The Hayne Royal Commission’s alarming findings of poor corporate governance and culture at AMP Limited (ASX: AMP) have forced Morningstar equity analysts to downgrade the stewardship rating of the wealth manager to “poor”.

In a report issued on Tuesday, equity analyst Chanaka Gunasekera said the downgrading reflected AMP’s poor corporate governance and risk management, some of which has been identified as potentially unlawful.

“AMP’s heritage brand has been trashed and its long-term strategy is now uncertain,” Gunasekera says. “A wide range of remedial actions have been announced and have been or will be implemented. Execution is always key to long-term success, and so far we think the jury is out on whether new management can deliver.”

Gunasekera added: “AMP will be in a period of transition in the next few years as it employs a new leadership team, incurs higher compliance costs, and suffers from material reputational damage.”

In her closing address to the Royal Commission, counsel assisting the inquiry Rowena Orr, QC invited Commissioner Kenneth Hayne to find that AMP breached provisions the Corporations Act by misleading the regulator on 20 occasions about its deliberate practice of charging fees to customers who were no longer receiving financial advice.

The inquiry also heard evidence of AMP’s attempt to influence a report by lawyers Clayton Utz, which they indicated to ASIC was external and independent. Orr said the their characterisation was “inaccurate, if not misleading".

AMP’s chief executive Craig Meller and chair Catherine Brenner resigned in the wake of the evidence. Board member Mike Wilkins has been appointed acting chief executive and executive chair, and an independent review into governance and culture is under way.

While Wilkins has the requisite financial services experience to run AMP, Morningstar analysts note his time as chair of AMP’s Audit and Risk Committee, and believe he will shoulder some of the blame of the company’s poor corporate governance and risk management.

“We expect Wilkins to be only a short-term appointment,” Gunasekera said.

With more leadership changes expected and its strategy to focus on investments and grow its wealth management business “in tatters”, analysts view AMP’s strategy as “unclear”.

Another reason for the negative stewardship rating is management’s history of poor capital allocation. In particular, analysts say the acquisition of AXA Asia Pacific Holdings Limited (AXA) in 2011, which increased AMP’s exposure to wealth protection, has proven detrimental for shareholders.

“The AXA acquisition resulted in AMP increasing its exposure to insurance, which has been plagued by higher-than-expected claims and other problems,” Gunasekera says.

“This has forced AMP to re-insure a large portion (65%) of their insurance book, resulting in much lower profits. The increased number of AMP shares issued as part of the AXA acquisition has resulted in lower earnings per share.”

The AMP board will meet with angry shareholders on May 10 where questions over culture and governance are expected to take centre stage. Three laws firms have each announced shareholder class action investigations, and the Australian Council of Superannuation Investors has instructed its 32 member funds to vote against the re-election of AMP’s directors. A fourth class action investigation was announced by law firm Phi Finney McDonald and funder IMF Bentham on Tuesday.

Hits keep on coming for AMP

The hits keep coming for AMP with Morningstar analysts downgrading the company’s fair value estimate (FVE) from $5.50 to $3.90, and a reduction in its moat trend from stable to negative.

The “possible break-up of AMP’s vertically integrated model” has also led analysts to give the company a high uncertainty rating.

While AMP’s share price has fallen significantly, analysts do not believe that the stock is “cheap” -- saying they expect a further fall if the Royal Commission requires the dismantling of the vertically integrated model -- which they describe as crucial.

“While we believe the Royal Commission has already done material manage to AMP’s reputational and growth prospects, the key risk still hanging over it is the potential break-up of its vertically integrated model, which is the backbone of its business,” Gunasekera says.

“Not having its network of financial advisers would be a major negative for AMP’s intrinsic value, impacting the company in multiple ways, including reducing growth in funds under management into its investment products and platforms.”

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Emma Rapaport is a reporter for Morningstar Australia.

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