AMP Limited (AMP) Earnings Call Transcript & Summary

Good morning, and welcome to AMP's Virtual Half Year 2020 Results Briefing. My name is Howard Marks, and I'm Director of Investor Relations. To my left sits CEO, Francesco De Ferrari; and CFO, James Georgeson, who will take you through the presentation. Thereafter, we will have time for questions. If we're ready, Francesco, can we begin?

Well, thank you, Howard, and welcome, everyone. Let me start by saying I hope you're all doing well and staying safe in these challenging circumstances. We have a lot to cover, so let me jump straight to the agenda. So today, we're going to cover 4 key topics. I'll start with a brief introduction and then hand over to James to cover our first half results. And then I'll walk you through the tangible progress we've made against our strategic agenda. And finally, I'll take you through an exciting opportunity we have ahead as we pivot our AMP Capital business for our next phase of growth. So let me start with a brief introduction on Slide 4. The results of the first half reflect the volatile environment in which we're operating. Being honest, nobody could have really predicted where we are today. Our immediate response in this crisis has been to prioritize our clients, our employees and to maintain the operational sustainability of our business. And while COVID has impacted our first half results, it has not distracted us from executing on our core strategic priorities and commitments we made to the market in February. In particular, we've executed the Life sale. We've continued to drive the transformation of Australian Wealth Management, and we've excitedly laid the foundation for the next phase of growth of our asset management business. Also, I'm pleased to be announcing that we'll be returning up to $544 million to our shareholders through 2 mechanisms: $344 million through a $0.10 fully franked special dividend and up to $200 million in a share buyback program, and James will take you through the detail as he discusses return on capital in a moment. I also wanted to give you a sense of the context in which we've been operating on Slide 5. Clearly, the short-term has been challenged as we've navigated through a difficult first and now second wave of COVID. The pandemic is clearly a fundamental economic and policy disruption event. But while acknowledging the short-term challenges on performance, this crisis, as any crisis, is also presenting interesting opportunities and market shifts, such as the opportunity that we have to reengage on the importance of financial advice and an imperative for it to be affordable and accessible to all. We've also seen an interesting trend of consolidation in wealth management, in which I believe AMP will be uniquely positioned with our differentiated whole-of-wealth setup. And in this market environment of low interest rates and extraordinary government stimulus represents a very favorable backdrop for infrastructure and for real assets. Before I hand over to James, I'd like to reiterate our focus on supporting our clients, our people and the wider community because I believe it's imperative that we remember what AMP stands for and why we're here, whether that is helping clients servicing their mortgage, providing early access to superannuation quickly and efficiently or just by simply being there in these times of hardship. Equally important is our commitment to continuing to support our employees who, I must say, have adjusted extremely well to this new normal, continuing to deliver for our clients while over 95% working remotely. On balance, I am very pleased with the progress in this first half. And let me pass over to James to take you through the first half results. James?

