Savings on variable costs, improvements in the performance of its advice business and a rise in underlying net profit after tax are among the pleasant surprises emerging in AMP’s latest results, supporting claims of a potential turnaround at the financial services giant, according to Morningstar.

In an ASX filing on Thursday, AMP reported a 5.4% rise in underlying net profit after tax (NPAT) of $118m for the half year ended June 30, up from $112m in 1H23.

Its platforms business posted a 22.7% increase in underlying NPAT to $54 million, which it said was primarily driven by stronger market conditions and disciplined cost controls.

Meanwhile, the core NPAT loss of AMP's consulting business narrowed from $25 million in 1H23 to $15 million in 1H24, which AMP also said reflected continued disciplined cost management.

With the statement, AMP chief executive Alexis George said the firm had made "good progress" on its key strategic commitments.

Morningstar raised its fair value estimate to $1.25 per share, from $1.20 per share, following the results, "particularly reflecting" the stronger-than-expected platform and main confidence flows.

In a recent market note, analyst Sean Lehr noted that AMP shares have rallied recently and are currently fairly valued.

Shares traded at $1.29 as of Friday, Aug. 9, up nearly 11 percent over the past five days.

"Signs of a recovery in earnings are now clearer and we believe AMP can reach a sustainable revenue base of around $287 million a year from 2024." until 2028 compared to the five-year average of $294 million,” Lehr said.

He described the strong recovery in product flows and the increased inflow of non-AMP advisers as "impressive", along with "effective" restructuring and product improvements in the wealth business.

"Other improvements, such as increased revenue per advisor/practice and reduced vertical integration, suggest that much of the reputational damage is now behind AMP, positioning it to compete more effectively with peers," Lehr said.

However, it also identified several risks that could still hamper earnings growth, such as AMP Bank lagging behind larger banks in competitive positioning due to a lack of edge in funding and product offerings.

In the half year ending 30 June 2024, AMP Bank delivered an underlying NPAT of $35m, down 38.6% from 1H23.

Net interest income decreased by 18.5%, while net interest margin remained stable at 1.14%.

"[AMP Bank] is likely to increase lending at low single-digit rates over the next five years, behind the five-year average of 10 percent. The decline in both net interest margins and loan volumes during the half year was disappointing, with future growth largely linked to the overall market rather than equity gains,” Lehr said.

"AMP is relying on the launch of its small digital bank to diversify revenue and funding mix beyond retail customers, although we do not see this improving competitive positioning or generating significant revenue synergies."

It forecast slower growth from 2025, stressing that recent improvements in flows may have reflected "pent-up demand for risk assets following the depression in capital markets in 2022-23".

Forward view

More broadly, the Morningstar analyst forecast group operating margins at AMP to average 35 percent over the next three years, then fall to around 32 percent by 2028.

In his memo, Lehr notes that this figure is above the five-year average of 29 percent, although it falls short of the pre-kingdom commission average of 45 percent.

"While we expect improved flows and cost control initiatives to benefit near-term margins, product fee margin compression, lower net interest margins, increased pension payments and likely higher reinvestment in growth as the business stabilizes may reduce long-term profitability," Lehr said.

He also described AMP's recent decision to sell consultancy licensees and self-licensed offering Jigsaw to Entireti, while retaining a minority stake, along with the sale of minority stakes in 16 AZ NGA consultancy practices, as "generally positive".

By doing so, the firm will be able to "extract value" from the advice business, he said, which might not be possible if it were proprietary.

Lehr predicts that with the business simplified and past uncertainties cleared, AMP will resume regular dividend payments from 2025, barring any unforeseen downside risks.

The third and final tranche of $295 million from the $1.1 billion capital return program is due by the end of 2024, he noted.

“Approximately $158 million of share repurchases were completed in the first half of 2024. and $52 million will be paid as an interim dividend. That leaves AUD85 million in share buybacks remaining for the remainder of the year,” Lehr said.

The firm has nearly $680 million in excess capital, he continued, while provisions on the balance sheet covering compliance, remediation, litigation and other items currently stand at $324 million. That's down from $508 million in December 2023.