‘Heightened risk’ of AMP capital raising, say analysts

AMP's failure to sell its life insurance business could mean it lacks the capital needed to fund an overhaul of its wealth management arm, analysts say, raising the risk of a capital raising by the wealth giant.

A day after AMP said it was “highly unlikely” to complete a $3.3 billion sale of the insurance business in its present form, several analysts argued this could make it harder for the company to fund its strategy.

AMP may need to raise capital if it does not sell its life insurance business, analysts say.Credit:Bloomberg

It had been assumed by many that AMP would need to spend hundreds of millions of dollars revamping its wealth operations, after the royal commission put intense pressure on wealth firms to focus more sharply on customers' best interests.

AMP has said it will try to salvage a deal with the buyer, Resolution, but it is expected that any such deal would be at a significantly lower price, after the wealth manager on Monday said it thought the life business was worth $700 million less than previous estimates.

Citi analysts led by Nigel Pittaway said AMP's scrapping of its dividend should mean it would have enough capital to meet the board's target surplus of $1.5 billion, but there would "surely" not be enough to fund its new strategy. In a note to clients, they said there was a "heightened risk" of a capital raising.

"It may therefore be left with a stark choice of either delaying the strategy’s implementation or coming to market to raise capital," said the analysts, who have a "sell" on AMP.

Macquarie analysts, who are "neutral" on the stock, said AMP shareholders are facing a "binary outcome". The company can either sell its insurance business for a lower price, or keep the life business, and gradually run it down. "We see a risk of a capital raising, particularly if a transaction doesn’t occur," Macquarie analysts wrote.

Bell Potter's Lafitani Sotiriou said AMP's move to cut the dividend to zero is a "terrible sign" and may suggest the need for the company to take more provisions.

"We continue to argue its client refund provisions are below that of the major banks, and any meaningful change here may result in the company requiring an equity raising to maintain healthy capital buffers," said Mr Sotiriou, who has a "sell" on AMP.

In a sign of the big investments AMP needs to make, Morgan Stanley last month estimated AMP would have to spend up to $500 million in order to overhaul its financial advice business.

UBS analysts led by Kieran Chidgey also told investors, "AMP's ability to embark on a significant strategic agenda in 'wealth' could now be curtailed by capital constraints."

The decision of whether AMP  should sell its life business more cheaply than hoped, or keep it, should be balanced against the prospect of delaying its transformation in wealth, the note said.

AMP shares were up 0.3 per cent higher at $1.82 in afternoon trade.

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