The removal of Australian financial services company AMP Limited (ASX: AMP) is one of three changes made to Morningstar's Asia-Pacific Equity Pick List for May 2018.

Utilising research from Morningstar equity analysts across the region, the list concentrates primarily on moat-rated companies that are trading at attractive valuations.

AMP's removal comes "after our analyst downgraded its fair value after shocking revelations regarding the company’s misconduct and poor corporate governance at the Royal Commission," says Lorraine Tan, Morningstar's regional director of equity analysis, Asia.

The negative sentiment directed at Australia's banks as the inquiry continues has also hit the share prices of Commonwealth Bank of Australia (ASX: CBA) and Westpac Bank (ASX: WBC). Both hold wide moats, but unlike AMP, Morningstar still regards them as undervalued.

Commonwealth Bank and Westpac's price-to-fair value ratios were 0.86 and 0.83, respectively, at the end of April.

Morningstar equity analyst, Chanaka Gunasekera, downgraded AMP's FVE to $3.90 earlier this month - below its 1 May share price of $4.

While Morningstar's senior banks analyst, David Ellis, expressed disappointment at the behaviour uncovered by the regulatory inquiries, he is confident they will make the necessary governance and culture remediations.

"Sincere apologies and heartfelt contrition from chairman Catherine Livingstone and CEO Matt Comyn provide confidence that the bank is taking the APRA report very seriously," he says.

Commenting after Westpac's 1H18 earnings results earlier this week, Ellis said: "We liked the 'clean' $4.25 billion cash profit, up 5.8 per cent on a year ago, with the bank benefiting handsomely from no major management and operational distractions, other than the Royal Commission, currently experienced at major bank peers."

Also within financial services, narrow-moat QBE Insurance Group (ASX: QBE) holds a price-to-fair value ratio of 0.76.

"We are quietly confident the new CEO can deliver the operational and financial turnaround required to deliver a sustained uplift in shareholder value," Ellis says.

He believes shareholders will be rewarded, with the share price expected to increase, closing the current 25 per cent gap to fair value.

Even at this early stage in the tenure of new CEO Pat Regan, Ellis sees "promising signs of a noticeable improvement in earnings quality," though it will be at least 12 months before these are reflected in financial accounts.

In the health sector, narrow moat Ramsay Health Care (ASX: RHC) is regarded as considerably undervalued, with a four-star rating and a 0.75 price-to-FVE ratio.

The largest incumbent in the space, Ramsay’s scale underpins “a sustainable competitive advantage that drives both cost advantage and a reasonable level of pricing power in negotiations with private health insurers,” says Chris Kallos, senior equity analyst, Morningstar.

He believes government policies will continue to insulate private hospitals from substantial "funding-related disruptions" and applauds Ramsay’s move into community pharmacy.

From other parts of the Asia Pacific region, the removal of Oversea-Chinese Banking Corporation (OCBC) and Swire Properties were the other two changes to the May Pick List, in addition to AMP's removal. They are replaced with Hong Kong Securities Exchange-listed Ping An Insurance and Beijing Capital International Airport (BCIA), and Singapore Exchange-listed bank, Mitsubishi UFJ Financial Group (MUFG).

Though it holds no economic moat, Ping An is rated four-stars and was trading at a price-to-fair value ratio of 0.78 as at 30 April.

Another no moat company, MUFG is regarded by Morningstar analysts as holding four-stars and a price-to-fair value ratio of 0.81.

BCIA holds a narrow moat, four-stars and an appealing price-to-fair value ratio of 0.72.

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Glenn Freeman is senior editor, Morningstar Australia.

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