The latest bank half-yearly results - together with AMPs first quarter net outflows - underscore the extent to which the Australian wealth industry has been wounded by regulatory uncertainty.
The stand-out feature was the level of revenue margin squeeze - running at double digits on an annualised basis, according to UBS insurance specialist James Coghill.
“While some elevated squeeze was anticipated as residual default Super funds under management transfers into low cost products ahead of 1 July, it appears that retail flow has also suffered through this, with AMP flagging losses to Industry Funds," he said.
Worse, while expectations are running high for a second-quarter flow uplift from the opposite spectrum of the client base, he argued that wealth management drivers appear subdued and the year ahead could disappoint. Clearly, net inflows remain under pressure for the big four banks which currently hold 55 per cent of the retail wealth industry with AMP holding 20 per cent.
“Retail providers have generated negligible organic growth from inflows for three halves now … with net flows contributing an average 0.8 per cent to FUM growth over the half,” Coghill noted in a report.
Change in business mix
However, the analyst noted that if Westpac’s $5.1 billion wholesale inflow - which is 2.8 per cent of funds under management - is excluded then no flow was generated in aggregate across the group.
So given the revenue growth challenges, the question becomes: is wealth management ex-growth unless equity markets are outperforming?
By Coghill’s calculations - since banks don’t disclose such details - margins have dropped from 67.3 basis points in the 2016 second half to 63.1 basis points in this latest half - a 6.3 per cent fall.
ANZ and National Australia Bank led the charge, with 11.1 per cent and 9.4 per cent falls respectively.
“NAB, ANZ and Westpac all pointed to change in business mix away from higher margin products to simpler and lower risk product - this mix change is mostly related to MySuper default transitions, but that's only half the story as net margins have long been in structural decline," Coghill explained.
“Unless wealth managers have very effective cost reduction plans in place or markets are rallying, we believe it's simply not possible to grow wealth management profits against this backdrop."
Only ANZ has demonstrated a capability to materially reshape the cost base, Coghill added, with a 15.6 per cent reduction on the year again same half from "productivity initiatives".
At least life insurance is out of the spotlight, for now.
With Commonwealth Bank withdrawing disclosure and NAB exiting manufacturing, profitability comparisons are less meaningful now, Coghill added, noting commentary indicated the claims environment remains challenging.
“Most players appear to be prioritising margins and stability over growth, with inforce premium growth slowing from 6.4 per cent in the 2015 second half to 2.0 per cent in first six months of 2017," he said.
“The growth offset that life insurance once provided when wealth mangers’ revenues were under pressure is currently elusive for the retail providers.”
Currently the major banks have 40 per cent of Life Insurance compared with AMP’s 12 per cent.