute to increases in gross written premium. 

AMP's primary focus is on the delivery of its demerger and assessment of post-demerger operating models.

The company reports it is starting to see some positive signs of growth and innovation, particularly in its bank and platforms business, where new services are being introduced. There is also a focus on rebuilding the brand and culture.

AMP is still in the process of remediating customers for issues brought to light in the Banking Royal Commission four years ago. The total cost of the remediation program is expected to be $823 million, of which approximately $596 million represents payments to customers. 

IOOF is also transforming its business and expects to deliver synergy benefits during FY22 and beyond.

Priorities for the next financial year include decommissioning additional legacy platforms and delivering annualised run rate synergies of $80 – $100 million. The combination of MLC and IOOF is expected to provide scale and growth opportunities through wide-ranging capabilities and technical expertise. 

Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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