Challenger share price tumbles 10% on FY22 profit woes

Challenger has commenced a strategic review of the Bank, acquired in December 2020 and not living up to expectations in changing market conditions.

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Key points

  • The Challenger share price tumbles in early trade
  • The financial services company saw profits hit from falling share markets in the second half of FY22
  • Statutory NPAT fell 57% year on year

The Challenger Limited (ASX: CGF) share price is down 10.53% this morning amid the release of the company's results for the 2022 financial year.

Shares in the ASX-listed investment manager closed yesterday at $7.12 each and are currently trading for $6.37 a share.

Let's check the results that seem to have investors concerned today.

Challenger share price dives on profit woes

  • Normalised net profit before tax of $472 million, up 19% year on year
  • Statutory net profit after tax (NPAT) of $254 million, down 57% from FY21
  • Assets under management (AUM) of $99 billion, down 10% year on year
  • Full-year dividend of 23.0 cents per share fully franked, up 15% from FY21
  • Normalised pre-tax return on equity (ROE) of 11.9%, up 0.70% year on year

What else happened during the year?

Challenger's before-tax profit came in towards the upper end of guidance for the year.

Meanwhile, the company said the 57% slide in its statutory NPAT was due to wider credit spreads and lower share markets "driving unrealised mark-to-market investment experience".

The Challenger share price could be coming under some additional pressure from rising costs. While the company cited a modest 2% increase in expense management, that figure excluded the Bank, acquired in December 2020.

The Bank incurred a loss before interest and tax of $11 million. Challenger pointed to significant regulatory and integration expenses as driving the losses. It noted that market conditions have changed since the acquisition and that the Bank is now "unlikely to realise the expected benefits in the timeframe anticipated". Challenger has commenced a strategic review of the business.

As at 30 June, Challenger remained strongly capitalised with a prescribed capital amount (PCA) ratio of 1.60 times.

The company also expanded its partnerships during the year, saying that a joint venture will be formed with global software provider SimCorp. As well, a definitive agreement with Apollo will also establish a joint venture.

What did management say?

Commenting on the results, Challenger CEO Nick Hamilton said:

Our Life business recorded book growth of 14%, driven by strong Life sales of $9.7 billion. Institutional sales were up 68% to $6.7 billion, reflecting our continued focus on expanding relationships with institutional partners. Retail sales increased by 11% to $2.4 billion.

The macro-economic environment presents both challenges and opportunities with rising interest rates supporting annuity sales and investment returns, however wider credit spreads and lower equity markets triggered unrealised market losses in the second half. Credit spreads have partially reversed in July…

We've also announced new strategic partnerships with SimCorp and Apollo, which will generate new and diverse sources of revenue.

What's next?

Challenger offered normalised net profit before tax guidance of between $485 million and $535 million for FY23.

Hamilton said, "As we look into FY23, our business is in great shape. We remain strongly capitalised and well positioned to leverage and benefit from our unique competitive advantages, and deliver for our customers, our shareholders and our people."

Challenger share price snapshot

With today's intraday loss factored in, the Challenger share price is down 6% in 2022. That's right in line with the year-to-date loss of 6% posted by the S&P/ASX 200 Index (ASX: XJO).

Motley Fool contributor Bernd Struben 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 has recommended Challenger Limited. 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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