Good morning, all, and thank you, Francesco. We're reporting our results today against the backdrop of what is a very difficult period of market volatility and economic uncertainty as a result of COVID-19. Pleasingly, we have delivered on a number of strategic initiatives in the half and are making good progress on our previously announced transformation strategy. However, overall earnings are down period-on-period. You can see on Slide 8 a summary of the COVID impacts across the business. On Slide 9, we show the half year profit summary where BU earnings are down 37% to $199 million, and underlying profit is down 42% to $149 million. This is at the top of our guided range we provided on the 31st of July. The fall in earnings was largely driven by the impacts of investment market volatility, bank loan loss provisioning and the impacts of lower transaction fees and seed and sponsor valuations in AMP Capital. Our bottom line result includes the final results for AMP Life, the accounting gain on sale and the recognition of all the remaining Life separation costs. Moving to a summary of the business unit performance on Slide 10. In our Australian Wealth Management business, in the face of significant market volatility, we remain focused on supporting our clients, simplifying our product offering and continuing to reshape the advice network. We also passed on significant pricing benefits to clients. Operating earnings of $59 million for the half reduced substantially period-on-period largely due to the lower average AUM, the Protecting Your Super legislation changes and the impact of previously announced pricing changes. In total, these were a $75 million impact. Given the recent market falls, average AUM balances were down approximately 6% from the second half of 2019. Pleasingly, AMP's flagship North platform continues to perform well with net cash inflows of $2 billion for the half, up 52% on 1H '19. The strong performance included inflows of $700 million from external financial advisers, which has been a particular focus of the business. At a total level, net cash outflows were $4.4 billion in the half against $3.1 billion of net cash outflows in 1H '19. However, the 1H '20 results includes $1.3 billion of outflows from lost corporate super mandates and $900 million from the early release of super payments. So adjusting for these one-off impacts, underlying cash flow performance has improved period-on-period. Total revenue margins declined to 75 basis points, a 10 basis points fall from 1H '19 and a 4 basis points fall from 2019. The movement from 1H '19 reflects product mix and volume changes of approximately 5 basis points, the PYS legislation impacts of 3 basis points and previously announced pricing changes of approximately 2 basis points. We expect revenue margins to decrease by approximately 9 basis points across full year '20. Costs for the half were flat against 1H '19 and 9% better than the second half of last year. This largely reflects the impacts of the cost savings offset by additional frontline costs to support clients through COVID-19, including the administration of early release of super payments. Moving to AMP Bank, which has performed well in a period of significant challenge for the sector. Mortgage lending grew in the first half despite a slowing housing market with our mortgage book growing by 4% to $20.5 billion. Deposits grew strongly, increasing $2.6 billion in the half, and costs were also favorable, 4% lower period-on-period. However, operating earnings of $50 million were down 30% following the recognition of $24 million of after-tax additional loan loss provisions, reflecting the challenging environment. Whilst there's been a small increase in arrears rates, the increase in the loan loss provision primarily reflects the worsening external macroeconomic outlook. The provision consider the current economic outlook across a number of recovery scenarios, along with the uncertainty of a potential second outbreak. NIM reduced 5 basis points from the second half of last year to 163, reflecting intense competition as well as higher funding costs. We expect these conditions to persist into the second half. Turning to Slide 11. AMP Capital results were also down with 1H '20 earnings of $72 million, a reduction of 40% period-on-period mainly from lower performance and transaction fees and unrealized seed and sponsor valuations. Pleasingly, AUM-based management fees were reasonably resilient in the half as average AUM remained just shy of $200 billion as market falls are broadly offset by the investment of committed capital. Accordingly, external cash flows in the half was strong at $2.6 billion, reflecting the investment of the committed capital. However, performance and transaction fees are a large reduction as one-off gains in the prior period were not repeated and COVID-related impacts affecting underlying exposures to international airports. Partially offsetting this decline were the receipt of performance fees for the first time on closed-end infrastructure funds. Seed and sponsor income was also impacted with a loss of $16 million for the half, reflecting unrealized revaluation impacts on the underlying assets versus a gain of $15 million in the prior period. Non-AUM-based fees increased significantly in the half, reflecting infrastructure and real estate commitment fees, which increased $14 million to $62 million. Controllable costs were up 6%, reflecting the higher staff numbers as we grow our geographic spread and distribution capabilities along with additional regulatory and compliance costs. Whilst this period was impacted by subdued performance fees in a period of significant market volatility, AMP Capital is well placed to take advantage of future market opportunities, including $5.7 billion of committed capital yet to be deployed. New Zealand Wealth Management's performance was down period-on-period as AUM levels fell from both market volatility and the closure of 2 legacy wealth management products. In addition, cost-sharing arrangements with AMP Life ceased, which also had a small negative impact. Turning to controllable costs on Slide 12. This chart outlines the controllable costs movements in the half, which shows an 18% decrease. Adjusting for the removal of AMP Life, costs are up 1% on 1H '19. If not for the one-off COVID-related items, controllable costs would have reduced half-on-half. The key movements in the half include $40 million of cost out achieved and $10 million from lower project investment spend as a result of COVID delaying the pace of spend. This has been offset by $20 million from increased regulatory compliance and insurance-related costs; $25 million from CPI and other cost increases; and a one-off $10 million impact from COVID, including additional client servicing costs and technology infrastructure investments to support remote working. The combination of additional COVID-related costs and a focus on the AMP Life sale has meant the pace of our cost-out program is behind initial plans for the first half. However, we've refocused on the cost out work post the AMP Life sale and are committed to delivering $300 million of gross run rate savings by the end of full year '22. Given the one-off COVID impacts, the slower cost out and