IOOF Holdings: Show me the money (for provisions)

Bell Potter

Stockbroker

ANZ Wealth P&I transaction under threat: IFL has released an update on the pending ANZ Wealth P&I acquisition, with some key negatives being the loss of income, and the potential for IFL to require APRA approval prior to deal completion:

  1. IFL notes that if the deal isn’t approved by 5 July 2019, due to recent changes to the Superannuation Industry Act, that APRA may need to approve the deal;
  2. As ANZ has completed its Successor Fund Transfer (splitting the Life and Wealth business), there is a step-down in the Coupon rate ANZ pays to IFL, from 14.4% to 2.0% from 11 May 2019, instead of our previous end of 2019 estimate;
  3. If the deal isn’t completed by 17 October 2019, then either IFL or ANZ may terminate the transaction.

Time no longer appears on IFL’s side. The income being generated is largely lost from the interest rate step down, and there are now clear time catalysts which create risk.

Majors continue to upgrade client provisions, while IFL quite

CBA is the latest to upgrade client remediation costs, moving today for a total Wealth cost/provision of $1.7 billion (pre-tax). Each of the major banks are now above $1 billion in provisions and refunds for Wealth. AMP currently sits at $656m, with its last update on the matter back in February. IFL, incredulously, has only earmarked up to $30m, with all of this just to perform the client file reviews. There is nothing, at this stage, for client refunds and we see this as a major risk and at odds with current industry trends. IFL’s client file review is scheduled to finish by end of September 19.

Earnings revisions

Following IFL’s update, we have downgraded our underlying EPS by -1.4%, -13.3% and -2.9% for FY19, FY20 and FY21 respectively. The earnings revision is driven by changed assumptions around the income payments from the Notes from ANZ. Following the earnings revisions our revised Price Target is $4.39 per share (previously $4.53) with our Sell recommendation remaining unchanged.

pdf attached
IFL 13 May 2019.pdf

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Bell Potter Securities is a leading Australian stockbroking, investment and financial advisory firm that provides a comprehensive offering of financial services to a diversified client base that includes individuals, institutions and corporations.

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