IOOF’s plunging profits are an isolated occurrence and the royal commission has not impacted its ability to attract funds or advisers, according to Morningstar.
IOOF’s profit plummeted 39 per cent from the previous year at their half-year result. But Morningstar blamed the loss on the acquisition of the ANZ pensions and investment (P&I) business and said that it will soon bounce back.
“The first-half fiscal 2020 result is an anomaly and doesn’t reflect the group’s earnings power from acquiring the P&I,” Morningstar said in a note.
“The biggest contributor to the reduction in UNPAT is from the lower interest earned on an $800 million debt note (2 per cent interest compared with the previous 14.4 per cent), which was part of the terms of the P&I agreement.”
Morningstar expects that the P&I business will swell IOOF’s funds under management and administration (FUMA) 50 per cent to about $220 billion. IOOF has also enjoyed continuing net cash inflows when compared with competitors like AMP, who are experiencing substantial outflows, and the business continues to attract advisers.
“Profit improvements are also expected to be generated by making its adviser network of 1,443 salaried and aligned advisers economically viable as stand-alone businesses,” Morningstar wrote.
“A key to this strategy is increasing the number of salaried advisers. Aligned adviser groups will also be required to pay higher fees for IOOF’s administrative services.”
And while the revelations of the royal commission could prompt more class actions and further investigations by regulators, the business has co-operated with APRA and ASIC, which have indicated that they don’t plan to take any further action against IOOF off the back of royal commission referrals.
“Heightened regulatory scrutiny made cost reductions difficult,” Morningstar wrote.
“Although we expect ongoing regulatory scrutiny, the intensity should reduce from the first-half fiscal 2020, as all APRA conditions have now been met.”
However, APRA is also seeking licence condition changes and ASIC is proposing to embed officers within IOOF. Morningstar also slapped a ‘poor’ stewardship rating on the business for the unprecedented action APRA took in seeking to disqualify five of IOOF’s leadership team from being a responsible officer of a superannuation trustee.
The firm said the challenging market environment had impacted its half-year results.
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