expected ramp-up in transformation in the second half, full year '20 controllable costs are expected to be approximately $850 million. Turning to Slide 13, which shows the key items outside business unit results. Overall, we are making good progress on the various programs we have underway despite COVID. Key items of note include the completion of the AMP Life sale in 1H '20, which resulted in an after-tax gain of $298 million. $208 million of separation costs for the half includes the bring forward of all the residual project -- program costs as required under accounting standards. This brings total separation costs to $410 million. No further costs are expected to be incurred in relation to the AMP Life sale. The risk management, governance and controls program continued with $14 million incurred in the half. The program is expected to be complete by the end of the year. Transformation cost out spending of $13 million relates to realizing cost improvements and program-related costs. The spend in 1H '20 was lower than expected as previously described. However, we expect this to ramp up in the second half. Further, impairments of $32 million were recognized in the half as expected given the continuing advice network reshape activities. On Slide 14, we show the latest position on our client remediation program. Pleasingly, significant progress has been made since December with the program now 45% complete, and we expect to be 80% complete by the end of this year. We're confident the overall program will conclude on time in 2021. The only change to the provision was for lost earnings of $15 million, which are recognized at each period end. There have been no other changes to the overall program estimates in the half. We continue to make good progress with the individual elements of the program at varying stages of completion and are shown on this slide. As previously disclosed, no insurance recoveries have yet been recognized, and we're continuing to progress all recovery options. Turning to Slide 15. We've set out a summary of the $298 million gain on the sale of AMP Life. As announced at the 1H '19 results, the revised deal comprised cash consideration of $2.5 billion with a $500 million residual investment in the Resolution Life holding company. As part of completion, a number of purchase price adjustments were recognized, the main one of these being approximately $90 million of additional capital that was required to be injected into AMP Life following best estimate assumption changes at 30 June in relation to COVID impacts. The impact of these changes absorbed all the capital surpluses built up in AMP Life. And as a result, under the sale agreement, the AMP Group was required to contribute a portion of the additional capital required to be held by AMP Life. Accounting adjustments of $16 million relate to the bring forward of stranded costs for IT and rental charges and provisions for potential warranty and indemnity claims offset by foreign currency translation reserve recycling. On Slide 16, we show the capital position as at 30th of June and our revised capital management framework. Based on the revised framework, as at the 30th of June, eligible capital is $3.4 billion, $1.4 billion above our target capital level. The revised framework targets a certain level of capital to ensure our overall position preserves the financial strength of the group in stressed scenarios. Accordingly, the target capital level comprises of 2 key components, being the minimum regulatory requirements and the Board buffer. The minimum regulatory requirements are determined by the stand-alone requirements for each of the operating businesses and are outlined on the slide. This totals approximately $1.25 billion at 30th of June. The Board buffer seeks to provide additional capital for operational market and product-related risks across each business. This totals approximately $730 million at the 30th of June. The revised framework moves away from the previous framework, which was heavily influenced by the requirements of the life insurance capital standards, which were applied to a large proportion of the capital base. The 30th of June capital position does not include the $500 million investment in Resolution Life as this is not eligible capital under the relevant standards. Further details on the allocation split by business line can be found in our Investor Report disclosures. Slide 17 show -- on Slide 17, we show the capital movements in the half to 30th of June and the impact of the capital management initiatives we have announced today. Surplus capital is in a strong position following the sale of AMP Life. And as at the 30th of June, we have $1.4 billion of surplus capital to our target requirements. Over the half, surplus capital has increased by $899 million, predominantly from the impact of the sale of AMP Life. Movements over the period also reflect underlying profit net or below the line costs, market impacts and BU capital usage. Today, we're announcing the repurchase of MUTB's 15% stake in AMP Capital, which will have a $400 million capital impact. This will allow AMP to accelerate the growth of this business and is expected to be accretive to earnings. The transaction will complete in Q3, subject to regulatory approvals. Following the completion of the repurchase of MUTB's 15% stake, the 30 June pro forma capital surplus is approximately $1 billion. Of this, up to $544 million will be returned to shareholders through a fully franked special dividend of $344 million and an on-market share buyback of up to $200 million. This combination was chosen as it strikes a balance between getting cash back in the hands of shareholders, deploying capital in an accretive manner and distributing surplus franking credits. The remaining capital will be used to invest in the transformation strategy over the next 2 years and continuing to support the growth in AMP Capital and AMP Bank. The size of the capital initiatives and residual surplus capital have been made in light of the current market backdrop and uncertain economic outlook. This is in line with our revised capital management framework whereby we hold capital to protect the group in stressed scenarios, such as the current market conditions. Finally, the Board does not expect to declare a final dividend for the remainder of 2020. So recapping on the 1H '20 results. The half saw an unprecedented environment with significant market volatility and challenging conditions impacting all of our business units. This impacted AUM-based revenue in Australian Wealth Management and performance and transaction fees in AMP Capital. Loan loss provisions impacted the AMP Bank result, reflecting the external macroeconomic environment. However, we delivered a critical milestone of the strategy with the sale of AMP Life and are today announcing up to $544 million return of capital to shareholders through a special dividend and on market share buyback. Our client remediation program has now reached scale, and we've made significant progress. We expect to be 80% complete by the end of this year, and we're continuing to invest in the 3-year transformational strategy. I'll now hand back to Francesco, who will update you on the progress we're making on delivery of the strategy.

