AMP shares tumble on weak profit forecast amid $60m banking push

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AMP is trying to limit the crunch on its banking profits by joining the rush to target the small business market, investing $60 million in a new digital bank to provide transaction and savings accounts to customers such as tradies, hairdressers and contractors.

The new step in its strategy came as investors were spooked by a weak trading update from AMP Bank, which warned of lower margins over the next year, sending AMP’s share price tumbling 15.8 per cent to 86¢, a record low.

Tradies are among the people AMP is looking to with its new digital banking push.Credit: Louise Kennerley

Seeking to expand its banking unit at a time when industry profits are under pressure, the wealth manager said on Thursday that it would team up with UK digital bank Starling to launch a new service aimed at gathering deposits.

The move is an attempt to provide AMP’s bank with cheaper types of funding, as banks’ funding costs have been pushed up by stiff competition for retail term deposits and higher-interest savings accounts.

Reflecting these pressures, AMP also warned on Thursday that its net interest margin – a key measure of banks’ profitability, which compares funding costs with pricing on loans – would come in at 1.25 per cent for the full year, down sharply from 1.39 per cent in its latest half.

While new digital banks in Australia have had a mixed record, with several retail-focused neobanks failing, AMP said its strategy was different because the new bank would bolt onto AMP’s existing bank and use its brand, with the deposits used to fund mortgage lending.

AMP will also use technology from Starling rather than trying to build its own systems from scratch.

“Compared to a lot of the fintechs, which were struggling to build a technology, build capability, build a revenue model and build presence and build a brand, we’ve got a couple of those really important things already delivered,” said AMP’s group executive in charge of banking, Sean O’Malley.

AMP said the $60 million cost of the digital bank would be absorbed within its current cost targets.

Morningstar analyst Shaun Ler said the market had reacted negatively to AMP’s guidance on margins, and the fact the new banking push would not add to its profits until 2027. “The bank promises to give some benefit, but the payback period is very long,” Ler said.

The wealth manager’s move comes as AMP’s larger Australian rivals – the big four banks – are also pursuing small business owners, given weaker conditions in retail banking.

O’Malley said research showed that smaller businesses, in particular those with fewer than 20 employees, feel unsatisfied with what banks are offering. He also said major banks tended to focus more on slightly larger firms, while ASX-listed Judo had a different approach that emphasised hiring bankers to deal with clients rather than focus on technology for customer self-service options.

At its latest financial results, AMP Bank reported underlying profit of $57 million for the first half. It had more than 192,000 customers across lending and deposits.

O’Malley said the bank’s growth was being held back by higher funding costs as banks compete for savings, while the need for banks to repay low-cost funding borrowed from the Reserve Bank during the COVID-19 pandemic is also sparking competition for deposits.

AMP is at a particular disadvantage on this front because it has very low balances held in transaction accounts – a cheap source of funding which typically pays close to zero interest.

Chief executive Alexis George, who is overseeing a strategy focused on superannuation, banking and wealth management, said this week’s move was an important step to expanding its bank.

“We still see the platform business and the bank business being our growth business, albeit it’s a difficult environment for banks at this point,” she said.

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