AMP Bank: The Trend is not Your Friend

S&P ratings agency recently downgraded by one notch the long-term credit rating of AMP Bank to BBB from BBB+, while ratings for AMP Limited and AMP Group Holdings were lowered to BBB- from BBB.

S&P stated “We lowered our ratings on AMP Ltd., AGHL, and AMP Bank to reflect our view that the overall creditworthiness of the AMP group is weaker.  In our view, the group is exposed to challenges that may disrupt its overall strategic direction and its ability to effectively execute its strategy.” 

Recent developments that triggered this downgrade included AMP’s announcement in early September that it will conduct a portfolio review of the assets and business units of the Group.  The market believes a potential sale or break-up of the business is likely to occur as AMP experienced a continuous weakening in profits combined with reputational damage due to scandals over the past years after a public inquiry into the financial sector showed AMP charged fees for no service.

Additionally recent departures of senior executives and board members in various units of the AMP Group are deemed to potentially weaken operational effectiveness.  S&P believes “AMP group’s governance standards are adequate. Nevertheless, based on the recent developments we do not consider the governance factors as strong as we previously considered.” S&P believes “these issues could provide impediments to the group’s future operating performance.  Strong governance and management leadership is key to achieving a solid strategic turnaround, especially in the current environment.”

AMP acknowledged S&P’s ratings revisions and stated that its balance sheet and capital position remains strong, with eligible capital more than the minimum regulatory requirements of $2.2 billion as at 30 June 2020. At this stage, Moody’s rating of AMP Bank remains unchanged at A3.

AMP’s share price has entered a downward descent from the end of 2017 when it was close to $6 to its current level of around $1.55 because of the troubles listed above that have also caused it to be downgraded progressively over that period; AMP was rated A+ in May 2017 before being downgraded to A that year and to A- in March 2019 and then to BBB+ in August 2019, before the latest downgrade to BBB this year. The bank has perennially struggled with funding over this period having to consistently offer Term Deposit rates higher than its competitors.

Amicus has consistently advised its clients to limit any long-term exposures to AMP Bank as there seems little evidence of the current trend of deterioration abating and if the Bank were to be downgraded again to BBB-, it would be only one notch above investment grade. Should it loose its investment grade rating it would most likely be acquired as a non-investment grade rating is more of a hindrance than a help to any ADI in Australia.

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