So thank you, James. So while it's clear, as you've heard from James, that our first half results have been impacted by the market conditions, I'm really pleased with the execution momentum we're generating. And so before I go into the progress of our delivery, let me take a step back and anchor on the foundations of our 3-year strategy. Now that we've landed our go-forward portfolio of businesses on Slide 19, the current composition ensures that we have a well-diversified portfolio with significant opportunity to capitalize on market disruption both domestically and internationally. For me, it is essential that in this environment especially, our strategy remains dynamic and adaptable. And I'm confident we are well placed to take advantage of the significant revenue pools in the markets in which we're playing. There's a lot on this slide, so I'm not going to talk to everything, but let me call out a few examples. In Australia, as I've said before, we have a uniquely positioned wealth manager that is able to address the increasing advice gap and the need for most sophisticated retirement solutions, the consolidation playing out in the superannuation industry and as a client-centric whole-of-wealth proposition underpinned by our highly efficient digital bank. In AMP Capital, we have a new management team in place and an exciting strategy that leverages our leading infrastructure capabilities and positions us really well for the next phase of growth horizon. And we have a leading wealth management business in New Zealand and strong strategic partnerships with China Life, Resolution Life and PCCP that provide the group with access to diversified revenue pools. Moving to Slide 20. As part of our 3-year strategy, in February, I committed to deliver a set of 10 strategic objectives over the course of 2020. I'm happy to report that even in the current challenged environment, we have made material execution to deliver against most of our milestones, and we've already hit our full year commitment for 3 of them. Let me assure you that our teams are working incredibly hard. And while we have significant more work to do in the second half, I remain committed to execute each element of our strategic agenda. Let me now take you through them one by one, starting with the objective to simplify our portfolio of businesses on Slide 22. I'm extremely proud of the effort our teams have put in to execute the sale of our Life business. As we've seen from other transactions, divestment of life insurance companies are extremely complex even in normal conditions. And we have delivered one of the largest successor fund transfers in Australian history while facing into a COVID lockdown. I must say that's been really impressive. In parallel, we've also explored the possibility of divesting our New Zealand business. But in order to maximize value for shareholders, we've decided to retain and grow the business as we announced in our AGM in May. You've heard me say this before, our New Zealand Wealth Management business is a leading market franchise, which delivers a really compelling return on capital. Moving to our Australian Wealth Management business and our update on our 4 key objectives, starting on Slide 24. We've made tangible progress to reinvent our advice business. We've completed the first phase of our network reshape. We've commenced the transition to -- of clients to annual agreements, and we're successfully piloting our ClientHUB tech platform. We've also removed the majority of grandfathered commissions ahead of legislation. And as you've heard from James, we remain on track to complete our client remediation efforts. Reshaping the advice business brings with it significant challenges, which we're facing into in partnership with our advisers. And while we've made material steps forward, we still have more work to do. Moving to Slide 25. In our superannuation business, as committed, we've successfully completed the first phase of our product rationalization exercise, reducing our Master Trust products from over 70 to 11. And as we continue to reduce the number of products and platforms over the next year, we will start to unlock benefits in terms of cost and reduce operational complexity. We've also been very focused on improving client outcomes in partnership with our independent trustees through more competitive fees and approximately $120 million in annualized benefits coming from the removal of grandfathered commissions. As you see on Slide 26, our flagship North platform business continues to move from strength to strength and has been ranked the most improved platform in the domestic market. This is evidenced through 52% growth in net cash flows and 39% increase in inflows from external financial advisers. North is a scale player in this market, although it doesn't always attract the attention that some of our independent competitors get. We are continuing to invest in our technology and enhancements to ensure that we remain in a market-leading position with a platform that has scale. Looking to the bank on Slide 27. We have made strong progress on the renovation of our core banking platform and continue to invest in digital capability and automation, and we remain on track to deliver this as committed by year-end. I'm also excited to report that after a successful pilot, we're launching our initial whole-of-wealth offer in the second half of 2020, providing direct mortgage offer to our superannuation clients with great benefit for our members. Moving to the group objectives to create a simpler and leaner AMP on Slide 29. We've streamlined the organization, shifting to 3 increasingly end-to-end businesses. On our cost base, we've marginally fallen short of the progress in the first half, as James explained, as we made a conscious trade-off to ensure we continue to deliver for clients amidst the current environment. However, let me be clear that while achievement of this year's target is behind schedule, we remain absolutely committed to hitting our $300 million exit run rate target by 2022. Enhancing our risk management capabilities remains of paramount importance. We've put in place new leadership and an operating model to further improve over our 3 lines of defense capability, and we're on track to complete our 2-year investment program. On culture, we're accelerating our transformation through a series of initiatives, ultimately with the aim of instilling inclusive leadership and driving a performance-based culture in support of our transformation agenda. I acknowledge that today, I've been heavily focused on resetting the operational aspects of our strategy. And while transforming AMP's culture has always been one of my strategic objective, considering recent events, I've committed to our employees that driving cultural transformation will now be my #1 focus in the second half. And I am determined to build a culture that brings out the best in our people, valuing their diversity because only with this, we will deliver superior returns for our shareholders. Moving to AMP Capital. As the Life sale progressed, I turn my mind to the AMP Capital strategy and how to maximize future growth opportunities. The reacquisition of MUTB's 15% stake, which we announced today, provides us the flexibility to do so. AMP Capital has been the growth engine, and as I'll point out today, the majority of this growth has come from private markets. Recognizing this, we're doubling down and using this opportunity to build a leading private markets business globally by leveraging our recognized strength in real assets and expanding into adjacent markets. We'll also refocus our public markets business to better support and align with our strategic partners and explore opportunities to translate the strong investment performance into growth. Turning to Slide 33. The repositioning of our business recognizes the strength in past performance. In private markets, we've delivered an exceptional 19% annualized revenue growth off the strength of our infrastructure equity and debt closed-end fund series and the solid performance in our domestic real estate business. Our public markets business has pockets of really strong performance across selected asset classes and capabilities, but has not been immune to the broader macro trends of margin compression and shift to passive that we've seen around the world. As I've already mentioned, our strategic refocusing towards private markets is supported by a very favorable market environment and the persistence of growth trends we've seen over the last few years. I fundamentally believe that the current disruption represents a once in a generation opportunity for fundraising in private markets. As you'll see on Slide 35, we have a proud heritage in real assets, and so we're building off an established platform. It's a platform that's been able to build scalable strategies, develop significant sector expertise and thought leadership and deliver investment value-add for the benefit of our trusted client base. The foundation on which we are building the next phase of growth is a very solid one. It's one of being a top 5 player globally in both infrastructure debt and infrastructure equity and a top 5 player in Australia and New Zealand in real estate. And this has been underpinned by landmark fundraises in Q4 of last year. So what does our road map for growth look like? This is detailed on Slide 36. In infrastructure, it's all about scaling our flagship equity and debt fund series through larger successor funds and increasing penetration of emerging markets. In real estate, our focus will be to take the business global, building on our leading domestic presence and expanding our product offering. Beyond this, we intend to expand into larger segments of private equity and private credit with adjacent strategies and solutions that capitalize on the current market dislocation and global forces of disruption and focusing on the sectors where we've built considerable expertise. It's clear that institutional investors are looking for managers with integrated offerings and a track record of capital deployment. So harnessing our strengths will allow us to continue to innovate and better meet the needs of our clients with a broader and more integrated platform. Moving to Slide 37. As part of the strategy, we'll be refocusing our public markets business to more closely align and deliver to the objective of our clients and strategic partners. Our public markets business comprises both a global equities and fixed income business and a multi-asset group business. Let me start with GEFI. The business is delivering compelling investment performance with 99% of funds under management outperforming benchmarks for the last 3 years. Looking forward, we're exploring opportunities to translate this track record into faster growth. Our multi-asset business, MAG, is a key partner to our retail wealth management businesses, providing multi-asset and multi-manager capabilities. We aim to more closely align MAG with AMP Australia to enhance client outcomes by providing the wealth management business greater control over investment operations and manager selection and coordinating simplification activity across the superannuation value chain. Underpin our strategic ambition is the delivery of 2 core enablers on Slide 38. First, building a distribution powerhouse. Successful private market businesses are fundraising machines. There is a significant opportunity for us to deepen the relationships we have with our existing clients with a broader range of private market solutions and thought leadership. To drive this, we've reorganized the leadership structure with the following 3 themes: expanding global representation of our senior executives, driving client centricity and recognizing the strength and commitment to our domestic franchise. Pleasingly, Boe has the go-forward team already in place and is moving at speed in the implementation of the strategy. The second key enabler is ensuring AMP Capital remains an ultimate destination for talent. By this, I mean, not only the ability to retain, but also attract some of the world's best talent. Our clients invest for the long-term and expect that their interest be in full alignment with the investment teams. Having listened to our clients, we're working towards the implementation of management equity to actively drive growth, ensure global competitiveness and closely align the interest of clients, management and our shareholders. And so in summary, we've seen today a challenging set of first half results, which have applied across the industry. And following the successful completion of the Life transaction, we're returning almost $550 million to shareholders. We're 12 months into our multiyear strategy to transform the business, and we're hitting our 2020 objectives and generate execution confidence and execution momentum. So overall, this leaves me extremely confident on our ability to deliver on our strategic agenda, capitalize on the market disruption in front of us and ultimately build a business that our clients and shareholders can be proud of. So Howard, over to you for Q&A. Thank you.

