Income Report / Income Report; ANZ result, Lessons from AMP Hybrid, GMA update

By Market Matters 31 October 18

Income Report; ANZ result, Lessons from AMP Hybrid, GMA update

Market Matters Income Report 31st October 2018

The ASX is trading marginally higher this morning coming off a strong session yesterday. Banks in focus following ANZ’s FY18 results this morning (stock +1.44%) while we’ve also seen Corporate Travel (CTD) come back online following a scathing short report from VGI. The stock down -15% currently, however buyers have stepped in on the open to buy weakness.

With a more bullish tone in financial markets, the highly leveraged fund managers are doing well today – Perpetual (PPT) up ~3% a standout while mortgage insurer Genworth (GMA) has added ~1.8% following a trading update.

For the week, the MM Income portfolio fell by -0.91% against a backdrop of the ASX which fell by -0.65%. For the financial year to date, the portfolio is down -1.2%  versus its benchmark of RBA cash rate +4% which sits at +1.82%. Since inception (5th July 2017) the portfolio has added 4.73% versus its benchmark of 7.26%. Weakness amongst the retailers has provided the biggest weight towards returns this FY to date.   


Bank Reporting – ANZ out today with Full Year results

An inline to slightly better full year result from ANZ this morning with the key points as follows;


There was no growth in either income or expenses for ANZ (excluding large one-offs) from 1H18 to 2H18. The bad debt charge was very low, and their capital position was very high with CET 1 at 11.4%. That implies that ANZ has a lot more room for capital management over and above their current $3bn buyback program.

In short – there’s not a lot to get excited about in terms of the ANZ result other than a very strong capital position and more capital management to come. That said, the stock is cheap, as are the rest of the banks.

ANZ Forward PE – cheap


ANZ Bank (ANZ)  Chart

Genworth (GMA) Q3 trading Update

Delivered a trading update today and the headlines were mostly weak, however that’s to be expected. GMA is priced for weak earnings and a deteriorating property market in our view. This is a complicated company and the result needs more attention (which we’ll provide) but for now, a reasonable outcome for GMA today – the stock trading marginally higher on the back of it.

GMA chart packs are always interesting in terms of housing trends. NSW is the blue line leading the charge and importantly the chart puts the recent pullback into perspective.

Total delinquency rates by geography are also important – not just for GMA, but also the banks, retailers and the broader economy. The biggest change in delinquencies yoy can be seen in WA while NSW has come up from a low base.

GMA has been weak of late however we continue to believe a lot of negativity is currently priced in.

Genworth (GMA) Chart

AMP – There’s a lesson here for hybrid holders!

In the past week we’ve seen the AMP share price fall out of bed, down from around $3.30 to $2.31 at close yesterday. While we don’t own AMP stock or hybrids, the share price move has implications for both sets of AMP security holders plus it provides a good case study for the broader hybrid market on a couple of levels. Firstly, AMP have two listed debt securities, the AMPHA which is a subordinated note (safer security) that has first call date coming up on the 17th December 2018, so is shorter dated and is not impacted by the share price decline. This is termed a tier 2 security as it doesn’t add to AMP’s tier 1 regulatory capital.

In simple terms, for a security to be considered tier 1, the capital it provides must be permanent. For the capital to be permanent there needs to be conditions within the security that trigger a conversion into underlying equity / shares thus making the capital permanent. The imbedded trigger events (and there are a couple) have some conditions and the first of them is around the current share price relative to the share price when the hybrid was issued, and this has now come into play for AMP causing the AMPPA to trade down from ~$107 to $101


The price drop in the stock occurred after AMP completed a portfolio review, announced the sale of a heap of assets that would detract from earnings but boost capital while they also delivered a poor trading update. There’s no need to delve into the detail for this note and we simply retain our negative stance on the stock for now (our last update on AMP is HERE), however the drop in the hybrid despite the sale of assets that would actually improve capital and theoretically make AMP ‘less risky’ is the point we’re highlighting.

AMP Chart

Bear with us! In the newer versions of tier 1 bank hybrids (issued after 1st January 2013) there are mandatory conversion conditions.  The first mandatory conversion condition states that the volume weighted average price (VWAP) of AMP shares on the 25th business day immediately preceding (but not including) the relevant distribution date(i) is more than 56% of the issue date VWAP. In simple terms, the AMP share price would need to be $3.24 or higher for AMP to convert, redeem or roll AMPPA into a new security.

Essentially, the share price decline that we’ve seen in AMP now means that the AMPPA are more akin to a perpetual security with no maturity / end date than a capital note with a prescribed time horizon – that makes it a whole different proposition.  

The AMP share price needs to recover back up above $3.24 for holders to have this security either bought back by AMP, converted into equity at $101 or rolled into a new security on the first optional call date of 22 December 2021. Practically however, AMP could issue a redemption notice and roll these securities into a new one, although presumably this would be at a higher margin given the prevailing issues facing the company, plus it would require APRA approval to do so. It’s hard to see APRA standing in the way however it is a possibility.

Why would AMP roll into a new security potentially at a higher rate?  To protect reputation and ensure the hybrid market remained accessible to them for future funding, although worth noting they certainly could leave the security out in the market.  

Thinking more broadly, this is a condition within all new listed tier 1 hybrid securities issued by the banks. The below table looks at the hybrids we hold, the share price at issue date and the level at which the share price needs to remain above;  

Other securities that are closer in terms of share price decline required to fail the first call conversion test is the ANZPF which is 14% above the test given issue date VWAP of $38.18, NABPC is at a similar level while the NABPB is 23% above the trigger given issue date VWAP of $33.86. Worth keeping these levels in mind for holders of those securities.

In terms of risk v reward in general terms, we like hybrids however its simply another example of having a clear understanding of the conditions imbedded in these securities and actively managing them around those conditions.   


-       Banks remains cheap and the result today + share price move in ANZ highlights this

-       The GMA result was okay on first read through

-       We have no interest in AMP or the AMP hybrid

Have a great day!

James, Harry & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 31/10/2018

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