AMP CEO Alexis George
Volume growth in AMP’s banking arm stalled in the December 2023 half as tumbling interest margins forced the company to pull back on home lending activity.
AMP Bank posted an underlying net profit of A$93 million in the 12 months to the end of December – a 9.7 per cent decline on the 2022 full year result of $103 million.
Group chief executive Alexis George indicated that margin contraction was expected to accelerate in 2024, with the bank’s net interest margin expected to slide from its current level at 1.27 per cent to between 1.1 per cent and 1.15 per cent.
In December 2022 the bank was sitting on a net interest margin of 1.38 per cent.
In the six months to the end of December, the size of the bank’s residential loan book reduced by more than $100 million.
“AMP Bank is operating in a challenging and competitive market, and we are carefully managing volumes in this business given the impact on margins,” George said.
The bank’s short term profitability is under extreme pressure and this appears to have contributed to a strategic push to diversify the business operations of the subsidiary.
Many challenger banks such as Macquarie are now focused on building their shares of the business banking market to counter margin contraction within their retail lending operations.
However, AMP’s entry into business lending is not likely to occur before 2025, which means that the remote prospect of an earnings turnaround this year will hang on achieving cost reductions, cheaper funding and lower arrears.
During an online briefing of investment analysts, George came under pressure to articulate AMP’s rationale for staying in the banking market given that the subsidiary was earning half its cost of capital.
One analyst claimed that AMP was effectively earning less than a 5 per cent return on the banking arm, which meant that the group was probably better off selling the business and investing the proceeds in a high interest savings account.
George acknowledged the bank needed to diversify its funding sources and insisted the launch of the digital business bank next year would increase enterprise value.
“We believe that it (the business banking platform) will give us diversity in
customers, diversity in funding – which we are clearly struggling with at the moment – and ultimately improve the enterprise value,” she said.
The bank suffered a 7 per cent blowout in labour and other variable costs in 2023 which contributed to an increase in business efficiency.
AMP Bank’s cost to income ratio rose to 48.7 per cent from 47.4 per cent over the year.
The growth trend in loan arrears appears to be a matter of greater concern.
While the percentage of loans past due by more than 90 days remains low at 0.62 per cent, it is markedly higher than in December 2022 when it was running at 0.3 per cent.
Given the worsening economic environment and the consequent negative impacts on credit quality across the lending sector, reducing arrears levels poses a stiff challenge for AMP Bank.
Throughout 2023, AMP was offering retail deposits at some of the highest rates in the market.
The bank may have to temper its generosity towards depositors this year or risk further acceleration in margin erosion.
According to disclosures made to investment analysts on Wednesday, costs associated with raising retail deposits accounted for a 16 basis point decline in the net interest margin.
While the increase in deposit raising costs was partly offset by other factors impacting NIM, it represents the single largest driver of margin pressure within the business.
AMP’s ASX-listed scrip rallied strongly after the company said that it would return $295 million of capital to shareholders this year through bonus dividends or a share buyback.
The stock closed up more than 10 per cent at $1.07 on high turnover.
AMP also announced that former Bendigo Bank managing director Mike Hirst would take over as chair of the company when incumbent Debra Hazelton retires from the board on 12 April.