Thank you, Francesco. So we have a number of questions queued up, so we'll begin shortly. [Operator Instructions] If we're ready, we can begin. I think Simon Fitzgerald should begin.

I'll keep them really brief. Just on the capital effect of the AMP Life sale. On the slide that you talked about the gain on the sale, I do recall that the effect previously was discussed as $1.1 billion. Now you've talked about some price adjustments there of $87 million, the accounting adjustments of $16 million, the tax benefit of $19 million. That still gets me to slightly over $1 billion. And then if I look at Page 21 of the Investor Report, it talks about a capital impact from the sale of AMP Life of $912 million. Wondering if you could talk about the difference there. Perhaps there's something I've missed.

Thank you, Simon. It's James here. If you go to Page 54 of the presentation slides, we provide a reconciliation here from the original announced transaction proceeds, which starts at the gross cash of $3 billion, deducts the resolution investment and the various items we've always called out around separation costs, repayment of debt and the capital dis-synergies. We were indicating at December a net contribution of about $1.1 billion. We have had the 2 items that I called out, which is the best estimate assumption change, $87 million. And the item below that is what I also called out, which is the provisions sort of for contractual obligations to these onerous contracts and also the potential for indemnities and warranties under the contract. That gets us to $965 million, which is the overall net of the transaction for the life of it. We obviously have incurred some of those separation costs originally and have already consolidated some of the profit. So the net that flows through the capital number is the $912 million, which is shown on the bottom of Slide 54, and that will then reconcile to the Investor Report.

Next question. I think we should have Andrew.

Just 2 quick ones from me, please. The first one on Slide 42. My question is are there risk costs, transformation costs and amortization numbers on top of what you have previously announced? Or are there just more certainty on numbers previously disclosed?

Andrew, yes, there's certainty for the second half, so they replace our previous guidance.

Perfect. Thank you. And then the only other one from me, hopefully, it's an easy one. I'm just trying to reconcile Slide 17 with Slide 53. So on Slide 17, it shows $484 million residual capital surplus. On Slide 53, it says you've got a $1 billion to $1.3 billion transformation program, which has only recently started. Can you just help us understand where the additional funds are now going to come from? What am I missing?

Okay. So the best way to do that, Andrew, is on Slide 53. So if I look down the left-hand side, you've got investing for growth, realizing the cost improvements and derisking the business. And on the far right-hand side, it says where the various items will go. So investing for growth will be effectively embedded in our operating results through controllable costs. So no real incremental spend. It's just we're repurposing the existing project investments across the organization. The realizing the cost improvement, that is additional capital which is effectively the $484 million is using to fund. That's the cost out transformation. We will report that below the line. And the derisking the business, there's 2 components. The first categorization there, which is the Master Trust simplification and regulatory and compliance, those are already in our controllable costs. So that's part of our BU operating earnings. And the last line there has the advice network reshape, which is capital usage. So really, the numbers that impact capital are the last line around the advice network reshape and the register acquisitions and the cost out work. And obviously, we would derive earnings through the next couple of years as we continue to ramp this spend up. So we're pretty comfortable that the surplus of $484 million is enough to fund the new items that I talk about there.

Your next question comes from Laf Sotiriou from Bell Potter Securities.

Can you hear me?

We can, Laf.

