Morningstar casts doubt on AMP’s digital bank plans

AMP Bank is expected to recover slower than expected, according to Morningstar, as the firm plans the launch of a digital bank.

In an analyst note, Morningstar said it expects the profitability of the bank to improve over the long term, supported by the digital bank launch, but net interest margin would still be below 2022 rates in 2027.

“We still expect AMP Bank’s profitability to improve over the long term, with net interest margin improving to about 1.35 per cent by 2027– still below 1.38 per cent in 2022, but above an average of 1.25 per cent from 2023–24. More rational pricing, diversification in funding sources, and ongoing cost-saving measures will likely help improve the bank’s margins.”

Last week, the firm announced it is planning to launch a digital bank for sole traders and small businesses in partnership with UK digital bank Starling. 

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The build will take place over the next 12 months and is expected to launch in the first quarter of 2025 as a mobile app only. This will offer customers transaction accounts, spending insights, debit cards and accounting integration, and it expects to offer term deposits, overdrafts and savings accounts in the future.

While Morningstar acknowledged it will help profitability, it was sceptical that it will boost AMP’s competitive place in the market as the technology is replicable.

“AMP aims to diversify its funding source beyond retail customers, targeting cohorts that it believes: (1) are underserved by the bigger banks; and (2) have greater use of transaction accounts – the cheapest source of funding for a bank. Small/micro businesses typically fall into this cohort. Deposit rates for business customers are also generally lower than those for retail customers.

“Regardless, we do not foresee the digital bank substantially enhancing AMP’s competitive position or generating material revenue synergies. The product targets small or micro businesses, a cohort not typically served by AMP’s advisers. 

“Unlike other firms that complement their digital bank with other offerings, such as [payment provider] Tyro with merchant acquiring or Judo with business lending, AMP’s digital bank is standalone.

“It’s likely that AMP will have to continue offering more attractive rates than the larger banks – albeit less aggressive than before – underscoring our expectations for its NIM to continuously remain below its larger peers.”