All right. Great. I've got a couple of questions, if I may. The first one is in relation to AMP contemporary wealth management and just the margin decline guidance that you flagged of 9 basis points. Just so I understand appropriately, you closed the year 2019 at 82 basis points; first half '20, 75. So there's already been a 7 basis point decline. So you're implying roughly just 2 basis point decline in the second half. And just more broadly, you've called out in the last few years a few factors that have contributed to the overall margin repricing of the book. Are you able to give a little bit of color as to whether most of that's now captured or done or -- and how it looks going out in the next few years?

Thanks, Laf. The 9 basis points is coming off the 82, as you say. So that sort of gets us to sort of like the low 70s, 72, 73 for this year. And then your broader question on go forward, we're expecting sort of further compression in 2021 as we complete the simplification road map around collapsing the products. As we collapse all those products, we will need to align the pricing in some of them to the more contemporary offers. So we do expect there'll be some further margin compression from simplification through 2021 as well as the normal mix and volume changes. So we'll see another period of that in 2021.

Your next question comes from Matt Dunger from Bank of America.

If I can ask on the adviser numbers, down about 21%. Can you talk to the outlook for adviser numbers? And to what extent are the adviser exits driving the outflows that we're seeing?

Maybe I can take that, James. It's clear that the advice industry has been disrupted. This is not just through FOFA. We've seen sort of the removal of grandfathered commissions, the legislation around annual agreements, the FASEA standards. My experience, having gone through disruptions like this before, is that roughly 30% of the advice -- the advisers really find it challenging to run a sustainable and profitable business. We partner with our advisers looking at how we would reshape the advice network, and we're really focusing on compliant professional advice practices that are sustainable. We have not put a number to what good looks like in terms of outcome. But anybody who fits our criteria, we were absolutely happy to partner with. My experience has been as you go through these restructurings is that while, like I said, 30% potentially don't make it out the other side, the practices that do tend to be a lot more profitable. And so we are working through this. This does not really materially impact our outflows. As you would have seen, we've disclosed sort of the average asset per adviser, and these would tend to be normally, on average, pretty marginal practices. Right, James?

Yes. That's right.

Your next question comes from Andrei Stadnik from Morgan Stanley.

I wanted to ask my first question on the circa $700 million excess Board buffer that you're targeting. The key driver for the group now is the bank. And so we're aware what the major regional banks are running in terms of their buffers. It's just it varies from the fraction of what AMP is running with. So what is driving maybe such a big Board buffer at the moment?

Thank you, Andrei. I'll take that question. On Page 21 of our Investor Report disclosures, we sort of showed the split of the $730 million Board buffer. I guess the minimum regulatory requirements are generally the sort of, as we say, the minimum regulatory. You can see, of the $730 million, there's about $230 million in the wealth business. That really relates to the operating risk allowances that we make in relation to some of the advice risks we carry. In the bank, I think you're pretty clear, we hold $170 million of Board buffer there for, I guess, being above the required CET1 levels. In AMP Capital, the minimum regulatory requirement is very small. It's really just an AFSL requirement of about $40 million. So really, that covers the breadth of the international operations and more sort of operating risk. Same with New Zealand Wealth Management. There's almost no capital requirement in our New Zealand business. So we hold a $50 million buffer there for operating risks. And in the group, similarly, we hold a small buffer there for operating risks as well as our DB funds. So they are defined benefits superannuation funds for the staff schemes. So really, when you look at it by business unit, I think that, that helps sort of understand the makeup and the sort of why the $700 million is about the right level.

And our bank currently has a CET1 ratio of 10.5%. We think that compares well to the market average. And we actually have a fantastic bank because -- let me highlight some of the other KPI. I mean we have taken our deposit to loan ratio to 81%. We think that's a lot more sustainable way of funding the growth in our bank. We have a cost-to-income ratio of 33%. Not having branches these days is a big advantage to be able to deliver to clients directly. And so -- but in any client business, it is important, especially in banking, that we do keep a healthy capital buffer.

And I wanted to ask a second question around AMP Capital, and you flagged you'd like to offer management equity stakes or line interest. Could that lead to the cost-to-income ratio arising over the current 60% to 65% target range in the medium term?

So our cost-to-income ratio for AMP Capital, as we signaled, is probably going to be slightly above the market range in this year just because of the impact of COVID, which as we've said has been transaction and performance fees. There's also, given the extent at which increasingly we are running a closed-end fund business, we have unrealized losses from the revaluation of some of those assets. And so that's what impacts the cost-to-income ratio. When we are discussing management equity, it's really about what the best players in the market do, the ones who are really doing significant fundraising, and that's driven by the demand of the highly sophisticated institutional clients in these markets to have full alignment.

Your next question is from Nigel Pittaway from Citi.

Just first of all, on AMP Capital, can you maybe give us some color as to how you've come up with the sort of $2.7 billion valuation for AMP Capital as implied by 15% costing $400 million?

Thank you, Nigel. Look, when we look to re-pivot the AMP Capital strategy, we looked at our 15% stake in MUTB -- or MUTB's 15% stake in AMP Capital, and we looked at sort of some of their movements in the market over the last 18 months or so as they bought the CFS business. We thought it was sort of the right time to have sort of focus on our own strategy and for them to focus on their strategy. In terms of the valuation, when they came into AMP Capital back in 2011, 2012, the mechanism was broadly agreed as to the price of exit, if that was to arise, which was broadly, I guess, the broker valuations that are occurring in the market. And so the price is set sort of in relation to that. So it's not as much of a buildup of the broad-based valuation. It's more -- was a contractually agreed mechanism at the start of the agreement.

Okay. Understood. And then in terms of the sort of contract there to run the assets that are now sort of transferred to Resolution, the investment management of those assets, can you just sort of comment as to how long that runs for and when it's up for renewal and where you are with that, please?

So I'm happy to take that, Nigel. And just to your question before, I mean, for us, it was critical to have strategic control of 100% of our fastest-growing business. And we thought it was absolutely in the interest of shareholders to be able to do that because we have a number of key decisions that we need to take, and we have a really exciting growth path ahead. And so being in control and not having a minority shareholder that owns sort of a competitor was the right way forward. In terms of the investment management agreements, AMP Capital has strong partnership agreements both with AMPA as well as our partners in Resolution Life and the business in New Zealand amongst also other institutional clients. Clearly, the clients that were, I would say, more internal are more embedded in the ecosystem. But we regularly benchmark these contracts, the fees and the service levels because that's what's required by regulation. And so we continue to do that to ensure that we offer these services at a competitive and arm's length basis. So in short, we will continue, like we do every other client, to keep their trust as long as we deliver the performance to market standards.

Your next question comes from Brett Le Mesurier from Shaw and Partners.

A couple of questions. It appears that there's only $83 million of debt included in the surplus capital of $1.428 billion at 30 June. Is that correct? There's no debt that's used to reduce the MRR, which is what used to be the case?

That's right, Brett. There's $83 million of sub debt which is eligible Level 3 capital. That's shown on Page 21 of the Investor Report. We did used to use more of the AT1, AT2 instruments very much in the Life company. But obviously, sale of AMP Life means that most of them are no longer eligible for Level 3 capital, and that's one of the reasons we'll see the debt buyback or paydown that we've disclosed and talked about previously as part of the transaction. So we obviously have surplus instruments in that regard.

So some of the existing corporate debt, that will also be retired sooner than the maturity date, I guess?

That's the plan. We obviously had -- the maturity date allows us, obviously, to repay them as planned. We're also looking to sort of see where we could buy back some of those, but we'll look at -- sort of see where the market conditions are and then the pricing of those are over the next sort of 6 months or so.

Okay. Moving back to the revenue margin in Australian Wealth Management. North is the only product that's getting inflows, and you've got a revenue margin of 50 basis points on that compared to what you're going to get in the second half for the division as a whole is slightly more than 70. Presumably, that revenue margin actually ends up at 50, the one for the division as a whole. As you said, you were repricing those other products down to something that was more similar with what current products -- current product pricing is. And of course, North is at 50. So [ doesn't ] the 70 -- the low 70s actually become 50 ultimately, assuming the 50 doesn't decline further?

So Brett, the way we -- the way the North margin is slightly different to the way the Master Trust margin emerges, so the 50 basis points on North really is just the product and platform margin. Whereas in the retail Super and Master Trust products, it also includes investment management margin. So we wouldn't expect the net business to trend towards an overall 50. We would expect it to be higher than that.

Right. So what is your expectation?

I guess I'm not going to get drawn on multiyear margin trajectory. But look, I think we will see -- as I said in my comments into Laf's question earlier, we will see some margin compression again in 2021 from the simplification, which is really bringing the products through to a smaller set of products, which means we will have to take some further hits, and we do expect the pricing and so the mix and volume impacts to still come through. So we do expect some more margin compression, but it definitely won't approach 50 from what we can see today.

Your next question comes from Shaun Ler from Morningstar.

I just got very -- some very quick questions on AMP Capital. Now I know that you guys have talked a lot about the future strategy on AMP Capital. I was just wondering, is there a niche space that you choose to compete that doesn't cross over to Brookfield, Macquarie or EQT? Because I'm just trying to work out how sustainable the margins are. How would you describe the real estate investment space? Is it like an even level playing field where you can grow alongside of the market? Or is it a place where everyone just tries to outbid each other?

Sorry, I'm not sure I really heard the last part of the question. Can you please repeat it, Shaun?

Yes. No, I was just trying to get your view on how would you describe the real asset investment space. Like is it an even level playing field? Or is it like a very competitive environment where everyone just tries to, I guess, outbid each other on projects?

Thank you. This gives me the opportunity to effectively have Boe speak. So Boe, why don't I let you illustrate some of the exciting opportunities we have ahead?

Thank you, Francesco, and thank you for the question. You're right. It is a level playing field. It's a level playing field if you are a top 10 player or a top 20 player. So let me give you some stats around that. So around 55% or as much as 60% of the fundraising that happens on an annual basis in the infrastructure and real assets area go to the top 10 players. And the rest, and there are about 300 players, are now fighting over the other 45% or 40%. So we are already in the top 10 in infrastructure equity and debt, as Francesco mentioned. That puts us in a very strong position. Now if we combine that with our domestic real estate business, which is, again, one of the top businesses in Australia, being top 5, we combine that and build an integrated private markets business. We're in an excellent position to be able to capture that sort of wallet that goes to the large-scale players. And let me explain why it goes to large-scale players. In what I've learned, what I've seen over the last 10 years of working with AMP Capital, particularly infrastructure business as well as in other businesses and markets, is the following. Clients today are not just looking for investment performance and client experience, which are, of course, absolute cornerstones of their decision making, but they're also looking for the velocity of deployment of capital. Why is that? Because if you think about the macro environment we're in, we need -- pension funds and institutional clients are looking for yield. And low interest rate environments, which will now continue given the QE that we've got, will mean that, that need will be further exacerbated. So large pools of capital are looking to be deployed. So if you have a capability and you are best-in-class and you are global, then you have the best chance of demonstrating the velocity of deployment of capital. And that's why that concentration is happening towards the top 10. We're in a very good position to be able to capture that opportunity with our clients.

All right. I just got a next question, just one final question on AMP Bank. I was just wondering if you wouldn't mind giving more color around the, I guess, the internal assumptions that were baked into your provisions. Could you perhaps elaborate more on what component of the loan book do you expect to be in stress and also how much is attributed to practice financing?

Okay. Let me answer that one, Shaun. So in terms of practice finance loans, we took a very significant provision last year in relation to that and post the Royal Commission as well as the BOLR term changes. So almost a very negligible proportion of the loan loss provision recognized this half relates to practice finance. In terms of the broader credit loss provisions in the residential book, we -- in terms of the pausing of deferral of repayments, we have about 10% or 11% of our book in pause, which is very much in line with the market. We have -- that's about 4,700 clients and about $2.5 billion of our $20 billion portfolio. We have been calling -- proactively calling the higher risk clients, which we would suggest is maybe 20% of that portfolio, and we're getting pretty -- we're pretty happy with the feedback from them and they feel, in the majority of cases, they're in a good position to restart payments over the coming months. So the provisions we've taken, we think, are a good balance of, I guess, of managing what we can see as the outlook for the bank. That being said, the conditions sort of globally, and clearly in Victoria, continue -- we continue to monitor those carefully. And if there was any further sort of material changes in the economic outlook, that would obviously cause for us to pause and look at our provisions as it would for most of us in this sector.

I think, Shaun, it's also fair to say that we have a much higher proportion of owner occupied. So our mortgage book would tend to look -- is probably on the safer side of the risk spectrum generally.

Your next question is a follow-up from Laf Sotiriou from Bell Potter Securities.

Just one quick follow-up question. Are you able to provide a little bit of color on the China Life Pension Company? I noticed that in the investment income for the group level, it jumped from $24 million to $39 million. And in the commentary you called out, it was driven by China Life Pension Company. Are you able to give us an idea as to how that business is going and what the overall level of contribution is from that business?

So Laf, we would love to provide more information. Obviously, our partner is a listed company in China, and so they're generally reluctant in letting us to release much information at all. What I can say is that the AUM growth that they've had over the last 6 months and, in particular, the last really 2 to 3 years is still very, very significant. The big change that they've had there in the last 18 months is what's called occupational pensions, which is effectively the version of corporate super in our markets, so mandated funds for employees. And so they've sort of started to roll that out across all of the government sort of provinces. I mean China Life has been the #1 selected, I think, in something like 32 of the 35 provinces. And so we're starting to see that AUM come into the market. So that's obviously the contribution levels of employees. And so they're starting to really ramp that up. So I guess the results that we're seeing that's driving the underlying investment income is, I guess, the profits that they're making as they grow their AUM quite significantly. Clearly, they're in a growth phase, so they are reinvesting some of those profits in growing their distribution and growing their overall risk and other capabilities. But it's really underpinning that very strong AUM growth in that occupational pensions market.

But Laf, I mean, you raise a good point. If I look on Slide 19 and how I've tried to articulate how the group looks like, while we're confident that we have the really businesses that are very well positioned, you would see on the right, we have sort of a box called strategic partnerships. We are aware that we have quite a bit of capital in these partnerships, and we're very committed to providing more transparency. We need to work with our respective partners there because as James said, a number of them are listed companies. So we'll continue to work on that, and hopefully, we'll improve the level of disclosure.

Your next question comes from Matt Dunger from Bank of America.

I just wondered if I could ask a follow-up question on the transformation program. Will this be extended to AMP Capital now that you've bought 100% of it? And also, now that you're retaining the New Zealand wealth business, is there any further need for reinvestment in that business?

Matt, let me take the one on New Zealand and maybe, Francesco, you can comment on the one on AMP Capital. So in New Zealand, Blair and the team have been, I guess, simplifying that business for a couple of years now and including the separation from AMP Life. And actually, New Zealand is much more segregated and separate from AMP Life with very little extra work to do. We still have a fair bit of work to do here in Australia, separating the technology platforms and other things like that. There will be some small reinvestment needed to -- in New Zealand. They're continuing to build their digital capability. We're also looking to sort of see how they would sort of acquire other books of business in that market. It's reasonably immaterial at a group level. And as Francesco said, look, the business has got a very good return on equity, sort of north of 20%. So -- but we will look to be making some small strategic investments there.

Yes. And so the plan that we have and the numbers that we have really consider the group without AMP Capital. We're now working with Boe and the team through what does a 3- to 5-year strategy look like, what are the numbers. And so we will come back at the end of the year when we go through our normal strategic planning process. Some of the businesses there are obviously working on -- have really positive momentum. Some of them are slightly more challenged. The one part of AMP Capital that is included in the numbers is the look-through of the superannuation value chain and the simplification of our sort of Master Trust product architecture. But in terms of the rest, we will work through with Boe and team and come back at the end of the year.

Thank you. Are there any other questions coming from the phones? In that case, it doesn't look like that is the case. I would like to bring this briefing to a close. If you do have any questions as the day wears on, please, either call myself, Howard Marks or my colleague, Michael Vercoe, and we'll be happy to help. Thanks a lot.

Thank you.